Dear Momentum Options Subscriber,
The bulls have weathered the storm in May, and they could come out of it smelling like roses. The “sell in May and go away” theme was bearish for much of the month, but it eventually turned into a buying frenzy. Today is the last trading day of the month, so the score still hasn’t been settled. However, I have a good feel for where there market could be going and how we are going to play the next few weeks of action.
The Dow gained roughly 45 points, or 0.25%, to close at 17,873 on Friday. The blue-chips held positive territory for much of the session, excluding a late-day dip to 17,824. The 4-point pullback held short-term support at 17,800-17,750 and the 50-day moving average. There is risk to 17,600-17,400 this week on a close below the latter. The good news is that Friday’s high reached 17,873, which keeps upper resistance at 17,900-18,000 in play. A move above this level could lead to 18,200.
The S&P 500 added nearly 9 points, or 0.4%, to end at 2,099. The index held positive territory throughout the session and went out at its high. However, it was no surprise that the bulls would fall a point short and fail to clear resistance at 2,100 into Friday’s closing bell. I have been talking about upper resistance coming back into play, and a move above this level could lead to 2,120-2,125 this week. Support is at 2,075-2,070 and the 50-day moving average. A move below the latter could lead to 2,060-2,050 over the near term.
The Nasdaq jumped 31 points, or 0.65%, to settle at 4,933. Tech was last seen going into the weekend in a good mood, as it also closed at its session high. Thursday’s move above 4,900 and Friday’s follow through were very bullish signs going into June, providing these levels hold. Resistance is at 4,950-4,975, and a close above the latter could lead to, dare I say it, the 5,000 level. Backup support is at 4,850 and the 50-day moving average if 4,900 fails this week.
The Russell 2000 surged 10 points, or 0.9%, to finish at 1,150. The small-caps led Friday’s charge to clear and hold upper resistance. The close above 1,150 should get 1,160 and possibly 1,170-1,175 in play. Rising support is at 1,140-1,135, followed by 1,125-1,120 and the 50-day moving average.
The S&P 500 Volatility Index ($VIX, 13.12, down 0.31) closed below 13.50 for the second-straight session after testing a low of 13.04. Additional support is at 12.50, which is a level that needs to be cleared in order keep the bullish momentum going. Resistance is at 14.50-15 and the 50-day moving average. Friday’s high tapped 13.76.
For those of you just joining us, welcome aboard. We had a huge holiday promotion, and I want to personally thank each and every one of you for signing up. I also want thank my current subscribers once again, and most of you know that I predicted last week’s rebound from the prior week’s clues.
Let’s now cover where the major indices stand at this point in May. The Dow is higher by 100 points, while the S&P 500 is up by 34 points. The Nasdaq is showing a gain of 158 points, and the Russell 2000 has advanced 20 points. The Dow has wiggle room of less than 1% if it wants to end the month in positive territory. The S&P and the small-caps have nearly 2% of wiggle room. Tech would have to fall off a cliff and fall over 3% today to ruin May.
To make a long, technical story short and sweet, the trading range from March produced a “head-and-shoulders” pattern that lasted into April. This led to the early/mid-May pullback to the “neckline” that ultimately held. Last week’s action represented a nice “V-shaped” recovery off of the May lows.
This is the important part. Given last week’s rebound, the current outlook remains bullish for another week or two. From there, we could see the major indices approach a near-term “double-top” and the mid-April highs. The longer-term charts could show a “triple-top” formation, but let’s stick with the near-term outlook for now.
The bigger picture is that the market also remains in a trading range until the 52-week and all-time highs are cleared. Higher highs are possible into June and July, but this would mean a VIX near the 10 level or approaching single-digits.
The Dow tapped a low of 17,331 in May. The 100- and 200-day moving averages are flat, and the 50-day moving average is starting to level out. My downside target of 17,400-17,350 was breached intraday, but it ultimately held, as the blue-chips closed at 17,435 on May 19. They haven’t looked back since. There is a good chance that the 18,000 level is cleared, but the real battle will be at 18,200.
The S&P 500 low reached 2,025 on the same day, which is a level I nailed as crucial backup support. I have been calling for a rebound to 2,100 and, obviously, I raised my near-term targets this morning if that level is cleared. The 50-day moving average still appears to be in an uptrend, and the 100-day moving average is showing signs that it wants to clear the 200-day moving average.
I have been zoned in on tech recently, and I talked previously about the possible “golden cross” that would be forming. The 50-day moving average has now crossed above the 200-day moving average, and it is still in a nice uptrend. The 100-day moving average is starting to level out following a steady decline since early December.
The Nasdaq chart from earlier shows key resistance at 4,950 and the April high of 4,969. A move above the latter could easily lead to 5,000 or higher, which is why I have chosen a PowerShares QQQ ETF (QQQ, $110.13, up $0.57) call option to play the bullish breakout.
From a technical standpoint, the QQQs held near-term support at $104.50-$104 earlier this month following a golden cross formation. As you can see from the chart below, near-term resistance is at $111.50-$112, and a close above the latter would likely lead to $114-$115. Short-term support is at $108 and the 50-day moving average.
There are a number of other bullish ways to play the QQQs and continued strength by using short-term and longer-term options. For possible future trades, I have the regular monthly QQQ June 110 calls (QQQ160617C00110000, $1.30, up $0.25) and the QQQ July 112 calls (QQQ160715C00112000, $1.10, up $0.15) on my watch list. There are weekly options available to trade on the QQQs as well, but volume and open interest are less active than the monthly options.
The biggest difference between the two aforementioned QQQ call options is that the QQQ June 110 calls expire in less than three weeks and are “in the money.” They will double from current levels if the QQQs trade past $112.60, technically, by June 17.
The QQQ July 112 calls have nearly six weeks before they expire and are “out of the money.” The return on these options would be 100% from current levels if the QQQs trade past $114.20 by mid-July. This is the “safer” trade, but I like them both going forward as long as $108 holds on any backtest.
As far as the Russell 2000, I had been warning that the April 7 intraday low of 1,088 could come into play, and I talked about risk to 1,080-1,075 and the 100-day moving average if 1,090 failed to hold. The one-day turnaround off of the May 19 low of 1,085 was my bullish signal that a rebound for the rest of the month and into June was likely. This is why I tried to get us into a bullish iShares Russell 2000 (IWM, $114.60, up $1.13) trade early last week.
We missed getting filled by $0.06 on the IWM June 113 calls (IWM160617C00113000, $1.85, up $0.45) using a limit order at $1.05. The calls gapped up to $1.11 after a previous close of $0.85, and we weren’t filled. I could have tried to re-enter the trade, but I didn’t want to chase the price action. As you can see, these call options made nice returns for traders that got into them near $1. If you did, continue to ride them higher, but set stop limits to protect your gains.
My focus this week (and next) will be the action in the VIX. The April 20 low reached 12.50, which is another reason I predicted that the April highs might not last. The VIX closed below the 13.50 level at 13.28 that session. Within six trading sessions, volatility was back above 15.
I also warned of panic-selling if the bears cleared the 16.50-17.50 area in May. These levels were breached, but they held following the May 19 intraday high of 17.65 and close at 16.33.
With the market closed yesterday for Memorial Day, I really wanted to go into the three-day weekend with no open positions. The monthly June options expire on June 17 and have less than three weeks before they expire. I consider this to be the “danger zone” for time premium, as decay starts to come into play quickly. However, for short-term trading, these options provide the biggest bang for the buck. The monthly July and August option chains should also provide nice returns for directional trading, but the returns on the June strike prices offer the biggest (and riskiest) returns.
Balancing this part of option trading into your regular portfolio can be overwhelming, which is why I also suggest having a “speculative” account for option trading. Given the current environment, volatility will play a key role going forward.
From desk to press, futures look like this: Dow (+34); S&P 500 (+3); Nasdaq (+8), Russell 2000 (+0.6).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 45-14 (76%). 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).
PowerShares QQQ (QQQ, $110.13, up $0.57)
Buy to open the QQQ July 112 calls (QQQ160715C00112000, $1.10, up $0.15) for a maximum price of $1.45.
Action: We are buying these call options on the open, and you can use Limit Orders up to $1.45 to get the best fills. I will provide the parameters of the trade in a Trade Alert later this morning if we are filled, or I may wait until the Mid-Market Update, depending on the action.
These are the regular July options that expire on July 15.
Editor and Chief Options Strategist