Dear Momentum Options Subscriber,

The bears did some major damage on Tuesday, especially heading into the closing bell, and the continued trading range from mid-April is on the verge collapsing. Of course, the bulls have shown resiliency over the past month, but yesterday’s action may have confirmed that lower lows could be coming quickly.

The Dow dropped 180 points, or 1%, to finish just below 17,530. The blue-chips opened at 17,701 and traded in negative territory throughout the day after testing a low of 17,469. The most important developments were the close below 17,600, which is now resistance, and the drop below the April 7 intraday low of 17,484. I’ve talked about risk to 17,400-17,350 on continued closes below 17,600, and there is risk to 17,200-17,000 if those levels are breached.

The S&P 500 sank 19 points, or 0.9%, to close at 2,047. The index opened at 2,065 and traded to a low of 2,040 late in the session. I have repeatedly highlighted the 2,040-2,035 area as a major breaking point, and there is risk to 2,025-2,000 on a move below the latter. Resistance is at 2,070-2,075.

The Nasdaq tumbled nearly 60 points, or 1.25%, to end at 4,715. Tech managed a one-point run into positive territory shortly after the open, but the index struggled with resistance at 4,775-4,800. The rest of the day was spent underwater, with the low checking in at 4,703. The bulls held support at 4,700, and I’ve mentioned that a close below this level this week might signal that a short-term market top is in. Backup support is at 4,650-4,600 if 4,700 fails to hold.

The Russell 2000 stumbled 18 points, or 1.7%, to settle at 1,097. The small-caps showed some strength on Tuesday after trading up to 1,118 during Wall Street’s lunch break. Resistance at 1,020-1,025 easily held, but the close below 1,100 and the low of 1,094 represent a new set of problems for the bulls. The April 7 intraday low of 1,088 and risk to 1,080-1,075 are now in play, and those levels will likely trigger if 1,090 fails.

The S&P 500 Volatility Index ($VIX, 15.57, up 0.89) jumped 6% and closed back above 15. There is risk to 16.50-17.50, and a move above the latter would likely leading to panic-selling. The bulls pushed a low of 14.48 mid-day, but they still need to get the VIX below 13.50-12.50 to confirm that higher highs might be in store.

From desk to press, futures look like this: Dow (-12); S&P 500 (-1); Nasdaq 100 (-3); Russell (-2).

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, $40.72, down $0.66)

XRT June 39 puts (XRT160617P00039000, $0.56, up $0.10)

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

Exit Target: $1.00

Return: 12%

Stop Target: None

Action: Tuesday’s low tapped $40.54. 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, $93.49, down $0.39)

AAPL June 87.50 puts (AAPL160617P00087500, $0.58, up $0.03)

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

Exit Target: $2.10

Return: -45%

Stop Target: $0.30 (Stop Limit)

Action: Support is at $92. Resistance is at $93.50-$94. The puts traded to a low of $0.44 yesterday, and I still like the trade going into June as long as $95 holds through May.

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

 

Mylan (MYL, $41.02, up $0.57)

MYL June 35 puts (MYL160520P00035000, $0.30, down $0.07)

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

Exit Target: $1.20

Return: -50%

Stop Target: None

Action: Upper resistance is at $41.50-$42 on the close above $41. Support is at $40.50-$40.

 

Potash (POT, $16.56, up $0.48)

POT June 15 puts (POT160617P00015000, $0.27, down $0.03)

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

Exit Target: $1.05

Return: -47%

Stop Target: None

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

 

Microsoft (MSFT, $50.51, down $1.32)

MSFT June 47 puts (MSFT160617P00047000, $0.28, up $0.13)

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

Exit Target: $1.25

Return: -55%

Stop Target: None

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

 

Bank of America (BAC, $14.01, up $0.08)

BAC June 15 calls (BAC160617C00015000, $0.10, flat)

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

Exit Target: $1.20

Return: -83%

Stop Target: $0.05 (Stop Limit)

Action: Resistance is at $14-$14.25. 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 $13.75-$13.50.

Momentum Q&A

Q: In the May 16 Pre-Market Update, you stated that the bearish “head-and-shoulders” pattern you previously warned about is now upon us. Does this mean that a breakdown in price below the neckline has occurred and, if so, what is the next major area of support below?

A: Today’s market commentary talked about “backup” support levels, and it’s great to see that you have recognized the “break of the neckline.” Technical patterns are hard to identify at times, as some technicians use wave patterns and other indicators. Additionally, technical patterns can change, but I have also talked about the effects of trading ranges over the years. Sometimes there are bullish outcomes, while other times they are bearish.

Today’s action could provide additional confirmation that the head-and-shoulders pattern is playing out if the bears take charge. However, if the bulls rebound, the trading range, or the “right shoulder” of the pattern, could continue.

 

Q:  Mylan (MYL) appears to have snapped its month-long downtrend. Do you see the recent price rise as a temporary “relief” rally or something to be potentially concerned about?

A: The answer to both questions is yes. While I had been rooting for lower lows coming into the week, shares of MYL have performed well. Yesterday’s run to $41.72 pushed short-term resistance at $41.75-$42, but I’m looking for the latter to hold.

The major moving averages are still in a downtrend, and the trade has over a month to play out. However, if $42 is cleared and holds, I will likely set a Stop Limit on half or all of the trade to save the remaining premium.

 

Q: Oil seems to be tightening into a bearish “rising wedge” formation on a daily chart. Are there any related plays on your radar that stand to benefit from a potential slide in crude should renewed price pressures in the industry bubble to the surface again?

A: There are different “grades” of oil that traders track, and I like to follow Brent Crude Oil, which usually runs slightly higher than WTI Crude, or what I consider regular oil.

In yesterday’s Mid-Market Update, I talked about how oil traders would be fighting to trigger the $50 level before $45-$40 comes back into play. The chart below shows that a “golden cross” has formed, with the 50-day moving average moving above the 200-day moving average. This is usually a bullish setup.

As far as trades, I have already started to do some research, as oil was going to be one of my themes for next Monday’s Pre-Market Update. I will be analyzing both bullish and bearish setups in a stock or ETF to play the current setup, so stay tuned.

 

Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options

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