Dear Momentum Options Subscriber,
The bulls have now extended their winning streak to four-straight weeks, and it has included records highs and a run to upper resistance. Tech showed strength throughout last week and helped pull the overall market into positive territory.
The bears made some noise and had a shot of a getting a split, however, as the small-caps were down and the blue-chips were only a point higher for the week going into Friday’s session. However, volatility continued to shrivel and sank to fresh 2016 lows to end the week.
The Dow added 53 points, or 0.3%, to finish at 18,570 on Friday. The blue-chips tested a low of 18,491, with support at 18,600-18,500 holding into the closing bell. There is risk to 18,400-18,350 on a move below the latter. Resistance is at 18,800-19,000 on a recovery of the 18,600 level. The major moving averages are in a nice, rising uptrend.
The S&P 500 surged 9 points, or 0.5%, to settle at 2,175. The index came close to setting another all-time record high after holding upper resistance at 2,170-2,175. Additional hurdles are at 2,185-2,200. Near-term support is at 2,060, with backup at 2,050-2,040 if the bulls fail to hold this level into the weekend. The major moving averages are in an uptrend, although the 200-day moving average is starting to flatten.
The Nasdaq jumped 26 points higher, or 0.5%, to close at 5,100. Tech slipped to a low of 5,064 on the open, with support at 5,050 holding for the third-straight session and in four of the past five. Fresh resistance is at 5,125, followed by 5,150-5,175 and the 52-week high.
The Russell 2000 climbed 9 points, or 0.8%, to end at 1,212. The small-caps traded to a weekly and 2016 high of 1,214. The 52-week high is at 1,244. Resistance is at 1,215-1,225, with a move above the latter likely leading to fresh 52-week peaks north of 1,245. Support is at 1,200, with 1,190-1,185 serving as backup.
The S&P 500 Volatility Index ($VIX, 12.02, down 0.72) closed back below 12.50 on Friday and did so for the fourth time in the past five sessions. Support is at 11.50, with a shot at 10 on continued closes below this level. Resistance is at 13.50, followed by 14.50-15 and the 50- and 100-day moving averages.
Earnings have come in better than expectations, as 75% of companies that have reported have topped forecasts. Typically, the rate of earnings beats or matches runs around 65%-70% each quarter, so this is an exceptional rate that has helped propel higher highs.
Much of the credit can go to the financial stocks, as a number of companies topped expectations. The suits-and-ties have been telling investors to stay clear of the sector for months and into earnings season due to the low-interest-rate environment. However, the price action has been bullish off of the post-Brexit lows.
The Financial Select SPDR (XLF, $23.68, up $0.15) is pushing a triple-top breakout, or breakdown, depending on whether the next move is above $23.75-$24 or a break back below $23 and the 50-day moving average. A tight trading range has developed over the past seven sessions. The aforementioned resistance and support zones will be good clues to possibly go long or short once the trading range is resolved. Near-term resistance is at $23.75-$24. Support is at 23.25-$23.
The XLF August 24 calls (XLF160819C00024000, $0.20, up $0.02) are a “cheap” way to play a breakout above $23.75-$23.80 for a blast past $24. These options expire in less than four weeks, and the breakeven point, technically, would be for XLF shares to trade to $24.20 by late August. If XLF shares reach $24.40, these options would double from current levels.
Interestingly, the XLF September 25 calls (XLF160916C00025000, $0.09, up $0.01) were active on my radar, as over 40,000 contracts traded on Friday. These call options have a breakeven price of $25.09 by mid-September. The 52-week high for XLF shares is at $25.45, and these options have nearly seven weeks before expiration. If XLF reaches $25.20, these options would easily double.
While it is tempting to take a few lottery tickets on the September 25 strike, the XLF September 23 calls (XLF160916C00023000, $0.98, up $0.06) offer a safer way for a double if shares do make a run at $25 and stall. If shares reach $25 by mid-September, these call options would double from current levels. As far as the XLF September 25 calls, the options would expire worthless if shares fail to clear $25.
A 5% move from current levels in shares of XLF would get $25 in play, and these are some of my favorite trades going into the week
The Dow Jones Transportation Average ($TRAN, 7,966, up 107) continues to struggle with resistance and the 8,000 level despite a golden cross forming, as the 50-day moving average is currently above the 200-day moving average. The 100-day moving average is in a nice uptrend, with solid support at 7,800-7,750. A move below the latter would likely signal a market top, while a surge past 8,000-8,100 would confirm higher market highs.
One stock that has pulled back but that is still in a bullish pattern in CSX (CSX, $28.48, up $0.14). The company recently reported earnings that were $0.02 ahead of expectations, but analysts were mixed. Two brokerage firms downgraded CSX stock from “Buy” to “Hold,” while another raised its price target from $30 to $35. Lowered third-quarter expectations were cited on the downgrades, while the one analyst said the company was benefiting from the U.S. auto recovery and growth in its domestic intermodal business.
The chart shows near-term resistance at $28.75-$29. A move above the latter should get the low $30s in play. The major moving averages are in a rising uptrend, with near-term support at $28-$27.50.
The CSX August 29 calls (CSX160819C00029000, $0.40, up $0.02) look like a possible bullish trade and would double from current levels if CSX shares reach $29.80 by Aug. 19.
The CSX September 28 calls (CSX160916C00028000, $1.15, up $0.05) would also double from current levels if CSX shares reach $30.30, technically, by mid-September. These options also allow another month of time premium for the trade to play out than the August 29 call options.
I have been covering the VIX in tremendous detail all month, and all year for that matter, as the talking heads continue to bring it more into focus the lower it goes. Some of the comments include “It is a great time to buy put protection,” or “When the VIX is this low, it is time to go.” These clever clichés have been heard over the years on Wall Street, but none of the knuckleheads study in the VIX in detail.
If the professional money managers did, they would have mentioned that a July rally was in store in late June when the VIX held longer-term resistance at 25-30. More specifically, I mentioned that if the VIX made continued closes below 15, fresh all-time highs would come back into play.
The VIX closed at 15.63 on the last trading day of June after testing a high of 26.72 just three sessions earlier. The prior day, volatility reached a high of 26.24 to form a short-term double top, and it helped confirm my July rally call to all-time highs was coming into play. On the first trading day for July, the VIX closed at 14.77.
The VIX also gave great clues heading into the Brexit vote, as the index was pushing 20. I also warned in mid-June that a pullback was coming before July and that second-quarter earnings season could help fuel additional gains.
My point is that I have never abandoned the VIX during my two decades of trading and writing about the financial markets. I talk about it daily because, to me, it remains one of the best indicators in the business.
While I have talked about the VIX possibly testing the single-digits, at current levels, the upside gains might be limited. For instance, the iPath S&P 500 VIX Futures (VXX, 11.17, down 0.28) traded to a 52-week low of 11.04 last week and could test 10 if the recent VIX fall continues this week. Near-term support is at 11.25-11 for VXX. Resistance is at 12.50-13.
The VXX August 11 puts (VXX160819P00011000, $0.72 up $0.08) would double from current levels, technically, if VXX trades below 9.56 by Aug. 19.
On the other hand, the VXX September 14 calls (VXX160916C00014000, $0.65, down $0.12) look good for “insurance” and would double if VXX trades above 15.30 by mid-September. The VXX December 15 calls (VXX161216C00015000, $1.25, down $0.15) could offer great value over the next four months, and I would be interested in getting them for under $1. However, if the VIX clears 13.50-15 in the coming weeks, both aforementioned calls options look very tempting, and they are currently on my watch list as well.
With earnings season switching into full gear this week, technology will be the main group in focus. I will try to cover some of the major announcements from Apple (AAPL, $98.66, down $0.77), which has earnings due out after Tuesday’s close, or Amazon (AMZN, $744.86, up $0.43), which is due to release numbers on Thursday. These two companies will weigh heavily on the overall market, depending on their results. However, options trades on these stocks can be expensive. Instead, I might try to find some under-the-radar trades in tech to play a possible run to all-time highs on the Nasdaq.
From desk to press, futures look like this: Dow (+12); S&P 500 (+1); Nasdaq 100 (+0); Russell (-0.7).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 59-18 (77%). 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).
Flextronics International (FLEX, $13.00, down $0.14)
FLEX August 13 calls (FLEX160819C00013000, $0.30, down $0.28)
Entry Price: $0.44 (7/14/2016)
Exit Target: $1.00, lower to $0.50 (Limit Order)
Stop Target: None
Action: Lower the Exit Target from $1.00 to $0.50 and make it a Limit Order.
Shares traded down to $12.12 on Friday despite a good quarter. Backup support at $12.25-$12 and the 100-day moving average held, and the close at $13 was encouraging. The rebound to $13.06 into the closing bell keeps resistance at $13.25-$13.50 in play.
Rambus (RMBS, $13.56, up $0.16)
RMBS September 14 calls (RMBS160916C00014000, $0.42, up $0.04)
Entry Price: $0.40 (7/22/2016)
Exit Target: $0.80
Stop Target: None
Action: A golden cross has formed, with the 50-day moving average crossing over the 200-day moving average on Friday. Shares traded to a high of $13.61, with resistance at $13.75-$14. If shares trade to $14.80, technically, by mid-September, these call options will double from our entry price. Support is at $13.25-$13 on a move back below $13.50.
MGM Resorts International (MGM, $23.19, up $0.02)
MGM August 24 calls (MGM160819C00024000, $0.50, down $0.02)
Entry Price: $0.74 (7/15/2016)
Exit Target: $1.50
Stop Target: $0.35 (Stop Limit)
Action: Support is at $23-$22.75. Resistance is at $23.25 and the 50-day moving average, followed by $23.50-$23.75.
Green Dot (GDOT, $24.15, up $0.09)
GDOT August 25 calls (GDOT160819C00025000, $0.80, flat)
Entry Price: $0.80 (7/7/2016)
Exit Target: $1.60
Stop Target: None
Action: Near-term resistance is at $24.25-$24.50. The recent 52-week high is at $24.34. Support is at $23.75-$23.50 if $24 fails to hold. The major moving averages are still in a solid uptrend.
Energous (WATT, $11.99, up $0.25)
WATT August 12.50 calls (WATT160819C00012500, $0.75, up $0.10)
Entry Price: $1.57 (6/28/2016)
Exit Target: $3.15
Stop Target: $0.50 (Stop Limit)
Action: Resistance is at $12-$12.25. Support is at $11.75-$11.50 and the 50-day moving average. Shares could see some action this week with Apple reporting earnings.
Viavi Solutions (VIAV, $7.12, up $0.04)
VIAV September 7 calls (VIAV160916C00007000, $0.40, flat)
Entry Price: $0.55 (6/23/2016)
Exit Target: $1.10
Stop Target: None
Action: Resistance is at $7.15-$7.25. Support is at $6.80-$6.75 and the rising 50-day moving average.
Editor and Chief Options Strategist