Dear Momentum Options Subscriber,
The bulls four-week win streak came to an end as the bears took a slice of the action. Despite the mixed action and three-week trading range, the technical outlook remains bullish. However, there are a few bearish signals, especially on the Dow, that are forming and something that remains a concern going into this week.
The Dow fell 24 points, or 0.1%, to finish at 18,432 on Friday. The blue-chips traded to a low of 18,371 on the open with support at 18,400-18,350 held for the fifth-straight session. The index closed lower all last week with a slightly “rounding top” forming. This is usually a bearish setup and I have warned of risk to 18,200-18,000 and the 50-day moving average if 18,350 fails to hold. The intraday run into positive to 18,466 failed resistance at 18,500-18,600. A close above the latter this week would help the technical outlook.
The S&P 500 added 3 points, or 0.2%, to settle at 2,173. The index reached another record high at 2,177 intraday and held resistance at 2,170-2,175. A close above the latter keeps 2,200 in play. Support at 2,160 held for the 12th-straight session following Friday’s low of 2,163. There is risk to 2,150-2,140 on a close below this level. The 50/100-day moving averages are still in a nice uptrend. The 200-day moving average is trying to maintain an uptrend but could be flattening out.
The Nasdaq gained 7 points, or 0.1%, to close at 5,162. Tech muscled its way to a high of 5,175 to push lower resistance 5,175-5,200. It was the fourth-straight higher high for the index with a close above the latter likely leading to a test of the all-time high just south of 5,232. Support is at 5,125-5,100 on a move back below 5,150 that has held for two-straight sessions. The 50/100-day moving averages are also in a strong uptrend with the 100-day crossing above the 200-day moving average last month.
The Russell 2000 climbed 2 points, or 0.2%, to end at 1,219. The small-caps reached a peak of 1,224 on Friday with resistance at 1,220-1,225 holding for the third-straight session. A close above the latter gets 1,235-1,240 in the mix. The 50-day moving average cleared the 200-day moving average in late May and the 100-day moving average followed suit last month. These “golden crosses” are bullish signals going forward as long as 1,200-1,175 holds on a major pullback this month.
The S&P 500 Volatility Index ($VIX, 11.87, down 0.85) fell 7% after trading down to 11.77. The close below 12.50 was a bullish signal and gets 11.50-10 in play. The 52-week low is at 10.88. Resistance is at 12.50-13.50. The major moving averages are still in a downtrend and I have talked about the possibility of a single-digit VIX coming into play.
The Dow jumped 502 points, or 3%, in July while the S&P 500 soared 74 points, or nearly 4%. The Nasdaq zoomed 319 points, or 7% and the Russell 2000 surged 68 points, or 6%. These are impressive numbers to say the least but even more astonishing are the gains off the post-Brexit lows.
The Dow is up 1,369 points, or 8%, since its June 27th low of 17,063 and the S&P 500 has advanced 182 points, or 9%, following its low of 1,991 on the same day. The Nasdaq tested a low of 4,574 intraday on June 27th and has raced 588 points higher, or 13%. The Russell 2000 bottomed at 1,085 in late June and has bounced 134 points, or 12%.
Although the market trudged higher in July, the past three weeks has produced the tightest trading range in decades as the major indexes have failed to move more than 1%. While this has been frustrating to most money managers, the portfolio had an incredible July and is light, meaning we can continue to add new trades.
While I can take credit for calling for a market pullback in late June followed by a July rally, setting up our next trades in September and October will be just as crucial. The August regular options expire in less than three weeks and I often call this the “danger zone” as time decay starts to evaporate more quickly. However, near-term call, or put options, will provide the biggest bang for the buck as well as dramatic losses, depending on what side of the trade you are on.
The one caveat we need to keep in mind that although the overall indexes are moving at a snail’s pace, other stocks and sectors are in strong uptrends. The most obvious is Tech, given the PowerShares QQQ ETF (QQQ, $115.23, up $0.25) push towards all-time highs last week.
The two-year weekly chart shows a “triple-top” breakout is in process with blue-sky territory up to $117.50-$120. These price targets are within reach providing support at $112.50 holds over the near-term.
To take advantage of a possible run towards $117-$118 in August, I’m looking at the QQQ August 115 calls (QQQ160819C00115000, $1.45, down $0.03) that are slightly “in-the-money” and the QQQ September 116 calls (QQQ160916C00116000, $1.75, down $0.05) that are slightly “out-of-the-money.”
Besides the 30 cents in premium difference, I mentioned the regular August options expire in less than three weeks, on the 19th, at Friday’s close. Given the current trading range, I would be a little hesitant using August options but I mentioned the QQQ’s are showing some of the strongest strength in the market.
At $1.45, the breakeven point for the QQQ August 115 calls, technically, would be at $116.45 with a double occurring if the QQQ’s clear $117.90 by August 19th.
As far as the QQQ September 116 calls, and the $1.75 premium, the breakeven point would be $117.75, technically by September 16th. A double would occur if the QQQ’s trade to $119.50.
I mentioned my upper targets for the QQQ’s are at $117.50-$120 so both of these trades could provide a triple-digit return depending on how quickly higher highs come into play. I will also add I’m not a big fan of the regular September options as they expire mid-month. The September option chains will have less than a month before they expire once the August options flare out.
August can be a very tricky month to trade as I’ve already mentioned there is historical weakness during the month. However, it has also been a bullish month and the technical picture is showing strength.
I know there are bearish emotions out there and I wouldn’t be wise if I didn’t have put options on my Watch List. While I have listed two bullish option trades on the QQQ’s, I also have the QQQ October 110 puts (QQQ161021P00110000, $1.70, down $0.15) on my radar. Although these options are $5 “out-of-the-money,” I might use them for “protection” if and when the VIX trades back above 13.50-15.
The aforementioned puts will get cheaper in the coming weeks if the Nasdaq stays flat or continues its drifts towards a retest of all-time highs.
Another sector, and one of favorites, I want to cover is Biotech. The S&P 500 Biotech Spiders (XBI, $62.07, up $0.75) is at a six-month high and has plenty more room to run. The 52-week peak is north of $86 and the recent breakout above the 200-day average was a very bullish signal.
Near-term resistance is at $64-$66 with a run at $70 possible over the next month or so. This is assuming momentum stays strong, or course, and there are other bullish technical signs showing the chances are good higher highs are in play. Fresh support is at $60 followed by $58 and the 200-day moving average.
One problem I have trading the sector or XBI options are that they are less traded than the QQQ’s. However, there were a few bullish trades that stood out to me on strong volume. One of the more riskier trades I was watching were the 2,000 contracts traded in the XBI September 75 calls (XBI160916C00075000, $0.07, up $0.02). These options are extremely “cheap” and lottery traders were picking up these put options that are $13 “out-of-the-money” (OTM) on Friday.
Although the aforementioned options could double on a run towards $70+, a more reasonable trade appears to be the XBI September 65 calls (XBI160916C00065000, $1.35, up $0.12). Open interest in these call options is above 15,000 and they are only $3 OTM.
If XBI can trade to $67.70 by mid-September, these call options would return 100% from current levels. The breakeven point is $66.35, technically, if XBI trades to this level by September 16th.
Tech and small-caps have a little more room to run higher before they approach all-time new highs. I’m looking for the money managers that have underperformed the market this year to help bid these
From desk to press, futures look like this: Dow (+21); S&P 500 (+1.75); Nasdaq 100 (+1.5); Russell (+2.6).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 61-19 (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).
Vuzix (VUZI, $8.04, down $0.08)
VUZI September 10 calls (VUZI160916C00010000, $0.75, down $0.03)
Entry Price: $0.97 (7/27/2016)
Exit Target: $2.00
Stop Target: None
Action: Support is at $8-$7.50, with risk to $7 on a close below the latter. Resistance is at $8.25-$8.50.
Green Dot (GDOT, $23.98, down $0.08)
GDOT August 25 calls (GDOT160819C00025000, $0.65, down $0.10)
Entry Price: $0.80 (7/7/2016)
Exit Target: $1.60
Stop Target: None
Action: Support is at $23.75-$23.50. Resistance is at $24-$24.25.
Energous (WATT, $12.47, up $0.02)
WATT August 12.50 calls (WATT160819C00012500, $0.80, up $0.05)
Entry Price: $1.57 (6/28/2016)
Exit Target: $3.15
Stop Target: $0.50 (Stop Limit)
Action: Resistance is at $12.50-$12.75. Support is at $12.25-$12.
Viavi Solutions (VIAV, $7.08, down $0.06)
VIAV September 7 calls (VIAV160916C00007000, $0.41, down $0.04)
Entry Price: $0.55 (6/23/2016)
Exit Target: $1.10
Stop Target: None
Action: Support is at $7, with $6.80-$6.75 and the 50-day moving average serving as backup. Resistance is at $7.25.
Editor and Chief Options Strategist