Dear Momentum Options Subscriber,

The bears did their part to keep the current trading range intact yesterday, as they recovered the bullish gains on Monday and then some. The lower highs and lower lows are becoming a fresh worry that is signaling additional weakness ahead.

The Dow tumbled 140 points, or 0.8%, to end at 17,750. The blue-chips stayed underwater throughout the session, with the bears pushing a low of 17,670. Support at 17,700-17,600 held. Resistance is at 17,800-17,900 following Tuesday’s open and high of 17,870.

The S&P 500 stumbled 18 points, or 0.9%, to settle at 2,063. The index opened at 2,077 and made a steady fade to 2,054 while pushing support at 2,050. The bounce off of the lows fell shy of upper resistance at 2,070-2,075, but a recovery of the 2,080 level would keep 2,100 in play.

The Nasdaq tanked 54 points, or 1.1%, to finish at 4,763. Tech opened below 4,800, which is now resistance, before sinking to 4,749. A close below 4,750-4,740 and the 100-day moving average would be a bearish development that would likely lead to 4,725-4,700.

The Russell 2000 sank 19 points, or 1.7%, to close at 1,121. The small-caps were the weakest link after bottoming at 1,116 during the first half of the action. Support at 1,125-1,120 was stretched, and the close below the 200-day moving average was slightly bearish. There is risk to 1,110-1,100 and the 50-day moving average if 1,115 fails.

The S&P 500 Volatility Index ($VIX, 15.60, up 0.92) regained 6% after trading to a high of 16.42. Resistance at 17-17.50 and the 50-day moving average held. Support is at 15-14.50, followed by 13.50-12.50.

I could have one or more New Trades this morning if additional support levels start to crack, so stay locked and loaded shortly after the open in case I decide to take action.

From desk to press, futures look like this: Dow (-91); S&P 500 (-12); Nasdaq 100 (-30); Russell (-6).

Momentum Options Play List

Closed Momentum Options Trades for 2016: 44-10 (81%). All trades are dated and time stamped so new subscribers can look at the past history to see how the trades have played out.

Do not risk more than 5% of your trading account on any one trade but do try to take all of the trades. Please remember, all “Exit Targets” and “Stop Targets” are targets. You should not have any “Hard Stops” entered to close any trades or “Exit Orders” in your brokerage account unless I list one. I will send out a “Profit Alert” or “New Trade” if I want you to close a position or if a new trade comes out. Otherwise, follow instructions at all times in the 9 a.m. and 12 p.m. – 1 p.m. updates. Also, I will usually give you a heads-up if I think I’m going to send an email outside of these time frames.

All prices given in this update are current as of 8:00 a.m. EST.

I hereby disclose that I will be participating in the following trade(s). Every Momentum Options recommendation is listed with the price at which I entered my own position. If the price is slightly different than my recommended entry or exit price when you receive the alert, don’t let that keep you from getting into or out of a trade. Occasionally, you might even get a better “fill” price than what is posted in the portfolio.

 

Microsoft (MSFT, $49.78, down $0.83)

MSFT June 47 puts (MSFT160617P00047000, $0.64, up $0.24)

Entry Price: $0.62 (5/3/2016)

Exit Target: $1.25

Return: 3%

Stop Target: None

Action: Near-term support is at $49.50-$49.25. A move below $49 could lead to a retest of the February low of $48.19. Multi-month and backup support are at $46-$45 if $48 fails. Resistance is at $50-$50.25 and the 100-day moving average.

 

Microsoft recently reported a profit of $0.62 a share, which fell $0.02 shy of estimates. Revenue of $22.1 billion matched forecasts. The company also slightly lowered year-over-year growth numbers.

The technical setup, along with lowered guidance, makes me feel comfortable going “short” MSFT with put options. The 50- and 100-day moving averages are at the start of a major downtrend, and the 200-day moving average is leveling out.

 

Bank of America (BAC, $14.36, down $0.41)

BAC June 15 calls (BAC160617C00015000, $0.27, down $0.15)

Entry Price: $0.58 (4/28/2016)

Exit Target: $1.20

Return: -53%

Stop Target: None

Action: Short-term support is at $14.25-$14 and the 100-day moving average. Resistance is at $14.75-$15.

Momentum Q+A

Q: The VIX has closed above 15 in three of the last four sessions. Should we be concerned about our Bank of America (BAC) calls? — B.G.

A: While I have been rooting for higher market highs, I mentioned that last week’s technical damage caused some concern. I also knew that a top might eventually be in, but it is still too early to say if that is the case.

If it is, BAC and the financial stocks could trade lower in sympathy with the market. Support is holding on BAC, but I could limit potential losses by closing half of the trade on continued weakness. However, I want to see how the rest of the week plays out before giving up on the trade too early.

 

Q: Why did we wait until Microsoft (MSFT) fell below its 200-day moving average before adding the puts? — T.M.

A: In hindsight, I wish I would have recommended put options on MSFT ahead of the company’s recent earnings announcement, as shares fell from $56 to test $51 on the $0.02 earnings miss in mid-April.

On the other hand, a good earnings report could have propelled shares past $60. I wanted to see if the recent fade below the 200-day moving average would hold and, so far, it has.

Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options