Dear Momentum Options Subscriber,
The bears pushed fresh lower lows last week to crack levels last seen in late March and early April. However, the bulls once again showed signs of life on Friday, which has me feeling semi-bullish going into mid-June, although the six-week trading range I have been warning about is still in play to some degree.
The Dow added 65 points, or 0.4%, to settle at 17,500 on Friday. The blue-chips stayed strong throughout the session while reaching an intraday peak of 17,571. Fresh resistance is at 17,600-17,700 and the 50-day moving average. I could use bullish call options on the index if the bulls clear and hold 17,700 today or this week. Shaky support is at 17,400-17,350, followed by 17,200-17,000 and the 100- and 200-day moving averages. A close below the latter would be a very bearish development.
The S&P 500 jumped 12 points, or 0.6%, to finish at 2,052. The index made a run at 2,060 and the 50-day moving average but fell shy of clearing those levels. The bulls will likely need to clear and hold 2,070-2,075 before I would get giddy about a run towards 2,100. Support is at 2,040-2,035, and Friday’s low reached 2,041. A move below 2,035 should get 2,025-2,000 and the 100- and 200-day moving averages back in the mix.
The Nasdaq gained 57 points, or 1.2%, to close at 4,769. Tech traded in positive territory throughout the day while reaching a peak of 4,781. The 50-day moving average has fallen below its 200-day moving average, which is something I will expand on more next week. The technical setup is deemed a “death cross,” which is when the 50-day moving average falls below the 200-day moving average. Short-term resistance is at 4,800-4,825. Near-term support is at 4,725-4,700 and the downward-sloping 100-day moving average.
The Russell 2000 surged 17 points, or 1.6%, to end at 1,112. The small-caps were Friday’s biggest surprise, as they led the bull pack higher. The close above 1,110 and the 50-day moving average was a bullish signal. There are additional hurdles at 1,020-1,025 and the 200-day moving average once 1,115 clears. Support is at 1,100-1,095. A close below 1,090 should get 1,075-1,070 and the 100-day moving average back in play. I mentioned in Friday’s Pre-Market Update that “a positive close by the small-caps today might make me turn bullish for next week.” I’m not certain how this week will play out, but I’m encouraged.
The S&P 500 Volatility Index ($VIX, 15.20, down 1.13) fell 7% after testing a low of 15.11 on Friday. The bears held 15-14.50 and the 50-day moving average. I mentioned on Friday that I wasn’t going to “overthink” this development until the weekend when I would have more time to analyze the situation. Now that I have, the bulls have several layers of support at 13.50-12.50 to crack on a move below 14.50. I believe these levels will hold this week on any rally. Resistance is still at 16.50-17.50, followed by 19-20 and the 100- and 200-day moving averages.
The downside action that has made me a little hesitant to trade more heavily recently could have reached its peak last week. The “head-and-shoulders” pattern during the six-week trading range has also completed its process for now. However, the right shoulder of the pattern is back in play, and this is a slightly bullish sign. From here, other forms of technical analysis can be used, such as wave patterns, candlesticks, moving averages and channels. I use a combination of all of these, but an investor must still be right about where the money is going to be made.
From this technical setup, there are numerous paths we can take, but let’s cover other areas of the market to see how busy or light we will be this week as far as option trading goes.
The market has been trending lower for nearly two months, and I often talk about the Monday/Friday closes. As far as the Dow goes, the bulls and bears have split the past six Mondays to win three each.
The gains have been higher than the losses, which is why I think the next two or three weeks could actually be bullish for the market. For the year, the Dow is up nearly 27 points, or 0.2%, during Monday sessions, which is a bullish signal.
The Dow Friday closes have been evenly split as well. The bulls won last Friday’s session to keep the see-saw action going, and they were the stronger species in early March and into April. I say this because the Dow was up for five-straight Friday sessions over this time frame, and the market had a bullish bias to it.
I often mention that trading ranges produce mixed Monday/Friday closes, which is why I was able to correctly “predict” the recent trading range. This is important to understand because I traded only lightly within the portfolio over this time period. When there is a more directional pattern in play, I will be more aggressive with our trades. Otherwise, we are still in a whacked-out and sketchy market.
The other area of concern I will be watching this week is the action in the S&P at the 2,040 level. The index danced with the devil in the 2,040-2,035 area last week, and I mentioned that it would be imperative for the bulls to hold there. These levels came into play last week, as the S&P 500 traded to a low of 2,025. This was important because it was my thesis that has kept me slightly bearish. However, my tone started to change following Wednesday’s test to 2,034, Thursday’s fall to 2,025 and Friday’s rebound.
The bulls did a tremendous job of defending their territory, as they held short-term support on the S&P 500, but there are still another seven months of market action to play out this year. The Fed’s hawkishness last week could be a blessing for the bulls as well. Without going into a lot of the rhetoric, the bottom line is that the Fed has backed itself into a corner for a rate hike in June.
Traders have to work harder when the market is not trending, and I have been warning of trading ranges and possible breakouts and breakdowns for weeks. When the market is trending, it makes trading a lot easier, as roughly 70% of stocks trade in tandem with market direction in theory.
In simple terms, I love the bulls and I love the bears, but I despise trading ranges. It’s that simple. I’m a numbers guy, so my thoughts on a stock and how options relate to the market are my niche. The most important aspect with our current trades is timing, and I have traded light over the past six weeks because I have prepared for this epic donnybrook between the bulls and bears. We are usually more active when the market is trending, and I often talk about how trading ranges make it harder to trade directional options.
A political race will also be in play this year, but let’s just leave it at that. The market doesn’t know who will be America’s next president, but the uncertainty is poised to play a major role in market direction. In other words, a major move market move of 20% is still possible. Hopefully, we will know the final two candidates by mid-June, as the market hates uncertainty. This could also be a major reason why the market has been stuck in a trading range.
I explained these thoughts to my publisher coming into 2016, and I also said that I saw the market playing out with wild volatility. We are nearly halfway through the year, but there are plenty of unknowns that remain a mystery to the market.
Nobody knows where the market will be at the end of the year, and all we can do as traders is watch the action. This has been frustrating because, in some months this year, there have been easy-money trades for the portfolio.
The current trades are struggling, but I’m still hopeful that they make their way back, although some positions won’t make it out of this maddening trading range. However, I have tried to protect the portfolio while not putting too much risk on the table.
Needless to say, I’m not too thrilled with my May track record in terms of winning percentage or returns. However, for the year, the win rate is close to 80%, and the monster gains we have made throughout the year should absorb some of the hits we have taken this month.
Bank of America (BAC) shares slipped into negative territory on Friday to trigger our Stop Limit, and the details are listed below. I could have a bullish trade on the small-caps shortly after the open or at some point today depending on how the first 30 minutes of the action goes, so stay tuned.
From desk to press, futures look like this: Dow (-1); S&P 500 (+0); Nasdaq 100 (+5); Russell (-0.2).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 45-13 (78%). 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).
Bank of America (BAC, $14.52, down $0.01)
BAC June 15 calls (BAC160617C00015000, $0.19, down $0.06)
Entry Price: $0.58 (4/28/2016)
Exit Target: $1.20
Stop Target: $0.18 (Stop Limit)
Action: The Stop Limit at $0.18 triggered late on Friday following the stock’s dip to $14.43, and we are now out of the position.
Inovio Pharmaceuticals (INO, $10.39, up $0.29)
INO August 11 calls (INO160819C00011000, $1.20, up $0.14)
Entry Price: $1.11 (5/20/2016)
Exit Target: $2.25
Stop Target: None
Action: Resistance is at $10.50-$11. Support is at $10-$9.50 and the rising 50-day moving average.
You can read my extended write-up on INO in the April 4 Pre-Market Update. I will add updates to this story at some point this week.
Mylan (MYL, $41.51, up $0.39)
MYL June 35 puts (MYL160520P00035000, $0.19, down $0.33)
Entry Price: $0.60 (5/12/2016)
Exit Target: $1.20, lower to $1.05 (Limit Order) (sold first half on 5/20/16)
Stop Target: $0.10 (Stop Limit on second half)
Action: Lower the Exit Target from $1.20 to $1.05 and make it a Limit Order. This would still make the trade profitable after we closed the first half of the trade last Friday at $0.20. The Stop Limit on the second half of the trade is still at $0.10.
Support is at $40.50-$40. Resistance is at $42.50-$43 and the sloping 50-day moving average. A close above these levels will likely trip the Stop Limit.
Potash (POT, $16.53, down $0.07)
POT June 15 puts (POT160617P00015000, $0.22, down $0.04)
Entry Price: $0.51 (5/9/2016)
Exit Target: $1.05, lower to $0.75
Stop Target: $0.10 (Stop Limit)
Action: Lower the Exit Target to $0.75. The Stop Limit is still at $0.10.
Upper resistance at $16.75-$17 and the 50-day moving average was tested last week. Support is at $16.25-$16.
Editor and Chief Options Strategist