Dear Momentum Options Subscriber,
The four-month trading range is officially over, as the bulls have put together a three-week winning streak for the first time since March. Volatility also flattened and is at its lowest levels of 2016, with 52-week lows in site.
The Dow Monday/Friday closes have also been higher in recent weeks, and earnings season has gotten off to a good start. These factors help to signal that money is continuing to move into the U.S. market following the Brexit woes and bounce off of the June lows.
The Dow gained 10 points, or 0.05%, to end at 18,516 on Friday. The blue-chips closed higher for the sixth-straight session after reaching an all-time intraday peak of 18,557. Upper resistance at 18,500-18,600 held for the second-straight session, with a move above the latter leading to a possible run at 18,800-19,000. Fresh support is at 18,400-18,350, followed by 18,200-18,100.
The S&P 500 slipped 2 points, or 0.1%, to finish at 2,161. The index tapped a record high of 2,169 shortly after the open, with my fluff targets at 2,175-2,180 holding. Continued closes into and above this zone get 2,200 in play. Rising support at 2,160-2,150 was tested for the second-straight session, but there is risk to 2,140-2,125 on a move below the latter.
The Nasdaq fell 4 points, or 0.1%, to settle at 5,029. Tech pushed a high of 5,044 at the start of trading, with near-term resistance at 5,025-5,050 holding or being tested for the fourth-straight session. Continued closes above the latter get 5,100-5,150 in the mix. Fresh support remains at 5,000-4,975. A close below 4,950 would be a bearish development and would likely signal a short-term market top.
The Russell 2000 advanced 3 points, or 0.3%, to close at 1,205. The small-caps held positive territory for much of Friday while making a run to 1,208. Although these appear to be bullish signs, the index made lower highs four-straight days following last Monday’s trip to 1,211. A blast past 1,215 should get 1,225-1,230 back in focus. The low of 1,201 held shaky support at 1,200, but there is risk to 1,190-1,180 if 1,200 is breached this week.
The S&P 500 Volatility Index ($VIX, 12.67, down 0.15) traded up to 13.22 but held 13.50 for the third-straight session and in four of the past six. A close above this level gets 14.50-15 back in the picture. The low of 12.27 cracked 12.50, which is a target the bulls need to capture this week to keep their momentum.
I want to cover some of my homework from late February, which is when I like to make my year-end forecasts for the major indices. This helps me keep possible upside and downside targets in focus, and mid-year is a great time to update my thoughts. I will be including my charts from February to show where the market was and my prior price targets.
To start, I got great clues that the market would rally off of the “double bottom” that formed in mid-February. The charts I drew mid-month showed major downtrend lines, and I predicted that once they were cleared, a run towards the major moving averages would come.
The snapshot from February showed that the 10-year charts were in the process of forming “rounding top” patterns, and these are bearish developments. Rounding tops can take a very long time to consolidate, and this helps explain the previous four-month trading range.
The major indices also held their “necklines” in February, and my upside targets from my notes are now coming into play. I often talk about upside (and downside) “stretch” and “fluff” targets, and this is what I expect to see over the next few weeks. I will be updating the February charts at some point in August, but, for now, let’s go check my homework.
The neckline for the Dow was at 16,000, which is a level that held following the February lows. At the time, the blue-chips were at 16,639, and I mentioned that a rebound could lift the index by 8%-10% and a run to 18,000-18,250 could ensue. Obviously, these levels have been exceeded, which is why I raised my fluff targets to 18,800-19,000 over the near term.
The S&P 500 needed to hold its neckline at 1,800 following the late-February low of 1,810. The index was at 1,948, and I talked about the possibility of a return 2,100-2,150 at some point in 2016. This represented gains of 8%-10% that have now been reached, which is why I have now penciled in 2,200.
The Nasdaq was at 4,590 when I did my late-February chart work, and it held its neckline at 4,250 after being stretched to 4,225-4,200. This area likely would have triggered on another drop below 4,500, but this level held during the June pullback. My upside targets for tech called for rally to 5,000-5,250, which represent gains of 9%-14%. If the bulls clear 5,250, I will be pleasantly surprised and happy to list additional fluff targets.
The neckline for the Russell 2000 was at 1,100 as February winded down, but that was breached following the Feb. 11 low of 943. A trip back above 1,100 required a 5% move, but it has held for the most part. The bears growled at 1,100-1,080 throughout April, May and June, but the bulls have the index at and near my rebound targets of 1,200-1,250. These levels represented 15%-20% returns off of the February low.
Although tech and the small-caps have failed to clear upper resistance, one sector benefitting and leading the way higher is the transports. The Dow Jones Transportation Average ($TRAN, 7,985, down 30) is flirting with the 8,000 level, and continued closes above this level would be a bullish sign. The index is approaching a “double top” breakout or “triple top” breakdown, depending if it can clear and make a significant advance past 8,100.
The 100-day moving average is in a solid uptrend, and the 50- and 200-day moving averages are starting to flatten out. These are bullish signs that could lead the transports to 8,400-8,500 over the near term. With the blue-chips making fresh all-time highs, a breakout on the transports will likely confirm higher highs. Near-term support is at 7,900-7,800, with a move below the latter being a bearish development.
Although I had planned for volatility throughout 2016 and a market pullback last month, I didn’t believe the four-month trading range from mid-February into June would last as long as it did. The technical signals that I was looking for off of the late-June pullback gave crystal clear signs that a July rally would follow.
The bulls showed up early, as the action “officially” started the last week of June, but, either way, we were prepared for the rebound. While I can now say that a “trend” is intact, trusting it is another story that most of the suits-and-ties have trouble dealing with as well.
There were numerous knuckleheads already warning throughout last week that another market top is coming. They were the same slick-talking pros that failed to see the June pullback and blamed the Brexit, were too nervous to buy the discount and are now too scared to trade the rally.
Last week, I talked about the possibility of the VIX testing the low teens and possibly single-digits:
“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. ”
I still believe that the VIX will be the most important technical clue to watch going forward and that the July strength could last at least into the end of the month. From there, August could be bullish for another week or two, but, historically, there is market weakness later in the month. This means another two to four weeks of gains, or three weeks on average.
I mention this because regular July options expired last Friday, and the regular August options will expire in five weeks. Time decay will become a factor in a couple of weeks. If the current action stays bullish, it will still be OK to use August options for another week or two. However, I have started planning possible bearish trades for September and October. For now, let’s continue to enjoy the ride, with the focus of exiting our bullish trades by the end of the month.
From desk to press, futures look like this: Dow (+32); S&P 500 (+6); Nasdaq 100 (+10); Russell (+1).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 58-18 (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).
MGM Resorts International (MGM, $23.34, up $0.05)
MGM August 24 calls (MGM160819C00024000, $0.68, flat)
Entry Price: $0.74 (7/15/2016)
Exit Target: $1.50
Stop Target: None
Action: Near-term resistance is at $23.75-$24. A close above the latter would be a bullish signal. Support is at $23.25-$23 and the 50-day moving average.
Flextronics International (FLEX, $12.89, down $0.07)
FLEX August 13 calls (FLEX160819C00013000, $0.40, down $0.07)
Entry Price: $0.44 (7/14/2016)
Exit Target: $1.00
Stop Target: None
Action: Support is at $12.75-$12.50 and the 50-day moving average, which is starting to turn higher. Resistance is at $13-$13.25. The 52-week high is at $13.23.
Rambus (RMBS, $12.75, up $0.13)
RMBS August 13 calls (RMBS160819C00013000, $0.50, up $0.03)
Entry Price: $0.46 (7/13/2016)
Exit Target: $1.00
Stop Target: None
Action: Short-term resistance is at $12.75-$13. Support is at $12.50 and the 100-day moving average, with risk to $12.25-$12 on a close below the latter. The 50- and 200-day moving averages are starting to trend higher, and earnings are due out after the close this afternoon. I will cover expectations in this afternoon’s Mid-Market Update.
Green Dot (GDOT, $24.00, down $0.13)
GDOT August 25 calls (GDOT160819C00025000, $0.85, down $0.10)
Entry Price: $0.80 (7/7/2016)
Exit Target: $1.60
Stop Target: None
Action: Near-term resistance is at $24.25-$24.50. Support is at $23.50-$23. Shares traded to a 52-week peak of $24.34 on Friday.
Energous (WATT, $11.96, down $0.15)
WATT August 12.50 calls (WATT160819C00012500, $0.90, down $0.15)
Entry Price: $1.57 (6/28/2016)
Exit Target: $3.15
Stop Target: $0.75
Action: There is risk to $11.75-$11.50 on continued weakness following Friday’s close below $12. Resistance is at $12.25-$12.50.
Viavi Solutions (VIAV, $7.03, up $0.03)
VIAV September 7 calls (VIAV160916C00007000, $0.37, down $0.06)
Entry Price: $0.55 (6/23/2016)
Exit Target: $1.10
Stop Target: None
Action: Resistance is at $7.15-$7.25. The 52-week high set in late June is at $7.20. Support is at $6.80-$6.75, followed by $6.65-$6.60 and the 50- and 100-day moving averages.
Editor and Chief Options Strategist