Dear Momentum Options Subscriber,
The market was choppy throughout last week as Wall Street dealt with post-Brexit woes and Friday’s nonfarm payrolls report. Tech and the small-caps showed strength going into the end of the week, however, and that was a good clue that a continued rally would take place.
The week was mixed going into Friday’s session, but the day’s gains ultimately gave the bulls the win. The bears look vulnerable and could give up higher highs, but we also know how fast they can strike. This week promises to be just as exciting and nerve-racking as the start of second-quarter earnings season gets underway.
The Dow jumped 250 points, or 1.4%, to close at 18,146 on Friday. The blue-chips cleared upper resistance at 18,000-18,100 while pushing a high of 18,166. Fresh hurdles are at 18,200, followed by the all-time high of 18,351. Support is at 18,000, followed by 17,800-17,750 and the 50-day moving average.
The S&P 500 soared 32 points, or 1.5%, to end just below 2,130. The index tested a high of 2,131 and came within 3 points of its all-time intraday high of 2,134.72 that was triggered on May 20, 2015. A move above this level could lead to a run to 2,150-2,175. Near-term support is at 2,110-2,100. A move below the latter will likely lead to 2,080-2,075 and the 50-day moving average.
The Nasdaq zoomed 80 points higher, or 1.6%, to finish at 4,956. Tech made a push to 4,959 and is looking to challenge new resistance at 5,000. The all-time intraday high is at 5,231.94, which was achieved on July 20, 2015. This would represent another 5%-6% move from current levels, but it would require strong beats across the board from tech companies over the next three weeks. Support is at 4,900, with risk to 4,850-4,825 and the 50-day moving average on a breach below this level.
The Russell 2000 jumped 27 points, or 2.4%, to settle at 1,177. The small-caps traded to a peak of 1,178 and cleared resistance at 1,170-1,175, which is now short-term support. Backup help is at 1,160-1,150. Short-term resistance is at 1,185-1,190, with a move above the latter getting the 1,200 level in play. The all-time high for the index is just south of 1,300.
The S&P 500 Volatility Index ($VIX, 13.20, down 1.56) fell another 10% and closed below 13.50 on Friday. The bulls pushed a low of 13.19, and higher highs for the market are likely on tap on continued closes below 12.50. Resistance is at 15-16 and the 50-day moving average.
As usual, the slick-talking pros were late to the rally after enjoying their July 4 holiday vacations. The notable talking heads also took a few days off, and they too were shocked that we are knock, knock, knocking on…all-time highs.
Following a four-month trading range, the bulls are once again on the verge of a breakout, and the chances of a continued July rally appear to be good. Volatility is at its lowest levels for the year. The 52-week low is at 10.88 and, at this time last year, I was also calling for the market to breakout to all-time highs.
Now that the VIX is trading within the 13.50-12.50 range, 11-10 could come into play by late July/early August. I have been mentioning that single digits for the VIX were also a possibility if the market pushed fresh all-time highs in a July breakout, but this would certainly signal that the market is topping. However, history shows that it is possible for the VIX to trade in the low teens and single digits for weeks and months, so I will be following this development closely.
The good news is that when the market does peak, I have a bevy of put options on stocks with negative chart patterns. Like a rising tide that lifts all boats, some companies have benefitted from the bullish rally, and I’m target a slew of bearish put option trades for August, September and October on a pullback. For now, the portfolio remains bullish, but don’t be nervous to play any pullback or correction.
I’ve been watching the financial stocks like a hawk given the continued plunge in yields around the globe and the weakness in the Financial Select SPDR (XLF, $22.92, up $0.43) over the past few weeks. The sector was doing “okay” after clearing its 50-day moving average on June 23, as XLF shares were at $23.33 ahead of the Brexit news. As you can see from the chart, XLF tanked to a low of $22 before closing at $22.08 the following session. Volume topped 134 million shares.
The following Monday low tapped $21.32, with a close at $21.45. The rebound off of the bottom has been impressive, but crucial resistance is back in play. The 50-day moving average is in a downtrend, with shares falling just shy of clearing this level. Friday’s move above the 100- and 200-day moving averages was a bullish signal, and resistance is now at $23-$23.25. A close above the latter would be very bullish.
If accomplished, there could be a bullish trade using the XLF August 23 calls (XLF160819C00023000, $0.50, up $0.10) that I have on my watch list. With the July monthly options expiring this Friday, the August calls will allow more time for the trade to play out. A return of 100% would be achieved from current levels if XLF clears $23.80, technically, by Aug. 19.
On the flip side, if XLF fails at $22.75-$23, there could be a bearish trade worth watching. A backtest to $21-$20 could be in the cards, and I have the XLF August 23 puts (XLF160819P00023000, $0.60, down $0.20) on my watch list as well. These put options would double from current levels if XLF falls below $21.80, technically, by Aug. 19.
It will be very important for the bulls to clear and hold the 50-day moving average this week, and there are a number of financial companies reporting earnings that could cause that to happen.
BlackRock (BLK), JPMorgan Chase (JPM) and Washington Federal (WAFD) will announce their numbers on Thursday, while Citigroup (C), FBR & Company (FBRC), PNC Financial Services Group (PNC), U.S. Bancorp (USB) and Wells Fargo (WFC) are set to confess their quarterly results on Friday.
The latest drama following the Brexit news was the bad debt on the books in the Italian banks, but this could be overblown. There is chatter that Italy’s banking crisis could spread like the Zika virus throughout the rest of Europe, with possible rules limiting state aid to lenders. In recent weeks, I’ve talked about negative interest rates around the globe, and we can now add another Japanese bond to the growing list. The yield on 20-year Japanese government bond turned negative for the first time last week. Here in the United States, the yield on the 10-year U.S. bond fell to an all-time low of 1.35% last Wednesday. I’ve never been a big fan of bonds due to the low returns, but these events are worth tracking.
I’m not sure if it’s time to go bottom-fishing in Deutsche Bank (DB, $12.97, up $0.37), but shares have been hammered given its European exposure. However, a possible double-bottom may have occurred last week, with shares holding $12.50 on Wednesday and Thursday before Friday’s 3% pop. All of the major moving averages are in a nasty downtrend, but there could be a rebound to the mid-teens worth playing.
There was heavy action in the DB August 15 calls (DB160819C00015000, $0.35, up $0.10) on Friday, as over 1,200 contracts traded hands. These calls are worth watching, as they could do well over the next few weeks if financial stocks rally.
The DB October 13 calls (DB161021C00013000, $1.65, up $0.20) are also on my watch list. The options would double from current levels if DB shares trade to $16.30, technically, by mid-October. This would give a bullish trade on DB an extra two months to play a rebound to the mid- to upper teens.
The flight to safety in gold ($GOLD, $1,367.40, up $5.60) and silver ($SILVER, $20.35, up $0.60) has been apparent as well, as both metals are pushing 52-week and 2-year highs.
Believe it or not, I read over the weekend that one “professional money manager” said they were convinced that gold was headed to $10,000 an ounce. There wasn’t a timetable given, but this kind of crazy price action won’t come anytime soon — maybe in decades — but not in the next decade.
Gold may be topping at the $1,375 level, but it finished Friday’s session higher following a backtest to $1,336. Continued closes above $1,375 would be bullish sign for a run past $1,400. Another move below $1,350 could lead to a backtest to $1,325-$1,300. The 50-day moving average is just below $1,280, as you can see from the chart below.
I always mention that the best was to trade gold is by tracking the SPDR Gold Trust ETF (GLD, $130.52, up $0.78). If gold does pullback, GLD could test $126-$124 on a drop below $130-$128. Keep the GLD August 130 puts (GLD160819P00130000, $2.86, down $0.64) on your radar, as the options traded nearly 1,200 contracts on Friday. The aforementioned put options would double if GLD does trade to $124, technically, by Aug. 19.
As a side note, the GLD August 125 puts (GLD160819P00125000, $1.00, down $0.40) fell nearly 30% Friday and would double from current levels if GLD falls below $123.
I didn’t list any GLD call options, but I would consider getting long on continued closes above $132. If this level is cleared and held for several sessions, it would be a good signal to possibly close put positions, as the current uptrend would still be intact.
Meanwhile, silver surged past $21 last week for a 50% return off of the early-January trip just south of $14. The metal may be peaking at $20-$21 over the near term, but the major moving averages are in a strong uptrend. A recovery of the $21 level would be bullish, but I believe a backtest to $19-$18.50 will come if the market clears all-time highs this month.
While there will be talk of the summer doldrums on a pullback this month or next, I have mentioned that I expect a continued rally into mid- to late July. This week should help me determine how long the now-two-week rally will last and if all-time highs are once again achievable
As you can see from the aforementioned trades I profiled, this week could be very busy, so please stay close to your email inboxes or wait for my text alerts. I could have a New Trade shortly after this morning’s open, so stay tuned.
From desk to press, futures look like this: Dow (+71); S&P 500 (+7); Nasdaq 100 (+22); Russell (+7).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 55-18 (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).
Achillion Pharmaceuticals (ACHN, $9.14, up $0.26)
ACHN August 10 calls (ACHN160819C00010000, $0.45, up $0.15)
Entry Price: $0.45 (7/8/2016)
Exit Target: $0.90-$1.35
Stop Target: None
Action: I have listed two exit targets above, as I have high hopes for this trade. Right now, they are at $0.90-$1.35, but these are not Limit Orders at this time because shares could make a quick run past $10. The 52-week high is at $10.95.
Last week’s rise above all of the major moving averages was a powerful bullish move. Near-term resistance is at 9.25-$9.50, with a move above the latter likely leading to $10 or higher. Fresh support is at $9-$8.75.
Green Dot (GDOT, $23.73, up $0.37)
GDOT August 25 calls (GDOT160819C00025000, $0.91, up $0.06)
Entry Price: $0.80 (7/7/2016)
Exit Target: $1.60
Stop Target: None
Action: Shares traded to a 52-week high of $23.90 on Friday. Resistance is at $24-$24.50. A blue-sky breakout could get shares pushing $25-$26. Support is at $23.50-$23, followed by $22.50 and the 50-day moving average.
Energous (WATT, $12.26, up $0.12)
WATT August 12.50 calls (WATT160819C00012500, $1.20, flat)
Entry Price: $1.57 (6/28/2016)
Exit Target: $3.15
Stop Target: $0.75
Action: Resistance is at $12.50-$13. Support is at $11.50-$11 and the 50-day moving average if $12 fails to hold.
Morgan Stanley (MS, $26.37, up $0.68)
MS August 28 calls (MS160819C00028000, $0.38, up $0.11)
Entry Price: $0.79 (6/23/2016)
Exit Target: $1.50
Stop Target: None
Action: Fresh resistance is at $26.50-$26.75 following Friday’s close above the 50-day moving average. Support is at $26-$25.75 and the 100-day moving average.
Viavi Solutions (VIAV, $6.75, up $0.19)
VIAV September 7 calls (VIAV160916C00007000, $0.29, up $0.03)
Entry Price: $0.55 (6/23/2016)
Exit Target: $1.10
Stop Target: None
Action: Near-term resistance is at $6.75-$7. Support is at $6.65-$6.60 and the 50- and 100-day moving averages, but there is risk to $6.50-$6.40 on a close below $6.60.
Editor and Chief Options Strategist