Dear Momentum Options Subscriber,
The bears wrapped up a volatile week of trading with Friday’s market pullback to get the weekly win. The bulls were caught backpedaling throughout last week as lower lows came into play, and this week promises more of the same volatility, with Fed news here in the United States and the “Brexit” vote overseas.
The Dow fell nearly 60 points, or 0.3%, to finish at 17,675 on Friday. The blue-chips traded in negative territory for much of the session after opening a fraction of a point higher at 17,733. Resistance at 17,700-17,800 held for the fourth-straight session. A move above the latter should get 18,000 in play. The fade to 17,602 held shaky support at 17,600, but there is risk to 17,400-17,350 and the 100-day moving average on a close below this level. Last week’s intraday low reached 17,471.
The S&P 500 skidded roughly 7 points, or 0.3%, to end at 2,071. The index opened a point higher at 2,078 but failed to clear short-term resistance at 2,080 and the 50-day moving average. The bulls are still eyeing a run to 2,090-2,100 on a close above these levels. The test to 2,062 made a higher low than Thursday’s backtest to 2,050. A close below 2,070 will likely get 2,025-2,020 and the 100-day moving average back in the mix. The bears held 2,071 twice and 2,075 once on three of five closes last week, which are levels that have held since late May.
The Nasdaq gave back 44 points, or 0.9%, to settle at 4,800. Tech was underwater throughout Friday’s session, with the bears pushing a low of 4,792. Support at 4,800-4,775 and the 200-day moving average is back in the picture, but a move below the latter would be a bearish development. Resistance is at 4,850 and the 50-day moving average, which are levels the bulls need to clear this week to regain momentum.
The Russell 2000 fell 3 points, or 0.3%, to close at 1,144. The small-caps showed some strength during the morning choppiness with the run to 1,151. Resistance at 1,150-1,160 was tested before the intraday pullback to 1,141. Support at 1,140-1,135 and the 50-day moving average held, but there is risk to 1,125-1,120 on a close below the latter. The next 15-point move from current levels could decide June’s overall numbers going into next week.
The S&P 500 Volatility Index ($VIX, 19.41, up 0.04) traded up to 20.03 during Friday’s session, with resistance at 20 holding by a thread. There is risk to 22-22.50 on continued threats above this level. The bulls pushed a low of 18.71 during the second half of the action, but they failed to get below support at 17.50.
I warned that the market would likely experience continued weakness following the “double tops” that formed in the charts earlier this month. Prior to that, I predicted the late-May rally into mid-June, and last week’s action was also penciled-in. While I now believe the rest of June could be shaky, a rally after the July 4 holiday is possible. For now, I’m more focused on the next two weeks.
I often talk about “stretch” levels when the major moving averages are in play, which is when support and resistance are being tested in a stock or index. The bears cracked the 50-day moving averages on the Dow & S&P 500 on Tuesday, and both indexes spent the rest of the week below this level.
The Nasdaq closed below its 50-day moving average on Tuesday and Wednesday and its 100-day moving average on Thursday and Friday. Meanwhile, the Russell 2000 held its 50-day moving average throughout the week, aside from Thursday’s test to 1,133.
If the small-caps fall below 1,130 and the 50-day moving average, there is a good chance for a backtest to 1,120-1,115 and the 200-day moving average. A move to the 1,100-1,090 area and the rising 100-day moving average could come on a move below 1,115-1,110.
To take advantage of a bearish breakdown, I have the iShares Russell 2000 (IWM, $114.06, down $0.49) on my watch list if 1,135-1,133 is breached on the small-caps. If the bulls manage to hold current levels and IWM reclaims $114.50-$115, a bullish play could be in the offering. The technical setup mirrors the Russell 2000, as the two trade in tandem.
The IWM July 114 puts (IWM160715P00114000, $2.75, up $0.20) could be used by aggressive traders if IWM falls below $113.50. These put options traded 3,400 contracts on Friday, and open interest is approaching 15,000 contracts.
The IWM July 110 puts (IWM160715P00110000, $1.47, up $0.13) traded nearly 3,400 contracts, and open interest is now above 68,000. Friday’s range was $1.18-$1.53 on these put options.
As far as a rebound above $114.50-$115, the IWM July 115 calls (IWM160715C00115000, $1.69, down $0.36) look appetizing on a move above the latter. These options traded roughly 2,300 contracts on Friday, and open interest was well over 14,000 contracts.
The IWM July 118 calls (IWM160715C00118000, $0.55, down $0.26) fell 32% on Friday on volume of over 2,000 contracts. Open interest is over 43,000 contracts and growing.
All of the aforementioned call and put options are the regular July options that expire on July 15. There are weekly options available to trade on IWM also, but the monthly options are more liquid and have tighter bid/ask spreads.
Turning to the Dow Jones Transportation Average ($TRAN, 7,989, up 43), I was watching the breakdown throughout last week, especially during Thursday’s tumble to longer-term support at 7,400. This level was also tested in mid-May and mid-March, and Friday’s rebound failed to touch the 100-day moving average by half of a point. Continues closes below 7,400 would be a bearish development. Resistance is at 7,600-7,625, followed by 7,700 and the 200-day moving average.
The options on the transportation index are thinly traded, but there are better setups in United Parcel Service (UPS, $105.02, up $0.81) and FedEx (FDX, $162.25, up $0.38). Both charts look a little bullish, with UPS above its 50-day moving average, while FDX is below its 50-day moving average.
Shares of UPS have been range-bound for two weeks between $105-$103.75. Although the overall transportation sector is suffering, a breakout to $108-$110 could occur if UPS shares clear $106. The 52-week high is north of $107. The 50-day moving average has flattened out, but the 100-day moving average cleared the 200-day moving average in late May to form a mini “golden cross.”
If UPS shares clear $105.50-$106, I could go long the UPS July 105 calls (UPS160715C00105000, $1.75, up $0.45). These call options would double from current levels if UPS shares clear $108.50 by mid-July, technically.
Bearish traders could target the UPS July 100 puts (UPS160715P00100000, $0.52, down $0.17) if shares fall below $102-$101 this week. These put options would double from current levels if UPS shares fall below $99, technically, by mid-July.
As to the Fed, Chair Janet Yellen will be on “The Hill” Tuesday and Wednesday talking to the zombies. Her comments will likely sway market sentiment depending on her hawkish or dovish remarks. The Fed’s decision to hold interest rates steady last week was already cooked into the books following last month’s lousy jobs report.
In her remarks following the rate announcement, Yellen stated that the upcoming Brexit vote on Thursday factored into its decision on maintaining rates at current levels. As a side note, the walking dead also lowered the economic growth forecast for the rest of this year and next, while raising the inflation numbers for this year. These two outlooks are not positive looking forward.
The financial stocks have taken a licking this month, but they kept on ticking following last Thursday’s test and stretch of the rising 100-day moving average in the Financial Select Sector SPDR (XLF, $22.61, down $0.02). The 200-day moving average has been in a downtrend all year, but the 50-day moving average has been in an uptrend since bottoming in mid-March. Both are trying to level out.
Individual stocks like Morgan Stanley (MS, $25.31, up $0.24), Bank of America (BAC, $13.40, up $0.09) and Citigroup (C, $42.48, up $0.36) are trading below their 100-day moving averages. The 50-day moving averages are showing signs of life in all three of these stocks, and they are on my watch list as well.
To review, here are the top five things I’ll be watching for this week:
- The most important levels on the VIX are 22.50 and 17.50 — A move above or below the latter will likely shape how the rest of June and possibly July shape up.
- The transports — Multiple closes below 7,400 on $TRAN would be a bearish development. I would wait for 7,700 to clear before getting too bullish on the sector.
- The Russell 2000 — Watch the 1,135-1,133 area for a possible “short” opportunity. I wouldn’t trust any rally until the index clears and holds 1,155-1,160 for several sessions.
- The financial stocks — I could profile and perhaps recommend bullish or bearish BAC, C, or MS trades. If support cracks or resistance clears in any of the aforementioned stocks, I could issue a New Trade alert. I’ve been doing the options research on these names to find the best setups for the portfolio, so stay locked and loaded.
- The Monday/Friday closes on the Dow — I will have more on this topic next week, but negative closes on both days would be bearish. Up-days on the index might make a bullish case. Mixed closes on the blue-chips could signal a continued trading range.
From desk to press, futures look like this: Dow (+216); S&P 500 (+27); Nasdaq 100 (+58); Russell (+19).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 49-16 (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).
Energous (WATT, $10.70, up $0.27)
WATT August 12.50 calls (WATT160819C00012500, $1.20, up $0.10)
Entry Price: $1.06 (6/16/2016)
Exit Target: $2.00-$2.50
Stop Target: None
Action: Shares tested a high of $10.97 on Friday, with the calls peaking at $1.35. Resistance is at $10.75-$11 and the 50-day moving average. Near-term support is at $10-$9.75, followed by $9.25-$9 and the 100-day moving average.
Viavi Solutions (VIAV, $7.02, up $0.07)
VIAV September 7 calls (VIAV160916C00007000, $0.55, up 0.05)
Entry Price: $0.48 (6/16/2016)
Exit Target: $1.00
Stop Target: None
Action: Shares reached a peak of $7.09 on Friday, with the calls testing $0.56. Near-term resistance is at $7-$7.25. The 52-week high is at $7.38. Support is at $6.80-$6.75, followed by $6.60-$6.50 and the 50- and 100-day moving averages.
Microsoft (MSFT, $50.13, down $0.26)
MSFT July 48 puts (MSFT160715P00048000, $0.50, up $0.01)
Entry Price: $0.71 (6/16/2016)
Exit Target: $1.45
Stop Target: None
Action: Shares traded down to of $49.82 on Friday, with the puts kissing $0.60. Resistance is at $50.50-$51 and the 200-day moving average. The 50-day moving average has fallen below the 100-day moving average, forming a mini “death cross.”
Support is at $49.50-$49. A close below the latter would be a bearish development.
Inovio Pharmaceuticals (INO, $10.47, down $.27)
INO July 12 calls (INO160715C00012000, $0.20, down $0.10)
Entry Price: $0.80 (6/1/2016)
Exit Target: $1.60
Stop Target: None
Action: Support is at $10.25-$10 and the 50-day moving average. Resistance is at $10.75-$11. Although the trade is down 75%, I still like the position. The bid/ask prices are wide, which was the reason for Friday’s slide. However, the stock is up 6% in pre-market trading this morning after the company received approval to start an early stage human trial to test its Zika vaccine.
Editor and Chief Options Strategist