Dear Momentum Options Subscriber,

The market finished mostly higher last week, but the small-caps failed to pull their weight. The gains were slight, but they should keep the bullish momentum going. This week could produce much of the same push-and-pull action, and earnings will likely produce the biggest winners and losers on an individual basis. Overall, the bulls are trying to rally other sectors of the market, as retail stocks are starting to break out, and they will remain in focus this week.

The Dow fell 37 points, or 0.2%, to end at 18,576 on Friday. The blue-chips traded in negative territory throughout the session while testing a low of 18,535. The bulls are holding upper resistance at 18,500-18,600, and there is additional blue-sky territory to 18,800-19,000 on continued closes above the latter. Rising support is at 18,400-18,350, with backup now at 18,200. The record high from last Thursday tapped 18,638.

The S&P 500 slipped nearly 2 points, or 0.1%, to close at 2,184. The index was weak on the open but traded to a high of 2,186 during the first half of the action. Upper near-term resistance held at 2,190-2,200. Support is at 2,180-2,175, and a close back below 2,170 would be a warning signal. Friday’s low tapped 2,179. Last week’s all-time high reached 2,188.

The Nasdaq added 4 points, or 0.1%, to finish at 5,232. Tech struggled for much of the session following several jabs at the 5,215 level. Support at 5,200-5,175 held for the sixth-straight session, with a close below the latter likely signaling a near-term market top. Upper resistance at 5,225-5,250 was firm following the push to 5,233. The recent all-time high is at 5,238, which is a level I would like to see cleared today.

The Russell 2000 climbed less than a point, or 0.1%, to settle at 1,229. The small-caps made a two-point trip to 1,231 ahead of Wall Street’s lunch break, with short-term resistance at 1,235-1,240 holding. A close above the latter would confirm that the index is still on track to clear the all-time peak just south of 1,300. This would represent a gain of 5.8% from current levels. The Friday afternoon fade to 1,225 held upper support at 1,225-1,220. A close below 1,215-1,210 this week would be a bearish development.

The S&P 500 Volatility Index ($VIX, 11.55, down 0.13) traded between 11.28 and 12. I was rooting for a close below support at 11.50, which is a crucial level the bulls need to get below and hold to win this week. Resistance is at 12.50-13.50, with backup help at 14.50 and the 50-day moving average. A close above 15 will be the true signal that a near-term market top is in. Otherwise, I plan to stay with bullish call options until some other technical issues weaken.

While August has been a historically weak month, the market is showing decent gains so far, as the technical indicators I follow have stayed strong and are in a bullish uptrend. Meanwhile, the VIX has been in a downtrend all summer long, or since late June, after “double topping” north of 26. This was one of the major indicators I used to stay long all summer with bullish trades.

This week’s earnings are heavy in retail once again. Home Depot (HD), Dick’s Sporting Goods (DKS) and TJX Companies (TJX) will announce their numbers on Tuesday. Wednesday’s parade includes reports from American Eagle Outfitters (AEO), Lowe’s Companies (LOW), Staples (SPLS) and Target (TGT).

Thursday’s lineup includes Gap (GPS), L Brands (LB), Perry Ellis (PERY), Ross Stores (ROST) and Wal-Mart Stores (WMT). On Friday, The Buckle (BKE), Footlocker (FL) and Hibbett Sports (HIBB) will announce their quarterly results.

I took a look at all of the aforementioned companies over the weekend to find a possible earnings trade for this morning, or early this week, and there are a few names I like. However, the safest way to play continued strength in the sector while limiting risk is to trade the SPDR S&P 500 Retail ETF (XRT, $45.51, up $0.25).

The chart below shows that shares are nearing a multi-month breakout above $46.50 and the late March high. A “golden cross” has formed, with the 50-day moving average crossing above the 200-day moving average. This is usually a bullish signal on continued closes above $46.50.

With the regular XRT August options expiring this Friday, I eliminated these from consideration. There are weekly options available to trade, but let’s look at the monthly XRT September 46 calls (XRT160916C00046000, $0.70, up $0.10), which have a good risk/reward profile.

The breakeven point for the trade would be if shares are at $46, technically, by Sept. 16. These options would return 100% from current levels if XRT clears $46.50 by mid-September.

The one caveat I don’t like about the aforementioned September calls is the fact that they expire mid-month, as the third Friday comes early in the monthly cycle.

I also looked at the XRT October 47 calls (XRT161021C00047000, $0.60, up $0.15). The breakeven point for the trade would be if shares are at $47.60, technically, by late October. The position would double from current levels if XRT clears $48.20 by mid-September.

These options expire in late October, which would allow the trade an extra five weeks of time to play out. While these are “cheap” options, these trades would lose money if shares fail to clear $46 by Sept. 16 or $47 by Oct. 21.

It is always good to follow history, and knowing some other “techniques” can bring reason to your trading. What I love about studying stock market history is that it often rhymes and repeats. A deeper look at the market shows that August is usually strong in election years, as there have only been two losing years out of the last 16 election years since 1952. Moreover, the last seven months of an election year tend to be bullish. This is another quirk I like to use in my trading style and, as Stevie Wonder would say, there is some “superstition” in me.

We haven’t made it through August yet, and nothing is a given. However, knowing the odds of a certain situation when playing stocks and options can give you a better “feel” for the market.

The major indices are comfortably above their 50-day moving averages, which is another subject I want to spend a little time talking about. While there continue to be non-believers of this return to all-time highs, it is getting easier to predict when a market peak will be reached and the exact time to get short. Until then, it is a stock picker’s market.

The Dow is currently 2% above its 50-day moving average, while the S&P 500 is 3% above. The Nasdaq is perched 5% atop its 50-day moving average, and the Russell 2000 is 4% above this technical level. While these single-digit levels would be impressive in the “old” market days, they don’t look too worrisome given the up and down double-digit moves in the market this year. Of course, the gains off of the Brexit lows make this a much more dangerous picture than I’m painting. However, I do believe the market could rally another 3%-5% from current levels based on momentum.

I talked about a July rally lasting into August and recently extended that forecast into September. With the Nasdaq up seven-straight weeks, some traders have lost their shirts trying to short tech’s longest winning streak since 2012. Like roulette, it’s hard to bet against those odds until we get back-to-back weekly losses on the index and a major break below the 50-day moving averages.

The last time the Dow, S&P 500 and Nasdaq closed at record highs on same day, before last week, was in 1999. Coming into 2016, I predicted a very volatility market would surface and resurface given all of the geopolitical tensions and tight trading ranges throughout 2015. While most professional money managers were “selling in May and going away,” I was predicting that the VIX could test 52-week lows over the summer.

While I have spent the entire past three months working, the slick-talking pros will be vacationing through the end of August and into the first week or two of September. This is when trading could get wacky as traders bet on where the market will be heading for next month and October.

Obviously, the suits-and-ties will be playing musical chairs from now until September. We just need to make sure we are seated and ready to buy put options when the actual pullback does begin. Until then, let’s listen and watch the music while doing our best to stay ahead of the action.

I could have a new trade shortly after the open, so stayed locked and loaded.

From desk to press, futures look like this: Dow (+43); S&P 500 (+4); Nasdaq 100 (+9); Russell (+3).

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).


MGM Resorts International (MGM, $24.50, down $0.39)

MGM September 25 calls (MGM160916C00025000, $0.53, down $0.17)

Entry Price: $0.70 (8/8/2016)

Exit Target: $1.40

Return: -24%

Stop Target: None

Action: Support is at $24.25-$24, followed by $23.75 and the 50-day moving average on continued weakness. Resistance is at $24.75-$25.


Bank of America (BAC, $14.91, up $0.03)

BAC September 15 calls (BAC160916C00015000, $0.32, down $0.02)

Entry Price: $0.50 (8/8/2016)

Exit Target: $1.00

Return: -36%

Stop Target: None

Action: Support is at $14.75-$14.50 and the 200-day moving average. We may exit the trade on a close below the latter to save the remaining premium, so stay tuned. Short-term resistance is at $15-$15.25.


Rambus (RMBS, $13.60, up $0.04)

RMBS September 14 calls (RMBS160916C00014000, $0.27, down $0.01)

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

Exit Target: $0.80

Return: -33%

Stop Target: None

Action: Resistance is at $13.75-$14. Support is at $13.50-$13.25.


Vuzix (VUZI, $7.87, up $0.12)

VUZI September 10 calls (VUZI160916C00010000, $0.35, up $0.02)

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

Exit Target: $2.00

Return: -64%

Stop Target: None

Action: Resistance is at $7.75-$8, and a close above the latter would be a bullish development. Support is at $7.50-$7.25.


Viavi Solutions (VIAV, $7.30, down $0.03)

VIAV September 7 calls (VIAV160916C00007000, $0.43, down $0.12)

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

Exit Target: $1.10

Return: -22%

Stop Target: None

Action: Shares traded to a low of $6.96 on Friday. Support is at $7 and the 50-day moving average. A close below this level could force us to make an early exit. Resistance is at $7.25-$7.50.

Volume was explosive, as these options traded over 6,000 contracts last Friday. This could mean bullish traders are placing bets and seeing the hidden value in this gem of a stock.


Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options