Dear Momentum Options Subscriber,
The bears pushed lower lows almost every morning throughout last week, but the bulls powered back each afternoon to test higher highs, excluding Friday’s session. The Dow fell 66 points, while the S&P 500 eked out a slim gain. The Nasdaq added 9 points, and the Russell 2000 jumped 14 points, or over 1%, for the week.
With Wall Street coming back from a holiday-shortened week, this week’s action will likely pick up steam, as a number of newsworthy events will come into play. While I have predicted higher highs into mid-June, I’m still watching the exit door in case the current “double top” pattern fails to provide a breakout to fresh highs.
The Dow fell 31 points, or 0.2%, to finish at 17,807 on Friday. The blue-chips traded in the red throughout the session following the low of 17,689. Support at 17,700-17,650 and the 50-day moving average held throughout last week, but it is starting to level out. Resistance remains at 17,900-18,000.
The S&P 500 dropped 6 points, or 0.3%, to close at 2,099. The index opened at 2,104 and tested a low of 2,085 shortly after the open. I mentioned that short-term support at 2,090-2,085 needed to hold into the weekend. The close above these levels remains bullish, with backup support at 2,075-2,070 and the 50-day moving average. Resistance is at 2,100-2,105, and a breakout towards 2,120-2,125 could come on a close above the latter.
The Nasdaq gave back 28 points, or 0.6%, to end at 4,942. Tech tangoed with the 4,909 level, which was below the shaky “double bottom” at 4,923, but it held this level for the fourth-straight session. The close above 4,925 and support at 4,900 looked slightly bullish, but the finish below 4,950 makes me a little nervous. A close below 4,900 could lead to 4,850 and the 50-day moving average. This could jeopardize our PowerShares QQQ ETF (QQQ) trade, but I’m looking for support to hold. Resistance is at 4,975-5,000.
The Russell 2000 dipped 6 points, or 0.6%, to settle at 1,164. The small-caps traded in negative territory throughout Friday’s session, with the bears pushing a low of 1,155. Support at 1,160-1,150 was split down the middle before the close above the former. Resistance is at 1,170-1,175. A close below 1,145-1,140 would signal that a short-term top is in.
The S&P 500 Volatility Index ($VIX, 13.47, down 0.16) made a move into resistance at 14.50-15 after reaching a peak of 14.66 shortly after the opening bell. This level has held for eight-straight sessions, which remains a bullish signal. The plunge to 12.90 into the close fell shy of clearing 12.50. The close back below 13.50 was also a slightly bullish signal.
Perhaps the most shocking development from last week was the lousy jobs report that came in with a reading of 38,000, which was the worst number in nearly six years. The American economy has stalled, but the zombies don’t want to admit it. With Gross Domestic Product (GDP) under 3% for seven-straight years, the writing has been on the wall.
The weak jobs report may jeopardize a rate hike this month as well as the Fed’s plans for a hike sometime during the summer or fall seasons. With the zombies backed into a corner with an assumed rate hike slated for June, Fed Chair Janet Yellen will try to soothe the suits-and-ties with an update today and kick the can down the road. She has done well calming the market’s fears over the past few years, but her words will carry much more meaning this time around.
I spent much of last week talking about the technical setups on the major indices, and not much has changed on that front following last week’s flat action. This week, I want to focus on the VIX again, along with the financial sector and gold.
The VIX traded to a high of 15.25 to start last week, but it closed below key resistance at 14.50-15 throughout the week. Friday’s low tapped 12.90, and I have mentioned that continued closes below 13.50-12.50 would likely confirm that higher highs are in play. Continued closes above 15 would be a warning signal, with moves above 16.50-17.50 leading to selling pressure. These three aforementioned support and resistance levels are the major clues to watch for over the next few weeks and into the summer months.
As far as the financial stocks, they continue to tease the bulls by showing signs of strength and then fading. Bank stocks have been rising lately on hopes of a Fed rate hike and higher bond yields. Both sectors fell when rates plunged last week.
I was really cheerleading for a move above $24 last week in the Financial Select Sector SPDR (XLF, $23.51, down $0.34), but Friday’s 1.4% pullback keeps the two-month trading range from early April in place. A close above $24 should get the 52-week high north of $25 in play.
Near-term support is at $23.25-$23 and the 50-day moving average that is still in a strong rising uptrend. The recent move above the 200-day moving average in mid-May also created a “golden cross,” which is another bullish development. A close below $22.75 would ruin the momentum and negate the bullish setup.
The XLF July 24 calls (XLF160715C00024000, $0.24, down $0.13) fell 35% on Friday and are “cheap” options to put on your watch list. If XLF clears $23.75-$24, I might make an official trade in these options for the portfolio. Volume was brisk, as over 14,000 contracts traded last Friday. Open interest is above 50,000 contracts. These options would return 100% from current levels if XLF trades to $24.50 by mid-July.
Bearish traders could target the XLF July 23 puts (XLF160715P00023000, $0.37, up $0.08) if shares fall below $22.75-$22.50. Volume was nearly 2,400 contracts on Friday, with open interest also above 50,000 contracts. High volume and open interest indicate tighter bid/ask spreads and quick fills, and I usually like to trade liquid options with spreads under a nickel. These options would double from current levels if XLF falls below $22.25 by mid-July.
I’m still bullish on the financial sector, but it has been frustrating trying to trade the names. Hopefully we will be able to catch the next breakout or breakdown in the coming weeks.
I have been mentioning throughout the year that Gold ($GOLD, $1,246.50, up $33.60) has been trapped in the $1,300-$1,200 range. The peak just past $1,300 in early May held resistance before last week’s drop to $1,200 and the 100-day moving average. The 50-day moving average is starting to rollover, but most of the suits-and-ties have been pounding the table for weeks on the yellow metal. This could explain Friday’s nearly 3% surge, but the failure at the 50-day moving average looked bearish.
Right now, I see two ways to play gold on a rebound towards $1,275-$1,300 or a drop below $1,200 by following the SPDR Gold Trust ETF (GLD, $118.88, up $3.21). The stock and options are also very liquid, and the technical pattern mirrors that of $GOLD.
With June options expiring in less than two weeks, I’m watching GLD July call and put options. Weekly options also trade on GLD (and XLF), but the spreads are wider, and volume is slightly more dry.
Resistance for GLD is at $119-$120 and the sloping 50-day moving average. Support is at $116.50-$116 and the 100-day moving average as of last week. A close above $119.50-$120 would be a bullish development that would finally give the pros some respect.
If the latter is cleared, I might go long the GLD July 124 calls (GLD160715C00124000, $1.01, up $0.58), which surged 135% on Friday. Volume topped 4,400 contracts after these calls opened at $0.89 from Thursday’s close at $0.43. The GLD July 127 calls (GLD160715C00127000, $0.60, up $0.35) zoomed nearly 150%. These call options opened at $0.35 and reached a peak of $1.05 on Friday. Volume topped 10,000 contracts.
If GLD falls back below $116-$115.50, I may be targeting the GLD July 114 puts (GLD160715P00114000, $0.76, down $0.81) if resistance holds over the next few sessions. These options tanked over 50% on GLD’s 3% surge last Friday. Volume was heavy, as over 7,000 contracts traded on open interest north of 13,000.
I could have a New Trade or a Trade Alert today or at some point this week. I still want to keep the portfolio light in case we remain in a trading range, but I have several more bullish and bearish setups I will profile throughout the week, so stay locked and loaded.
Also, be sure to sign up to receive SMS text message alerts to your mobile device if you haven’t done so already.
From desk to press, futures look like this: Dow (+50); S&P 500 (+5); Nasdaq 100 (+11); Russell (+3).
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 ETF (QQQ, $110.35, up $0.01)
QQQ July 112 calls (QQQ160715C00112000, $0.96, down $0.24)
Entry Price: $1.15 (5/31/2016)
Exit Target: $2.30
Stop Target: $0.55 (Stop Limit)
Action: Set a Stop Limit at $0.55 to limit losses.
Friday’s low tapped $0.79 on the calls after the QQQs tested a low of $109.34. Support is at $108.50-$108. Resistance is at $111.50-$112.
Tailored Brands (TLRD, $14.11, down $0.33)
TLRD July 15 calls (TLRD160715C00015000, $1.07, down $0.08)
Entry Price: $1.17 (6/3/2016)
Exit Target: $2.35
Stop Target: None
Action: Friday’s low reached $13.82. Support is at $14-$13.75 on failed momentum and a close below $15. Near-term resistance is at $14.50-$14.75, followed by $15 and the 100-day moving average.
Inovio Pharmaceuticals (INO, $11.08, down $0.31)
INO July 12 calls (INO160715C00012000, $0.65, down $0.10)
Entry Price: $0.80 (6/1/2016)
Exit Target: $1.60
Stop Target: None
Action: Shares kissed $11.49 before the backtest to $11 on Friday. Resistance is at $11.75-$12. The major moving averages are in a strong rising uptrend, and shares look poised for a breakout. Support is at $11.50-$11.
Editor and Chief Options Strategist