Dear Momentum Options Subscriber,
The three-week winning streak for the bulls ended last Wednesday as the bears pushed the market’s backup support levels. “Brexit” concerns, oil and the financial stocks were the main culprits that were blamed for the pullback — at least, that’s what the talking heads were saying.
The Dow fell 120 points, or 0.7%, to end at 17,865 on Friday. The blue-chips were in the red throughout the session, with the bears pushing a low of 17,812. Support at 17,800 and the 50-day moving average held, and these are levels I had warned about throughout all of last week. Additional support is at 17,600, followed by 17,400. Resistance is at 17,900-18,000.
The S&P 500 sank nearly 20 points, or 0.9%, to close at 2,096. The index opened at 2,109, which was well shy of upper resistance at 2,120-2,125. The late-day bottom touched a low of 2,089.96, with shaky support at 2,100-2,090 holding. The bears just cracked backup support levels on Friday and, by doing so, 2,075-2,070 and the 50-day moving average are now in the mix. A close below the latter would be a very bearish development. If this happens, don’t get nervous. I will let you know how we will play such an event shortly.
The Nasdaq tanked 64 points, or 1.3%, to settle at 4,894. Tech started the session at 4,915, which was below major resistance at the 4,950 level. How quickly the bulls recover this level will show how “major” Friday’s price action really was. I talked about fragile support at 4,925-4,900 throughout last week, and the close below the latter was slightly bearish. The 50-day moving average held, but there is risk to 4,825-4,800 and the 100-day moving average if 4,850 fails to hold.
The Russell 2000 gave back 17 points, or 1.5%, to finish just under 1,164. The small-caps failed to hold 1,180-1,175 at Friday’s open, and the close below 1,170 was a bearish sign. The aforementioned levels are near-term resistance and important areas which I said needed to hold last week. Backup support is at 1,160-1,150 and the 50-day moving average. I move below the latter could also represent a short-term bearish trading opportunity.
The S&P 500 Volatility Index ($VIX, 17.03, up 2.39) jumped 16% and reached a peak of 17.33. I repeatedly warned that any closes above the 15 level could lead to a quick blast to 16.50-17.50. While I can take great pride in making that crystal-clear call, there is now risk to 19-20. These levels could be tested on further weakness this week, and a close above 20 will likely lead to panicked selling pressure. If it does, don’t get nervous, as I have a trade on my watch list to play the nasty action, should it come.
In late May, I started saying that there would be a possible rally into mid-June, and that forecast may have come a few days early. Ahead of that, I had forecasted a rally off of the February lows and into April. Coming into the year, I called for a major pullback in the market.
Here are three important notes from last week to keep in mind:
- The most important takeaway from last week is that the 50-day moving averages held for the major indices. A closer look at the charts reveal that these levels were “stretched” in May, and the same outcome will likely happen at some point in June on continued lower lows.
- Before May, the 50-day moving averages had held since the beginning of March for the Dow and S&P 500.
- The 50-day moving average on the VIX was in play throughout last week, which is a level that had held for much of June.
My next job is to figure out where the market is heading going into July and August. The major support levels were breached on Friday, and the indices closed below key levels I had been mentioning throughout last week. On a technical level, I talked about a possible backtest to backup support, and more importantly, I said that I would be watching the VIX.
I often mention that the suits-and-ties bash the VIX and say it’s broken. However, they do notice volatility when it pops above 20. I have been following the VIX for decades, and I still believe it is one of my most reliable market indicators. I will profile a possible VIX trade this afternoon, or at some point this week, for a New Trade, so stay locked and loaded. Right now, the bulls need to worry about holding the 100- and 200-day moving averages.
The 50-day moving averages look healthy on the major indices. The difference between the Dow and the S&P 500 and the Nasdaq and Russell 2000 is volatility. Tech and the small-caps will likely lead the moves up or down in the coming weeks and months.
The 100- and 200-day moving averages are in a decent uptrend, so it is too early to paint an overall bearish picture for the rest of the year. Coming into the year, my major theme was volatility and, by watching the VIX on a daily basis, we have been a step ahead of most Wall Street “pros.”
Some of Friday’s market woes came from the “Brexit” news, which is something I have been warning about since late May. Central banks have been preparing for market turbulence, but their worries were heightened following Friday’s poll that showed that 55% of voters plan to vote for Britain to leave the European Union. This was a dramatic turnaround from earlier polls that sent global bond yields tumbling.
Japan’s 10-year note fell into negative territory and was last seen trading near -0.15%. Germany is in the same boat as Japan with negative interest rates. I’ve never been a fan of bonds, and I have never taken the time to truly study them because the returns are small compared to options. However, bonds represent “security,” and I understand how they work in correlation with the stock market.
I thought stocks provided great returns, but, obviously, as a subscriber to my newsletter, you know that options are the secret sauce to earning powerful returns. I always shoot for returns of 100% or more for all of my option trades, while most fund managers hope to make 3%-5% over the coming years. This is down from the historical average of 7%-8% returns for stocks.
European financial stocks tanked on the Brexit news, which helped drag down the sector here in the United States. The yield was down to 1.62% on 10-year note at levels last seen in February when the market was tanking.
A possible curve ball this week will be the two-day Fed meeting on Tuesday and Wednesday. As far as the U.S. financial sector, I have been cheerleading for the Financial Select Sector SPDR (XLF, $23.16, down $0.29) to clear the $24 level since it held its 50-day moving average in mid-May.
The chart below shows XLF reaching $23.93 in late May, and that high was as good as it got for the financials. Friday’s close two pennies below the 50-day moving average brings risk to $23-$22.75 and the 200-day moving average into play.
The weakness in individual names such as Bank of America (BAC), Citigroup (C) and Morgan Stanley (MS) may represent trading opportunities this week or next. All three are near or are riding their 100-day moving averages. A close below these major technical levels could spell big trouble for the overall market.
I talk a lot about the financial sector, as its stocks will likely lead this week’s market volatility. There might be an opportunity to trade these names in the coming days. If I see a bullish or bearish option trade to play continued weakness or a rebound, I will also send out a New Trade alert.
I mentioned last week that I was watching a possible “double top” pattern for the market, and this appears to be the case at the moment. This is also triple-witching option expiration week, as this Friday’s close represents expiration for the regular June options. There are also weekly June options available to trade in a number of ways, but this week will be big as far as getting stock prices closer to or further away from significant strike prices.
Regular July options also expire four weeks after this Friday’s June expiration. This should provide enough time for our current bullish trades to play out. As Wall Street enters the last few weeks of this month and July, many of the suits-and-ties will head out on vacation. Of course, not many of them deserve one given how they have underperformed the market after being whipsawed or too afraid to trade.
Understanding rotation is also key to following the market — not trying to guess where the market is going to be in 1-3 months. I also do a prediction each February as to where the indices will be by the end of the year. I have been very accurate in calling the bullish rallies and price targets for the major indices over the years, and I was one of the earliest market forecasters that said that the Nasdaq would blow past 5,000 last year.
I’m not afraid to trade any type of market, but I do prefer trends over volatility and trading ranges. During bullish and bearish market trends, I often say that stocks follow the indices 70% of the time.
I do like volatility, however, but trading options during turbulent times requires much more discipline and focus. This is why I have been using tight Stop Limits to limit losses and issuing Profit Alerts with trailing stops when a trade is up double- or triple-digits.
This week, I will specifically be focused on the S&P 500. Last week’s highs reached 2,119 and 2,120 on back-to-back sessions. This is why I referenced a possible double top last Monday morning. If this actually did represent a double top, it should be confirmed this week.
I’m watching the SPDR S&P 500 ETF (SPY, $210.07, down $2.01) as a possible way to use call and put options this week.
The SPY July 210 calls (SPY160715C00210000, $3.15, down $0.73) fell 19% on Friday on volume north of 15,000 contracts. The range was $2.77-$3.35. If the S&P recovers 2,100-2,110, I could go long the call options on a dead-cat bounce or continued rebound.
The SPY July 210 puts (SPY160715P00210000, $3.97, up $1.06) jumped 36% last Friday on volume of over 18,000 contracts. If the index falls below 2,075-2,070, I could use the put options to play continued weakness.
Both aforementioned options purchased together would represent a “straddle” option trade with a combined price premium of over $7. The breakeven points would be if the SPY is above $210 or below $203, technically, by mid-July.
Economist Robert Rhea was quoted as saying, “No profession requires more hard work, intelligence, patience and mental discipline than successful speculation.” I’m not as well-known as many of the talking heads, but I can tell you that I do more homework than anyone on Wall Street. Stay locked and loaded for what could be a very turbulent week, especially given the terrorist event that occurred over the weekend.
There will likely be some opening weakness today, and how the bulls respond within the first hour or so of trading will be interesting.
From desk to press, futures look like this: Dow (-58); S&P 500 (-6); Nasdaq 100 (-20); Russell (-2).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 47-16 (75%). 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 Gold Shares ETF (GLD, $121.74, up $0.49)
GLD July 125 calls (GLD160715C00125000, $1.79, up $0.17)
Entry Price: $1.25 (6/8/2016)
Exit Target: $2.50
Stop Target: $1.50, raise to $1.60 (Stop Limit)
Action: Raise the Stop Limit from $1.50 to $1.60.
Friday’s high tapped $112.10 on the stock, with the options trading to a high of $1.92. Resistance is at $122-$124. Support is at $120-$119.50 and the 50-day moving average.
Energous (WATT, $13.65, up $0.67)
WATT July 15 calls (WATT160715C00015000, $1.20, up $0.39)
Entry Price: $0.80 (6/8/2016)
Exit Target: $1.60, raise to $2.00
Stop Target: $0.85 (Stop Limit)
Action: Raise the Exit Target from $1.60 to $2.00. Also, set a Stop Limit order at $0.85 to protect profits.
Shares traded to a high of $13.70 and were up to $13.85 in after-hours trading on Friday. The calls tested a high of $1.40.
Short-term resistance is at $13.75-$14. Support has moved up to $13, followed by $12.50-$12.25.
Inovio Pharmaceuticals (INO, $10.62, down $0.39)
INO July 12 calls (INO160715C00012000, $0.35, down $0.20)
Entry Price: $0.80 (6/1/2016)
Exit Target: $1.60
Stop Target: None
Action: Shares traded down to $10.25 on Friday. Support is at $10.25-$10 and the 50-day moving average. Resistance is at $11-$11.25.
I expect shares to be very volatile this week, and I will update the Zika story as it develops.
Editor and Chief Options Strategist