In This Issue:
Dear Momentum Options Subscriber,
The bears pushed lower lows on Friday despite opening slightly higher. It was the third-straight week of losses for the bulls, and the Dow and S&P 500 closed below their 50-day moving averages. Volatility also closed above a key level of resistance, and the “head-and-shoulders” technical pattern I warned about a few weeks ago has finally developed.
The Dow tanked 185 points, or 1.1%, to end at 17,535 on Friday. The blue-chips made a 14-point run to 17,734 intraday, but they struggled throughout the second half of trading. The close below 17,600 and the 50-day moving average sets up risk to 17,400-17,350. A close below the latter will likely lead to 17,100-17,000 and a test of the 100- and 200-day moving averages. Resistance has moved down to 17,800-17,900 if the bulls can clear 17,650 this week.
The S&P 500 sank 17 points, or 0.9%, to settle at 2,046. The index kissed 2,066 during the first half of trading, with resistance at 2,070-2,075 holding. The 26-point loss afterwards held support at 2,040 following a low of 2,043. This was a slightly bullish signal, and I have talked about wiggle room to 2,035. A close below this level would get 2,025-2,000 and the 100- and 200-day moving averages in the mix. A move back above 2,055-2,060 this week would be another slightly bullish clue.
The Nasdaq fell 19 points, or 0.4%, to finish at 4,717. Tech held positive territory for much of the first half of the action while reaching a peak of 4,759. The index failed to clear upper resistance at 4,775-4,800 and it also failed to hold 4,750 on the pullback. Support at 4,725-4,700 held, but the close below the 200-day moving average was bearish. There is risk to 4,650-4,600 on continued selling pressure, especially if Apple (AAPL) starts making fresh 52-week lows.
The Russell 2000 gave back a six-pack, or 0.6%, to close at 1,102. The small-caps traded 4 points higher to 1,112 intraday, but they failed to clear fresh resistance at 1,115. Upper resistance at 1,120-1,125 has now become more challenging following Friday’s dip to 1,099 and the close below the 50-day moving average. There is backup help at 1,090, but a move below this level gets 1,075-1,070 and the 100-day moving average back on the map.
The S&P 500 Volatility Index ($VIX, 15.04, up 0.63) added 4% after trading to a high of 15.47. The close above 15 and the 50-day moving average was a bearish development, and there is risk to 17-17.50 over the near term. A move above the latter gets 18-20 and the 100- and 200-day moving averages in play. Support is at 15-14.50.
“The longer-term technical setup, if another trading range resumes for a few weeks, would be a “head-and-shoulders” pattern. The right shoulder forms starting with a pullback, followed by a peak that is lower than the head. Once complete, traders watch for the break of the right-shoulder lows for the possible start of a major selloff.”
These were my closing thoughts in the May 2 Pre-Market Update. At the time, the Dow was at 17,773, the S&P stood at 2,065, the Nasdaq came into May at 4,775 and the Russell started at 1,130.
The indices went on to make higher highs afterwards, but, as I mentioned, “The right shoulder forms starting with a pullback, followed by a peak that is lower than the head.”
The “right shoulder” came into play last week along with “the break” of near-term support, as all of the major indices closed at their session and intraday lows for the week on Friday. April’s support levels that served as prior resistance are now in play.
The trading range I warned about in mid-April coming off of the mid-February lows also played out like a fiddle into last week. However, I’m still on the fence as to how the rest of May will play out due to conflicting bullish and bearish signals.
I have saddled up with the bears over the past week or so because my gut feeling is that much lower prices are ahead. In some cases, the bearish signs are obvious and, in other instances, there is still hope for the bulls. This could quickly change over the course of this week, but I feel more bearish than bullish at this point, and the portfolio reflects this with our current trades.
Although trading ranges can be frustrating, I mentioned that it’s often a great time to do homework and set up possible bullish and bearish trades. Additionally, when the indices started to move more than 1% per day, it was a good clue that the trading ranges would become more volatile and that clearer signs would start developing.
The breakdowns in the transports and financial stocks were also bearish signals, as these groups helped the market bounce off of its mid-February lows. The retail stocks were also a mess last week, and a number of high-flying retailers reported disappointing quarterly results.
The Dow Jones Transportation Average ($TRAN, 7,507, down 93) broke down like a rented mule after briefly dropping below its 200-day moving average. The “golden cross” that formed in late April is starting to flatten out, and a close below 7,400 would be a very bearish development.
In the April 11 Pre-Market Update, the Dow Jones Transportation Average was just above 7,600, and I mentioned that the index had a real shot at regaining the 8,000 level. As you can see from the chart, a two-week trading range followed that helped push the Dow Jones Industrial Average towards its all-time high.
The two indices tend to trade in tandem according to the “Dow Theory,” and there are a number of major developments in play that are signaling a bearish setup.
Both indices have experienced significant corrections from their previous all-time highs that reached a capitulation point in mid-February. It was one of the main reasons I turned bullish and said that the market could make a major recovery into late April or early May.
The next setup that is playing out from a Dow Theory standpoint is that the rally attempt that followed the January correction is now failing. The Dow and the Transports have both failed to rise above their pre-correction highs, and this is a bearish signal.
The Financial Select Sector SPDR (XLF, $22.88, down $0.28) pulled back last week, but it held its 200-day moving average. The 50-day moving average is still in a rising uptrend, and it’s possible that a golden cross could form.
The two major moving averages are only $0.15 apart, and it would be a bullish signal if this pattern develops. However, a close below $22.50-$22.25 and the 100-day moving average would negate this setup.
The SPDR S&P Retail ETF (XRT, $41.04, down $0.57) has fallen over 10% from its April highs, and all of the major moving averages are in a downtrend. A test to $38 and the January/February lows seems to be in the cards if $40.50-$40 fails to hold. I have a New Trade this morning to play the bearish setup, so be sure to check that out below.
To summarize my plan for the week ahead, I will be watching the transports and the financial sector as well as the VIX. However, the biggest clue might come from the S&P 500 and how it trades in the 2,040-2,035 area. These levels represent the early-April lows and, if breached, panic-selling could follow.
From desk to press, futures look like this: Dow (+8); S&P 500 (+2); Nasdaq 100 (+11); Russell (+3).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 44-10 (81%). All trades are dated 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).
SPDR S&P Retail ETF (XRT, $41.04, down $0.57)
Buy to open the XRT June 39 puts (XRT160617P00039000) for a maximum price of $0.60.
Action: I like these put options at current levels, and you can use a Limit Order up to $0.60 to get the best fill.
These are the regular monthly options that expire on June 17, and I will provide the parameters of the trade in today’s Mid-Market Update.
Apple (AAPL, $90.52, up $0.18)
AAPL June 87.50 puts (AAPL160617P00087500, $1.41, down $0.12)
Entry Price: $1.05 (5/12/2016)
Exit Target: $2.10
Stop Target: $1.10 (Stop Limit)
Action: Set a Stop Limit at $1.10 to protect profits.
Friday’s low for the stock kissed $90, and the 52-week low is at $89.47. Support is at $88-$87.50 on a close below $90. Resistance is at $92.50.
You can read my detailed on write-up on AAPL in the May 10 Mid-Market Update.
Bank of America (BAC, $13.88, down $0.26)
BAC June 15 calls (BAC160617C00015000, $0.13, down $0.05)
Entry Price: $0.58 (4/28/2016)
Exit Target: $1.20
Stop Target: $0.05 (Stop Limit)
Action: Set a Stop Limit at $0.05 to save the remaining premium.
Short-term support is at $14-$13.75 and the 50- and 100-day moving averages. The trade will likely be closed on a drop below $13.50. Resistance is at $14.75-$15.
Mylan (MYL, $39.16, up $0.54)
MYL June 35 puts (MYL160520P00035000, $0.63, down $0.16)
Entry Price: $0.60 (5/12/2016)
Exit Target: $1.20
Stop Target: None
Action: Resistance is at $40.50-$41. Short-term support is at $39-$38.50.
Potash (POT, $15.69, down $0.15)
POT June 15 puts (POT160617P00015000, $0.43, up $0.04)
Entry Price: $0.51 (5/9/2016)
Exit Target: $1.05
Stop Target: None
Action: Support is at $15.75-$15.50. A close below the latter should get $15 in play. Resistance is at $16-$16.25.
Microsoft (MSFT, $51.08, down $0.53)
MSFT June 47 puts (MSFT160617P00047000, $0.25, up $0.03)
Entry Price: $0.62 (5/3/2016)
Exit Target: $1.25
Stop Target: None
Action: Resistance is at $51.50-$52. Support is at $50-$50.50 and the 200-day moving average.
Editor and Chief Options Strategist