Dear Momentum Options Subscriber,

I have been talking about the weakness in retail stocks over the past few weeks, and one company that will face a crucial test after Thursday’s close is Gap (GPS, $17.07, down $0.26).

The company has been around for decades, and it continues to struggle against the competition. Just as different fashions come in and out of favor, investors are clearly showing their displeasure with the stock. Shares are at fresh 52-week lows, and they are approaching multi-year lows as well.

Gap is down from a 52-week peak just south of $40, and the 57% haircut has been hard to look at. The technical setup is a mess, and the major moving averages are in a severe downtrend. Lower lows look to be a given, but I often mention that earnings trades are tricky.

The “gaps” lower you can see in the chart have resulted from lowered forecasts and revenue misses. Last week, shares dropped over 11% after Gap reported its fifth-consecutive month of declining sales. Management also warned Wall Street that the company would miss current estimates for earnings of $0.32 a share. Revenues were expected to come in north of $3.5 billion, but they are now obviously in question.

The numerous downgrades by analysts this year alone have been plenty, and there are just too many to list at this point in the story. Although the stars are aligned perfectly for a test to the mid- to low-teens, a possible deal with Amazon.com (AMZN) has kept me cautious about going “short” on the stock.

The company’s CEO, Art Peck, went on record yesterday to say that the company was considering using AMZN as an option to grow its brand again.

Here is an excerpt from his comments at the annual shareholder meeting:

“To not be considering Amazon and others would be — in my view — delusional. We are always considering all of the opportunities beyond our traditional mix of channels and stores. Amazon is certainly one, and there are others as well.”

This was a powerful statement by Gap’s top brass and one that could make for a bullish argument if a deal between the two companies was to be announced. Amazon has stated its desire to be the one-stop shop for all of our needs, and it recently announced that it wants to launch private label brands and a restaurant delivery service.

As far as Gap is concerned, the big question is how well a partnership with Amazon would work out.

As you can see, this is still a tricky trade to make given how the boat is already leaning and the lowered numbers that are already factored into the equation. Usually, when too many people lean to one side of the boat, it tips over. However, if Gap’s future remains in question and sales come in dramatically lower, then the bears could stay in charge.

With the regular May options expiring this Friday, they are basically all-or-nothing trades if you are looking at long calls or puts.

The GPS May 17.50 calls (GPS160520C00017500, $0.40, down $0.05) could be used by bullish traders expecting a move above $18, which is basically the breakeven price for the trade. If Gap shares rally to $18.50, technically, by this Friday, these options would return a triple-digit profit.

The GPS May 17.50 puts (GPS160520P00017500, $0.65, up $0.05) are an option for bearish traders, with a breakeven price of $16.85. These put options would double from current levels if shares are below $16.20 by this Friday’s close.

Shares will need to move 10% or more for a May directional trade to be profitable. As a “strangle” option trade, both options could be purchased together for $1.05, and shares would need to be above $18.55 or below $16.45 to break even. A double on a strangle trade with the aforementioned call and put options would occur if shares are above $19.60 or below $15.40.

Watching futures overnight, I had a feeling that the bulls might bounce back this morning, but that feeling changed by 3 a.m. EST, as futures were in the red when I went to bed. They remained choppy leading into this morning’s open and today’s Fed minutes. You can never judge a full day of trading until it’s over, but the bears are keeping the pressure on with today’s lower open. Needless to say, the bulls have battled back.

As I go to press, the Dow is up 29 points to 17,559, while the S&P 500 is adding 4 points to 2,052. The Nasdaq is higher by 29 points to 4,745, and the Russell 2000 is jumping 8 points to 1,106.

I wanted to come to press early today because I knew the news flow would be heavy. I could have a New Trade today or an Alert ahead of the closing bell, so stay locked and loaded. In the meantime, let’s go check on our current trades.

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 11:00 a.m. EST.

I hereby disclose that I will be participating in the following trade(s).

 

SPDR S&P Retail ETF (XRT, $40.21, down $0.51)

XRT June 39 puts (XRT160617P00039000, $0.62, up $0.06)

Entry Price: $0.50 (5/16/2016)

Exit Target: $1.00

Return: 24%

Stop Target: $0.55 (Stop Limit)

Action: Set an initial Stop Limit at $0.55 to protect profits. Today’s low as I go to press has been $0.62, and yesterday’s low was $0.56.

Support is at $40.50-$40. A close below $40 could lead to a test to $39-$38. Resistance is at $41.50-$42.

 

Apple (AAPL, $94.83, up $1.34)

AAPL June 87.50 puts (AAPL160617P00087500, $0.40, down $0.18)

Entry Price: $1.05 (5/12/2016)

Exit Target: $2.10

Return: -62%

Stop Target: $0.30 (Stop Limit)

Action:  Resistance is a $95, and we could get stopped out of the trade if shares clear this level. Support is at $93.50.

You can read my detailed on write-up on AAPL in the May 10 Mid-Market Update.

 

Mylan (MYL, $42.53, up $1.51)

MYL June 35 puts (MYL160520P00035000, $0.19, down $0.11)

Entry Price: $0.60 (5/12/2016)

Exit Target: $1.20

Return: -68%

Stop Target: None

Action: Upper resistance is now at $42.50-$43. Support is moving up to $42-$41.50.

 

Potash (POT, $16.52, down $0.04)

POT June 15 puts (POT160617P00015000, $0.25, down $0.06)

Entry Price: $0.51 (5/9/2016)

Exit Target: $1.05

Return: -51%

Stop Target: None

Action: Resistance is at $16.50-$16.75. Support is at $16-$15.75.

 

Microsoft (MSFT, $50.92, up $0.41)

MSFT June 47 puts (MSFT160617P00047000, $0.22, down $0.06)

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

Exit Target: $1.25

Return: -65%

Stop Target: None

Action: Resistance is at $51.50-$52. Support is at $50-$50.50 and the 200-day moving average.

 

Bank of America (BAC, $14.42, up $0.41)

BAC June 15 calls (BAC160617C00015000, $0.21, up $0.11)

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

Exit Target: $1.20

Return: -64%

Stop Target: $0.05 (Stop Limit)

Action: Fresh resistance is at $14-$14.50-$14.75. Short-term support is moving up and is at $14.25-$14.

Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options

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