Dear Momentum Options Subscriber,

While tech pushed higher highs, the “rounding top” on the Dow that I warned about coming into this month got worse last week. The lower lows and break below near-term support for the blue-chips on Tuesday helped speed up the selling pressure, and the bears cracked near-term support.

However, Wednesday’s rebound shows why I have been saying that we shouldn’t give up on the bulls, as the big question from last week was if the major indices would hold their 50-day moving averages. Despite the Dow’s seven-session slide before the mid-week bounce, the pullback was less than 2%, while tech was holding gains over the same time period.

This slight divergence had many on Wall Street in panic mode, and the suits-and-ties took their eyes off the ball once again. Thursday’s flat session ahead of Friday’s rally was the flop that won the weekly pot.

The Dow jumped 191 points, or 1%, to settle at 18,543 on Friday. The blue-chips made their biggest move in a month during the steady push to the high into the closing bell. Upper resistance at 18,500-18,600 held, and the July 20 intraday high of 16,622 is now back in play. A move above this level could lead to a run to 18,800-19,000. Support is at 18,350-18,400, with backup support at 18,200-18,000 and the 50-day moving average.INDU

The S&P 500 surged 18 points, or 0.9%, to end at 2,182. The index closed at an all-time high after clearing prior resistance at 2,170-2,175. The momentum from Friday should easily get 2,200-2,220 in the mix. Support is at 2,160-2,150 on a drop back below 2,170. The S&P is 3% above its rising 50-day moving average.SPX

The Nasdaq rocketed 55 points, or 1.1%, to close at 5,221. Tech easily cleared prior resistance at 5,175-5,200, which is a level that will now try to hold as short-term support. Blue-sky territory is possible up to 5,275-5,300 over the near term. The index ended at a record closing high on Friday but fell shy of its all-time intraday high of 5,231.94 that was set on July 20, 2015. The prior record close is at 5,218. The index is 5% above its 50-day moving average.COMPQ

The Russell 2000 rallied 17 points, or 1.5%, to finish at 1,231. The small-caps traded to a fresh 52-week peak of 1,232.87, and the close above 1,225-1,220 was a bullish sign. These levels will try to hold on a pullback, with 1,210-1,200 serving as backup. The 50-day moving average is at 1,175. Resistance is at 1,245-1,250, and the all-time high is south of 1,300 at 1,296, which was reached on June 23, 2015.RUT

The S&P 500 Volatility Index ($VIX, 11.39, down 1.03) dropped another 8% to close below the magical 11.50 level. I say “magical” because it opens up the possibly for the bulls to push the VIX to 10 or possibly single digits. The slick-talking pros that have been saying “Buy protection” or “When the VIX is this low, it’s time to go” were wrong again. I have talked previously about the VIX continuing to test fresh 52-week lows, and Friday’s bottom tapped 11.18. Resistance is at 12.50-13.50. A close above the latter would be a bearish development, but there is no need to “get long” or “buy protection” until the VIX clears 14.50-15.VIX

Although I warned of some early-August weakness, the indices are in the green for the month. The Dow is showing a gain of 111 points for the month, and the S&P 500 has advanced 9 points. The Nasdaq is higher by 59 points, while the Russell 2000 is up over 11 points.

With the S&P 500 setting another record high and the Dow back to its recent all-time high, I talked about tech and the small-caps leading the next breakout and the push to lifetime peaks. More importantly, I have been hammering away at the fact that the VIX could drop below 10. So far, so good.

With this is mind, and with the 50-day moving averages easily holding last week, it was easy for me to ignore the noise of the talking heads, and I hope you did as well. All of the technical indicators, at least the ones I follow, remained bullish in what was then nearly a month-long trading range.

Trading ranges can be maddening, but the portfolio did extremely well in June and July. The slick-talking pros often call this time period the “summer doldrums,” but that is just an excuse and a reason for them to enjoy their not-so-well-deserved vacations. My motto is, “If you are not working, you are not getting paid,” which is why I have been able to accurately predict the nuances of one of the tightest trading ranges ever.

Behind the scenes of last week’s action, I was also watching the Dow Jones Transportation Average ($TRAN, 7,866, up 146), especially on Tuesday, which was when the index torpedoed below its 50-, 100- and 200-day moving averages. The drop from 7,800 to nearly 7,600 went largely unnoticed by the media, with the 200-day moving average holding for three-straight sessions. Friday’s pop past the 50-day moving average was a bullish sign, but there is additional resistance at 7,900-8,000. I would like to see these levels cleared this week. A close below 7,600 would be a very troubling sign.TRAN

Now I want to take a closer look at oil. At times, the talking heads have said that rising oil prices are one of the main reasons the market rebounded in May. While this may have been true to some degree, I was preaching about the trading range that had carried on since March. Oil was on the brink of falling below key levels of support last week, but none of the zombies were blaming it for the less than 2% market pullback over the last two weeks.

Crude oil tested 3-month lows, with WTI battling $40. I follow Brent oil as well, and it was also testing a key level of support at $42. As you can see from the chart below, the 200-day moving average held, and Friday’s close above $44 gets resistance at $46 back in play. The concerning part on the chart is the declining 50-day moving average south of $48.BRENT

I’m not bullish on oil over the short term or longer term due to the technicals, but I do believe there is an opportunity to trade some of the oil stocks for a possible rebound over the near term.

Shares of Exxon Mobil (XOM, $87.56, up $0.08) have been hammered since reaching a peak north of $95 in mid-July. The “gap” drop below $90-$89 led to a further backtest to $86-$85.75. A recovery of $88.50-$89 and the 100-day moving average would be bullish for a possible short-term run past $90.XOM

The XOM September 87.50 calls (XOM160916C00087500, $1.45, down $0.02) could be used by bullish traders expecting $90 or higher to come into play by mid-September. These call options would double from current levels if XOM clears $90.40, technically, by Sept. 16.

The XOM September 90 calls (XOM160916C00090000, $0.53, down $0.03) could be used by super bullish traders that expect shares to clear $91. These call options would double from current levels if XOM clears $91.06, technically, by mid-September.

As a hedge, bearish traders could target the XOM September 85 puts (XOM160916P00085000, $1.15, down $0.13) if shares fall below $86-$85.75. Another drop below this level could lead to a test to $84-$83.50 and the 200-day moving average. If shares continue to rise, the put options will become cheaper, of course, so just put them on your watch list. These put options would return 100% if XOM shares fall below $83.70 by mid-September.

The XOM October 82.50 puts (XOM161021P00082500, $1.25, down $0.15) could also be targeted on a break below $85.50. These put options would double if XOM shares fall below $80, technically, by Oct. 21.

Aside from the transports and oil, it will be important for the financial stocks to show continued strength. The Financial Select Sectors SPDR (XLF, $24.02, up $0.45) finally broke out of a four-week trading range to clear $24 on Friday. The two-year chart below shows that a run to $25 or higher could be in the cards over the near term. This is a very bullish development as long as fresh support at $23.75-$23.50 holds on a pullback.XLF

It is hard to trust the financial stocks following Japan’s $274 billion stimulus package last week. To put things in perspective, it was the country’s 26th stimulus package since 1990. Wow. Rumor has it that the country is using the cash from the stimulus package to buy everything under the sun, including U.S. stocks.

The race to the bottom continues, as Australia cut its interest rates to record lows recently, and the euro hit 5-week highs against the U.S. dollar. While Bank of America (BAC, $15.05, up $0.57) warned of post-Brexit woes, in any event, the charts are looking bullish for the bank stocks. BAC surged 4% on Friday to clear $15 and easily put 52-week highs back on the map. The 2-year weekly chart shows the 52-week high north of $18, with longer-term resistance at $15.50-$16.BAC

To play continued strength in the stock, aggressive traders could use the BAC August 15 calls (BAC160819C00015000, $0.27, up $0.19). These options zoomed an astounding 238% on Friday, as 41,000 contracts traded after opening at $0.15 from the prior close of $0.08.

The BAC September 16 calls (BAC160916C00016000, $0.11, up $0.05) soared 83% on volume of over 9,500 contracts, and these could be used by more conservative traders wanting to give the trade an extra month to play out.

Whipsaw action and air pockets in the market take a ton of homework to navigate, and most “fund managers” hate to put in long hours. I haven’t taken a vacation all year, but I’m gearing up for one at some point in September. With only a few current trades, along with a couple of new ones this morning, I expect to stay busy up until Labor Day weekend, and I’m hoping the bulls stay strong until then.

I have a New Trade this morning on a name that recently made us a decent gain of 7% in 12 days. This time around, I’m hoping that we can make a double- or triple-digit return with MGM Resorts International (MGM) back in an uptrend. I also have a New Trade on Bank of America (BAC) with different call options than those I discussed above. Let’s go check them out.

From desk to press, futures look like this: Dow (+26); S&P 500 (+3); Nasdaq 100 (+9); Russell (+1).

Momentum Options Play List

Closed Momentum Options Trades for 2016: 61-21 (74%). All trades are dated and time stamped 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).


New Trades

Bank of America (BAC, $15.05, up $0.57)

Buy to open the BAC September 15 calls (BAC160916C00015000, $0.45, up $0.22) for a maximum price of $0.55.

Action: I like these call options at current levels, and you can use a Limit Order up to $0.55 to get the best fills on this morning’s open.

These are the regular monthly call options that expire on Sept. 16. I will provide the parameters of the trade in today’s Mid-Market Update.


MGM Resorts International (MGM, $24.45, up $0.39)

Buy to open the MGM September 25 calls (MGM160916C00025000, $0.60, up $0.10) for  a maximum price of $0.75.

Action: I like these call options at current levels, and you can use a Limit Order up to $0.75 to get the best fills on this morning’s open.

These are the regular monthly call options that expire on Sept. 16. I will provide the parameters of the trade in today’s Mid-Market Update.


Current Trades

Rambus (RMBS, $13.67, up $0.21)

RMBS September 14 calls (RMBS160916C00014000, $0.35, up $0.08)

Entry Price: $0.40 (8/1/2016)

Exit Target: $0.80

Return: -13%

Stop Target: None

Action: Fresh resistance is at $13.75-$14. A move above the latter this week would be bullish. Support is at $13.50-$13.25. A close below $13 would be a bearish development.


Vuzix (VUZI, $7.47, down $0.30)

VUZI September 10 calls (VUZI160916C00010000, $0.35, down $0.20)

Entry Price: $0.97 (7/27/2016)

Exit Target: $2.00

Return: -64%

Stop Target: None

Action: Friday’s low tapped $7.35. Support is at $7.25-$7 and the 50-day moving average. Resistance is at $7.50-$7.75. Earnings are due out this week or next, but the company hasn’t officially announced a date yet.


Viavi Solutions (VIAV, $7.25, up $0.11)

VIAV September 7 calls (VIAV160916C00007000, $0.48, up $0.06)

Entry Price: $0.55 (6/23/2016)

Exit Target: $1.10

Return: -13%

Stop Target: None

Action: Shares traded to resistance at $7.25 and a fresh 52-week peak. Support is at $7, with $6.90-$6.85 and the 50-day moving average serving as backup. Earnings are due out on Thursday, Aug. 11, and I will cover the expected numbers this afternoon.


Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options