Dear Momentum Options Subscriber,
The bears tried their best to cause wide-spread panic on Wall Street last Monday, but a quick “double bottom” that went unnoticed by the suits-and-ties was made in the process. The rest of the week was controlled by the bulls, as the indices made average daily moves of 2% before relaxing on Friday ahead of the three-day weekend. With the first half of the 2016 action behind us, the next six months promise to be just as exciting, with continued whipsaw action and explosive volatility.
The Dow climbed 19 points, or 0.1%, to finish at 17,949 on Friday. The blue-chips traded down to 17,916 on the open, with fresh support at 17,800-17,750 and the 50-day moving average holding. Backup help is at 17,600-17,500 and the 100-day moving average. The push to 18,002 cleared lower resistance at 18,000-18,100. A move above the latter will likely get fresh 52-week and all-time highs in play.
The S&P 500 added 4 points, or 0.2%, to settle at 2,102. The index slipped a point to 2,097 at the start of trading, with support at 2,090-2,085 holding. Additional support is at 2,075-2,070 and the 50-day moving average. Resistance is at 2,120-2,125. The 52-week high is at 2,132.
The Nasdaq gained nearly 20 points, or 0.4%, to close at 4,862. Tech was also slightly weak on the open and fell 5 points to 4,837. Rising support at 4,825-4,800 and the 50- and 200-day moving averages held tight before a run to 4,880. Upper resistance at 4,875-4,900 held into Friday’s close, but a move above the latter could get 5,000 in the picture.
The Russell 2000 advanced 4 points, or 0.4%, to end at 1,156. The small-caps fell three-quarters of a point to 1,151 on the opening shuffle, with support at 1,150 holding. There is risk to 1,140-1,135 and the 50-day moving average if 1,150 fails. The intraday rebound to 1,161 cleared near-term resistance at 1,160 before closing slightly below this level. If cleared and held, the next hurdles lie at 1,170-1,175.
The S&P 500 Volatility Index ($VIX, 14.77, down 0.86) closed below 15 on Friday for the first time in 15 trading sessions. This was a huge development that could lead to 13.50-12.50 and continued market highs. Of course, another move above 15 would make me cautious, as it would get 16.50-17.50 back in the mix.
As far as the June results, the action was mixed, as the Dow gained 142 points, while the S&P 500 added 2 points. The Nasdaq tumbled 105 points, and the Russell 2000 slipped nearly 3 points. Obviously, tech was the weakest link last month, but this sector could lead the next recovery to higher highs.
The action before and after the “Brexit” was breathtaking, and it created an environment that not too many traders expected. My forecast for June weakness followed by a strong July rally was fairly accurate, although I was also surprised by the rapid recovery. In any event, we stayed long and strong with our bullish positions, as my indicators gave me a good feeling that last Monday’s continued selloff would create a near-term double bottom.
While this has been good news for the bulls, the overall action has kept the major indices in a continued trading range since early March. The better news is that all of the major indices have recovered their 50-day moving averages. The trend still looks bullish, as the 100- and 200-day moving averages have also been cleared.
A closer look at the aforementioned index charts shows strong bullish moves after the recovery off of the 50-day moving averages in February and May. However, the indices had cleared their 50-day moving averages ahead of the Brexit vote before falling nearly 7%-8%, on average in the two-day debacle afterwards. All of the major averages were breached as Wall Street went on vacation.
The suits-and-ties plan their long weekends and summer getaways when the market action is flat or negative. Holidays are an even better excuse to take a few days off from the action, but I work every day the market is open, which is why we were very well prepared for the rebound rally.
The Dow stood at 18,011 ahead of the Brexit vote and tumbled to a low of 17,063 last Monday. The 17,000 level was tested in the morning and again in the afternoon while holding key support. The 948-point drubbing off of the high has nearly been recovered, with the bulls coming within nine points of erasing all of the losses on Friday.
The S&P 500 is within 11 points of clearing 2,113 and its prior close ahead of the Brexit vote, while the Nasdaq is 48 points, or 1%, away from recovering 4,910. The Russell 2000 needs to regain 16 points, or 1.5%, to clear 1,172 and its pre-Brexit high.
The fact that the VIX closed below 25 and lower for the session at 23.85 last Monday while never testing 27.50-30 was another bullish clue. The bulls recovered the 17.50 level two days later on Wednesday and the 15 level two days later on Friday. I’m still pulling for a drop below 13.50-12.50 this week or next on continued market strength, with the possibility of 11-10 coming into play if all-time highs are achieved.
The market reached its all-time peak last summer, so history could repeat itself this month. However, the major technical issues that are developing are the double- and triple-tops that will come into play. These types of technical patterns can be bearish on another failed attempt or bullish on a major breakout into blue-sky territory.
The VIX would also be within spitting distance of historic lows on a surge to fresh highs, but it’s hard to see single-digits coming into play, although we can’t rule it out. The VIX continues to be one of my major market indicators for predicting market direction, but it continues to be dismissed by the suits-and-ties.
The Monday and Friday closes on the Dow are another way to see if money is moving into or out of the market. Up Monday/Friday closes usually signal higher highs, while lower closes indicate weakness. Mixed Monday/Friday closes can signal possible trading ranges.
As far as Mondays, the Dow closed the first two Mondays lower in April, but, amazingly, it has flip-flopped every other Monday into the end of June. The market was closed yesterday, but it finished the prior Monday lower on the post-Brexit woes. I would like to see a higher close today, although it won’t officially appear in the stats. Next Monday, the blue-chips would need to close higher to keep this streak intact.
The Friday Dow closes were mixed in April, with three up and two down days. May was mostly bullish, as the blue-chips finished higher in three of four Fridays. June was a debacle, which gave me another good clue that the late May rally would run into trouble by mid-June. The Dow fell 31, 120, 58 and 610 points on June Fridays.
A positive close today, on Friday and next Monday would all be bullish signs that the bulls are going to make another run at all-time highs. However, we have also seen these rallies to the tops of the trading ranges fail over the last few months, so keep this in mind. If upper resistance holds and another pullback comes in July or August, we will switch sides and play with the bears by using put options.
The next major catalyst that will likely lead the market higher or lower will be the upcoming second-quarter earnings season. There are a few notable companies I’m watching this week, but these companies have different fiscal years and different quarters.
The real action starts next week on Monday with Alcoa (AA) reporting its numbers. The company used to be considered the “kickoff” to earnings season, but it lost this title after getting booted from the Dow, along with Bank of America (BAC) and Hewlett-Packard (HPQ), back in September of 2013. Visa (V), Nike (NKE) and Goldman Sachs Group (GS) replaced the three.
I have Alcoa on my watch list, but it’s not a trade I’m likely to take. However, I will be watching the company’s earnings results to get a feel for how other companies are doing in this slow-growth economy and low-interest-rate environment.
I do have a New Trade listed below that I would like us to get into this morning, as I’m expecting continued market strength today.
From desk to press, futures look like this: Dow (-107); S&P 500 (-14); Nasdaq 100 (-29); Russell (-9).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 53-18 (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).
Altria Group (MO, $69.02, up $0.06)
Buy to open the MO August 70 calls (MO160819C00070000) for a maximum price of $1.25.
Action: I like these call options at current levels, and you can use a Limit Order up to $1.25 to get the best fills. These are the regular August call options that expire on Aug. 19. I will provide the parameters of the trade in today’s Mid-Market Update.
Shares traded to a multi-year high of $69.98 on Friday and look poised to clear $70-$72 on a blue-sky breakout.
Cisco Systems (CSCO, $28.80, up $0.11)
CSCO August 29 calls (CSCO160819C00029000, $0.70, up $0.07)
Entry Price: $0.55 (6/30/2016)
Exit Target: $1.10
Stop Target: $0.58 (Stop Limit)
Action: Set a Stop Limit at $0.58 to protect profits. Resistance is at $28.75-$29. A close above the latter would get $30 in play. Support is at $28-$27.75 and the 50-day moving average.
Energous (WATT, $12.16, down $0.79)
WATT August 12.50 calls (WATT160819C00012500, $1.40, down $0.40)
Entry Price: $1.57 (6/28/2016)
Exit Target: $3.15
Stop Target: $0.75
Action: Friday’s low tapped $12.07. Support is at $11 and the 50-day moving average if $12 fails to hold. Resistance is at $12.75-$13.
Morgan Stanley (MS, $25.92, down $0.06)
MS August 28 calls (MS160819C00028000, $0.35, down $0.01)
Entry Price: $0.79 (6/23/2016)
Exit Target: $1.50
Stop Target: None
Action: Resistance is at $26.25-$26.50 and the 50-day moving average. Support is at $25.75-$25.50 and the 100-day moving average.
Viavi Solutions (VIAV, $6.61, down $0.02)
VIAV September 7 calls (VIAV160916C00007000, $0.28, down $0.04)
Entry Price: $0.55 (6/23/2016)
Exit Target: $1.10
Stop Target: None
Editor and Chief Options Strategist