In This Issue:
Dear Momentum Options Subscriber,
The bulls rebounded to get a clean sweep on Friday, as the market ended the week on a positive note. The bears still won the week, however, and they did some damage after forcing a lower trading range into play, which could become very volatile at some point this month.
The Dow jumped 80 points, or 0.5%, to close at 17,740 on Friday. The blue-chips traded to a low of 17,580 on the open to breach short-term support at 17,600, which is a level that has held since mid-April. I have talked about risk to 17,400-17,350 on a close below this level and the 50-day moving average. The second-half push to 17,744 fell shy of resistance at 17,800-17,900.
The S&P 500 added 6 points, or 0.3%, to end at 2,057. The index tested 2,039 during the morning pullback, with support at 2,040 and the 50-day moving average holding by a thread. The April 12 low tapped 2,039, and the S&P hasn’t closed below 2,040 since late March. I have been cautioning that a move below this level would be a bearish development that could lead to 2,025-2,020.
The Nasdaq gained 19 points, or 0.4%, to settle at 4,736. Tech tumbled below near-term support at 4,700 after kissing 4,684 intraday. A close below this level opens risk down to 4,650-4,600. The bulls held the 100-day moving average into the closing bell, but they face additional hurdles at 4,750-4,800 and the 50-day moving average.
The Russell 2000 popped a 6-pack, or 0.6%, to finish at 1,114. The small-caps tangoed with support at 1,100 on Friday’s open after hugging 1,101. The 50-day moving average was stretched, but it held, and there is risk to 1,090-1,085 if that level is breached. The last close below 1,100 came in mid-April. Resistance remains at 1,120-1,125, but I would wait until 1,130 clears before possibly going long.
The S&P 500 Volatility Index ($VIX, 14.72, down 1.19) traded in negative territory for much of the session following the morning pop to 16.58. Resistance at 16.50-17.50 has been holding since mid-March, and a move above the latter will clearly cause some panic-selling. The close back below 15 offered some hope for this week, but the bulls desperately need to reclaim 13.50-12.50 to reverse the momentum.
The trading range that carried over from the end of April into May has been frustrating to watch, but these periods in the stock market happen relatively often.
In the “old” days, tracking the market was like watching grass grow. Daily moves of 1% were rare, but they are now more common. I often mention how the suits-and-ties would, and still do, automatically pencil in 7%-8% gains for the year without ever looking at a chart or the historic nature of the market.
Last month’s divergence still has a lot of the suits-and-ties guessing as to where the market is headed, and none of them have game plans. Fortunately, we do, and I have been covering ours on a daily basis.
I have learned over the past few years to avoid taking new trades during these types of trading ranges, which is why we haven’t been as active in recent weeks. February was a slow month, as was April, but the portfolio still outperformed the market. Option premiums suffer due to time decay during trading ranges, which is another reason it is imperative to identify them early.
I also watch trading ranges intensively in order to be well prepared when it is time for our next big batch of trades. This helps pass the time and gets us in excellent shape to play the market’s next major move.
I have been trying to cover more trade setups from my watch list on a regular basis after recently receiving this question from a subscriber:
“Sometimes Rick will talk about a trade he is watching and he is talking about making it a recommendation if something else happens. It’s a company on his watch list. He tells us many things about it but he never mentions which stock. I would also like to read up on the same stock and try to see what he sees in it. Thanks.”
While it would be hard to list all of the trades on my watch list, I will profile a few of them from time to time. I recently covered a possible iPath S&P 500 VIX Futures ETN (VXX) trade, and I talked about playing Dunkin’ Brands Group (DNKN) after earnings. With this possible trade, I wanted to wait until after the earnings announcement so that I could evaluate the company going forward. Besides their technical setups, I also like doing the fundamental analysis of a company in order to “predict” where a stock could be headed.
Together, technical and fundamental analysis make for a powerful combination. Most traders focus on one or the other, but, by doing both, you really get a better picture of the possible trade setup.
The other important aspect of my watch list is that all of my potential trades come from my own ideas. In most occurrences, these trades become official recommendations within days, but sometimes trades may take a few weeks to develop. The good news is that I can now show you some trades I’m looking at based on my comments from April 18:
“Remember these numbers going forward, and write them down on your trading desk. The uptrend lines I currently see have the bulls in charge as long as the major indices hold the following levels going forward on any pullback:
- Dow: 17,600-17,500
- S&P: 2,050-2,040
- Nasdaq: 4,825-4,800
- Russell: 1,110-1,100
This could change on higher highs, but these levels will signal when it is time to start lightening up on long positions.”
I mentioned that these targets would come into play, which is why I wanted you to write them down. These levels came into play last week, but I also mentioned that Friday and today could be bullish sessions for the market. If upper resistance holds over the next few days and lower lows come back into the mix, here is how we will play it:
The first setup I’m looking at is a trade on tech if the Nasdaq falls below 4,700-4,675. The best way to trade a breakdown would be to use the PowerShares QQQ ETF (QQQ, $105.58, up $0.56). The technical setup is mirroring the Nasdaq, but the QQQs are showing that a “golden cross” has formed. This is usually a bullish setup, but the 50-day moving average is already starting to level out.
Near-term support is at $104, and a move below this level could lead to $102-$100. Resistance is at $106 and the 100-day moving average. If cleared, a run to $107-$108 and the 50- and 200-day moving averages could come.
If the QQQs fall below $104, I could target the QQQ June 100 puts (QQQ160617P00100000, $0.87, down $0.29) for our next trade. Although there are weekly and May expiration options available, I like the regular June puts to give the trade more time to play out. If the QQQs are below $98 by June 17, technically, these options would be $2 “in the money,” which would represent a return of over 100% from current levels.
The QQQ July 100 puts (QQQ160715P00100000, $1.60, down $0.30) are a little more expensive, and they would give the trade an additional month to play out. These put options would double if the QQQs are below $96.80, technically, by mid-July.
I’m also tracking call options on the QQQs in case $106 clears, but there are several layers of resistance afterwards that I expect to hold.
As far as the S&P 500, I’m looking at possible bearish trade if the index closes below 2,040-2,035 this week. The SPDR S&P 500 ETF (SPY, $205.72, up $0.75) is a very liquid way to trade the index.
Current support is at $204 and the 50-day moving average. A close below $204-$203.50 could lead to $200 over the near term. Resistance is at $207-$207.50.
Bearish traders could target the SPY June 195 puts (SPY160617P00195000, $1.40, down $0.35) if shares fall below $203.50. These put options would double if SPY is pushing $192, technically, by mid-June.
Although weekly and the regular May monthly options are available, our next batch of trades will carry us into June and July. The regular May options expire in less than three weeks, which is a time frame I refer to as the “Danger Zone.”
The June and July regular monthly options allow us to buy another month or two of time in case the current trading range carries on.
I want to be careful before opening a plethora of new trades until we get crystal clear market signals. In the meantime, I wanted to share with you some of the ideas I have on my watch list.
We should get a better picture of the technical setup following this week’s action. If the trading range continues, we will deal with it. I will be covering a number of other trade setups this week as well, including a possible bearish setup in Apple (AAPL, $92.72, down $0.52).
Tech, the VIX, financial stocks and the 1,100 level on the small-caps are the main areas of the market I’m focusing on right now. If the technical picture worsens in these areas, we should have our signal that a major pullback could be coming.
From desk to press, futures look like this: Dow (+33); S&P 500 (+4); Nasdaq 100 (+12); Russell (+2).
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, $50.39, up $0.45)
MSFT June 47 puts (MSFT160617P00047000, $0.47, down $0.15)
Entry Price: $0.62 (5/3/2016)
Exit Target: $1.25
Stop Target: None
Action: Shares cleared resistance at $50-$50.25 and the 200-day moving average on Friday. There is risk to $50.50-$51 on continued strength, but I expect those levels to hold. 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.
You can read a more detailed write-up on MSFT and view the chart in the May 4 Pre-Market Update.
Bank of America (BAC, $14.11, up $0.06)
BAC June 15 calls (BAC160617C00015000, $0.21, up $0.01)
Entry Price: $0.58 (4/28/2016)
Exit Target: $1.20
Stop Target: None
Action: Short-term support is at $14-$13.75. Resistance is at $14.75-$15.
Editor and Chief Options Strategist