Dear Momentum Options Subscriber,
The bulls and bears split the wins last week, as the Dow and the S&P 500 struggled to hold their slight gains going into Friday’s session. Although the Nasdaq and Russell 2000 finished lower on Friday, they both ended the week slightly higher.
The Dow fell 45 points, or 0.2%, to close at 18,552. The blue-chips traded in negative territory throughout the session, with the low checking in at 18,491. Near-term support is at 18,400-18,350 on a close below 18,500 this week. Resistance at 18,500-18,600 continues to be a headache, but continued closes above this level could lead to 18,800-19,000 and fresh all-time highs.
The S&P 500 declined 3 points, or 0.1%, to end at 2,183. The index opened at 2,184 and tested a morning low of 2,175. Lower support at 2,180-2,175 held, but there is risk to 2,160-2,150 on a breach of 2,170. Resistance is at 2,190-2,200, and the all-time high is at 2,193.
The Nasdaq declined nearly 2 points, or 0.03%, to settle at 5,238. Tech tested 5,217 shortly after Friday’s open, with support at 5,225-5,200 standing strong. A move below the latter could get 5,175-5,150 in the mix. The intraday rebound into positive territory reached 5,245, but resistance at 5,225-5,250 held. A move above the 5,250 level should keep 5,275-5,300 and fresh record highs in play.
The Russell 2000 slipped a fraction of a point, or 0.01%, to finish at 1,236. The small-caps traded in the red for the majority of the session, with the bears pushing a low of 1,231. Upper support at 1,230-1,225 held, but there is risk to 1,210-1,200 on a move below 1,220. Short-term resistance is at 1,240-1,245, and a close above the latter will likely lead to 1,250-1,260.
The S&P 500 Volatility Index ($VIX, 11.34, down 0.09) traded in a tight range between 12.28-11.33 while closing near its late-day low. Resistance is at 12.50-13.50, and a close above the latter will likely lead to 14.50-15. Continued closes below 11.50 should keep 10 and possibly single-digits in play.
One of the longest trading ranges in history continued last week, with the bulls pushing higher highs and higher lows. While watching for all bullish and bearish clues each and every session is part of the grind and something I relish, it is not an easy task. However, I hope I have made it easier for you to bear during the summer doldrums.
While the Dow, S&P 500 and Nasdaq all hit record highs earlier this month, the action in the Russell 2000 will be important this week and into the end of August. The Russell is the only index that hasn’t posted fresh all-time highs, but I’m still hopeful that 1,300 comes into play at some point in September or October.
The Russell managed a seven-point gain last week, but more impressive was that it was the Nasdaq’s eighth winning week in a row, which is its longest streak since 2010. These bullish clues are helping the bulls keep momentum inside the current trading range, which is what has me hopeful for higher highs.
The major indices are up 1%, on average, for the month of August, which is historically in line with the return for the S&P 500 during presidential election years since 1952. With seven trading days left in the month, the bulls are in control and volatility remains low, both of which are bullish signs.
The financial stocks held up well following the release of the Federal Reserve meeting minutes last week. The update showed that the Fed is still divided on whether to raise interest rates, and another meeting is scheduled for late September. Some of the zombies said that they want inflation to rise before they hike interest rates, while others prefer to wait for the November and December powwows before possibly raising rates.
Wall Street took last week’s news as a hint that a September rate hike is off of the table, and the indices rallied higher. Less than 48 hours later, San Francisco Fed President John Williams cautioned that the Fed should raise rates sooner rather than later based on domestic economic momentum. This didn’t make much sense to me, as second-quarter GDP came in at 1.2%, but perhaps those comments led to some of Friday’s weakness. Fed Chair Janet Yellen is set to speak this Friday, and she will likely try to say that a September rate hike is still in the cards.
The Financial Select Sector SPDR (XLF, $24.01, down $0.01) has been in a tight trading range since it broke out above the $23.75 level, which represents short-term support. A close above $24.25 would be a bullish development that could lead to $24.75-$25 and fresh 52-week peaks.
Bullish traders could target the XLF September 24 calls (XLF160916C00024000, $0.33, down $0.03) if $24.25 is cleared this week. These options would double from current levels if XLF shares trade to $24.66, technically, by mid-September. I also like the XLF October 24 calls (XLF161021C00024000, $0.53, down $0.01), as they would allow the trade another five weeks to play out. These options would double from current levels if XLF trades to $25.06 by Oct. 21.
Bearish traders could focus on the XLF September 24 puts (XLF160916P00024000, $0.40, flat) on a move below $23.75. These options would double from current levels if XLF shares trade to $23.20, technically, by Sept. 16. The XLF October 24 puts (XLF161021P00024000, $0.62, down $.03) are also attractive on a move below support and would return 100% if XLF is below $22.76, technically, by Oct. 21.
Second-quarter earnings season is now winding down, as 95% of the companies in the S&P 500 have reported their numbers. Of the companies that reported, over 70% have beaten earnings estimates, while 54% have topped revenue estimates. While the information technology and consumer discretionary sectors stood out during this earnings season, the surprisingly strong numbers from Wal-Mart Stores (WMT, $72.81, down $1.49) seem to indicate that consumer spending is still strong.
Friday’s 2% pullback in WMT held the $72.50 level and the 50-day moving average, but a close below this level could lead to an additional backtest to $70 and the 100-day moving average. The recent 52-week high of $75.19 will likely be back in play if WMT shares clear near-term resistance at $73.50-$74.
I am more bearish than bullish on Wal-Mart, and I have the WMT September 72.50 puts (WMT160916P00072500, $0.92, up $0.40) and the WMT October 70 puts (WMT161021P00070000, $0.80, up $0.20) on my watch list. I could go long with either option, or both, if WMT shares fall below $72.25, so stay tuned.
The bulls need to get a Monday win today to keep upper resistance in play this week. I’m looking for the financial stocks to show strength and for the VIX to hold 13.50. If not, the rest of the week could be choppy to the downside.
I could have a New Trade ahead of today’s Mid-Market Update, so stay locked and loaded after the open in case I take action.
From desk to press, futures look like this: Dow (-50); S&P 500 (-5); Nasdaq 100 (-9); Russell (-4).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 63-22 (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).
Viavi Solutions (VIAV, $7.77, down $0.04)
VIAV December 8 calls (VIAV161216C00008000, $0.49, up $0.07)
Entry Price: $0.51 (8/19/2016)
Exit Target: $1.05
Stop Target: None
Action: Shares traded to a fresh 52-week high of $7.83 on Friday. Resistance is at $7.75-$8, while support is at $7.50. My year-end target for VIAV is $10. If shares clear $10 by late December, these options will be worth at least $2 for a 292% return from the entry price of $0.51.
MGM Resorts International (MGM, $24.16, down $0.20)
MGM September 25 calls (MGM160916C00025000, $0.28, down $0.11)
Entry Price: $0.70 (8/8/2016)
Exit Target: $1.40
Stop Target: None
Action: Support is at $24.25-$24, followed by $23.75 and the 50-day moving average. A close below $23.50 will likely force us to exit the trade. Resistance is at $24.50-$24.75.
Bank of America (BAC, $15.22, up $0.06)
BAC September 15 calls (BAC160916C00015000, $0.43, up $0.04)
Entry Price: $0.50 (8/8/2016)
Exit Target: $1.00
Stop Target: None
Action: Near-term resistance is at $15.25-$15.50. Support is at $15-$14.75. I like this trade going forward as long as $14.75-$14.50 holds through the end of August. The 200-day moving average is just north of $14.50.
Rambus (RMBS, $13.84, up $0.28)
RMBS September 14 calls (RMBS160916C00014000, $0.30, up $0.09)
Entry Price: $0.40 (8/1/2016)
Exit Target: $0.80
Stop Target: None
Action: Resistance is at $13.75-$14, while support is at $13.50-$13.25. A close below $13-$12.75 and the 50-day moving average would be a bearish development that would likely force us out of the trade.
Editor and Chief Options Strategist