Dear Momentum Options Subscriber,
The bulls are trying to wind down August with a victory, and they are slightly ahead of the bears with three trading days left in the month. Tech and the small-caps led last week’s rally to record highs before the market pullback later in the week. However, the subsequent damage to the blue-chips and the S&P 500 has given the bears renewed hope, as they are showing losses for August and are growling heading into September.
The Dow dropped 53 points, or 0.3%, to finish at 18,395 on Friday. The blue-chips tested upper resistance at 18,500-18,600 with the morning trip to 18,572. A close above the latter could lead to 18,800-19,000 and record highs. Support at 18,400-18,350 was breached following the tumble to 18,335 late in the session. I have talked about risk to 18,200 and the 50-day moving average if 18,350 fails to hold on a close. The Dow fell 157 points last week.
The S&P 500 dipped 3 points, or 0.2%, to close at 2,169. The index came close to cracking 2,188 shortly after the open, with near-term resistance at 2,185-2,190 holding. A close above the latter this week keeps 2,200-2,225 and fresh 52-week peaks in play. The backtest to support at 2,170 and close below this level was a slightly bearish development. Friday’s low tapped upper backup support at 2,160-2,150. A move below the latter could lead to 2,145-2,140 and the 50-day moving average. The S&P gave back nearly 15 points last week.
The Nasdaq added over 6 points, or 0.1%, to end at 5,218. Tech was strong throughout the first half of the action and reached a peak of 5,253. Upper resistance at 5,225-5,250 held, and continued closes above the latter should get 5,275-5,300 and blue-sky territory back in the mix. The sudden mid-day fade below 5,200 reached a low of 5,191, but the bulls held these levels into the closing bell. The bears will be trying to get under 5,175-5,150 to start the week, and a close below the latter will likely lead to panic-selling to 5,100-5,050 and the 50-day moving average. The bears did nearly 20 points of damage last week.
The Russell 2000 slipped 2 points, or 0.2%, to settle at 1,238. The small-caps tried to hold lower resistance at 1,250-1,260 on Friday’s high, but they gave back their 10-point, nearly 1% pop ahead of Wall Street’s lunch break. The stumble to 1,231 afterwards split support levels at 1,240-1,235 and 1,225-1,220. A close below the latter could lead to a quick flush to 1,210-1,200 and the 50-day moving average. The index finished higher last week by nearly 2 points.
The S&P 500 Volatility Index ($VIX, 13.65, up 0.02) traded below lower support at 13.50-12.50 following the push to 12.13. Continued closes below 12.50 should get 11.50-10 and record market highs back on the radar. The run to 14.93 into the closing bell cleared resistance at 14.50-15 and the 50- and 100-day moving averages. If the bears get a close above 15, a near-term market top might be confirmed.
The financial stocks showed some strength for the most part, as the Financial Select Sector SPDR (XLF, $24.11, up $0.03) showed a slight gain for the week. I talked about a possible trade in XLF last Monday morning, but the pivot points, or support and resistance levels, were not breached. Bullish and bearish options are still on my watch list for XLF, but I’m now targeting faster-moving sectors and individual stocks.
Much of Friday’s wacky action centered on Fed Chair Janet Yellen and her comments about the current state of interest rates. She said that the case for increasing interest rates had strengthened, though she offset that by saying that the central bank remains data-dependent. She then went on to say that the Fed could not predict when its next rate move might be made.
To confuse the situation, Federal Reserve Vice Chairman Stanley Fischer said later in the day that a rate hike could happen as soon as September. This may have led to the market pullback on Friday, as it continues to look like the Fed has backed itself into a corner by not raising rates when it had a chance to do so months ago.
The Nasdaq failed to close its ninth-straight week of gains last week, which was a feat last accomplished in 2010. Tech has been the quiet story for much of the summer, and the action in the small-caps last week was also very encouraging.
I have talked about the small-caps possibly playing “catch-up” to the other major indices, as the Russell 2000 has yet to take out its all-time high from last summer. The bulls need nearly a 5% move to take out the 1,300 level.
The one concern now is the current trading range, as it has been 34 trading days since a 1% move in S&P 500 has occurred. In fact, it was mid-June the last time the index lost more than 1%, and there have been no three-day losing streaks in 50 trading days.
This can be frustrating, but navigating ranges is part of becoming a better trader. The reward will come when the breakout (or breakdown) occurs and the trading range starts to unbuckle. Remember, the longer the range lingers, the bigger the move will be.
I’m still hopeful for an upside breakout to continued record highs into September and possibly October. The last three days of August will carry some weight as to how September might play out.
The Dow needs to recover 18,433 to show a gain for the month, while the S&P needs to clear 2,174. The Nasdaq is up 57 points in August and needs to hold 5,162 on a pullback. The Russell 2000 is higher by 18 points, or 1.5%, after coming into the month just below the 1,220 level.
If the bulls can show some momentum to start the week and the broader market recovers, September could be a bullish month. Friday’s non-farm payrolls report could also shape next month’s action, and that will be a catalyst for the end-of-week action as well. The market will be closed next Monday for Labor Day, and traders will need to decide if they want to be long or short ahead of the three-day weekend.
No matter what happens, the portfolio is in great shape to play a continued run to record highs or a massive breakdown in the coming weeks. We have done well trading the summer doldrums, and we have been rewarded for our patience.
I have updated a number of parameters for our current trades below, so please adjust them in your trading accounts accordingly. I could also have one or more New Trades or fresh Trade Alerts after the open this morning, so stay locked and loaded in case I take action.
From desk to press, futures look like this: Dow (-1); S&P 500 (+0.25); Nasdaq 100 (-0.75); Russell (-1).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 63-23 (73%). 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).
Vuzix (VUZI, $7.85, up $0.19)
VUZI October 7.50 calls (VUZI161021C00007500, $1.15, up $0.30)
Entry Price: $0.95 (8/23/2016)
Exit Target: $1.90
Stop Target: $0.97 (Stop Limit)
Action: Set a Stop Limit at $0.97 to start protecting profits.
Shares traded up to $8 on Friday. Resistance has moved up to $8-$8.25. Support is at $7.50, followed by $7.25 and the 50-day moving average.
Energous (WATT, $16.73, up $0.65)
WATT November 17.50 calls (WATT161118C00017500, $1.90, up $0.17)
Entry Price: $1.15 (8/22/2016)
Exit Target: $2.30, raise to $2.50-$3.00 (Limit Order on first half at $2.50)
Stop Target: $1.40, raise to $1.45 (Stop Limit)
Action: Raise the Exit Target from $2.30 to $2.50-$3.00, and set a Limit Order to close the first half of the trade at $2.50.
Raise the Stop Limit from $1.40 to $1.45 to protect profits.
Shares kissed $17 on Friday, with the call options touching $2.10. The 52-week high at $17.41 was set last Wednesday. Resistance is at $17-$17.50. Support is at $15.75-$15.50 if $16 fails.
Bank of America (BAC, $15.79, up $0.26)
BAC September 15 calls (BAC160916C00015000, $0.85, up $0.12)
Entry Price: $0.50 (8/8/2016)
Exit Target: $1.00, raise to $1.25 (closed half at $0.63 on 8/25/2016)
Stop Target: $0.55, raise to $0.70 (Stop Limit)
Action: Raise the Exit Target from $1.00 to $1.25 on the second half of the trade.
Raise the Stop Limit from $0.55 to $0.70 on the second half of the trade to lock-in a high double-digit return.
I’m still looking for a triple-digit return for these call options, but the regular September options expire in less than three weeks, and I would like to be out of all September trades by the end of this week. The market is closed next Monday, so time decay will rapidly speed up starting next Tuesday.
I could “piggy-back” this trade on continued strength with October call options. BAC made a run towards $16 on Friday, reaching $15.90. The calls traded to a high of $0.94. The 52-week high is north of $18 for the stock. If I take additional action, I will send out a New Trade alert, possibly as early as this morning.
Near-term resistance has moved up to $15.75-$16. Support is at $15.50-$15.25.
Nucor (NUE, $48.69, down $0.20)
NUE October 52.50 calls (NUE161021C00052500, $0.56, down $0.03)
Entry Price: $0.63 (8/25/2016)
Exit Target: $1.30
Stop Target: None
Action: Friday’s peak reached $49.89, with the calls tapping $0.86. Resistance is at $49-$50 and the 100-day moving average. Support is at $48.50-$48. There is risk to $46 on a close below the latter.
Viavi Solutions (VIAV, $7.77, up $0.04)
VIAV December 8 calls (VIAV161216C00008000, $0.46, up $0.01)
Entry Price: $0.51 (8/19/2016)
Exit Target: $1.05
Stop Target: None
Action: Resistance is at $7.85-$8. The recent 52-week peak at $7.89 was set last Tuesday. Support is at $7.75-$7.50.
Rambus (RMBS, $13.91, up $0.01)
RMBS September 14 calls (RMBS160916C00014000, $0.28, down $0.01)
Entry Price: $0.40 (8/1/2016)
Exit Target: $0.80
Stop Target: None
Action: Resistance is at $14, which was Friday’s high. A close above this level could lead to a run at $14.25-$14.50. The recent 52-week high is at $14.17. We need shares to clear $14.40, technically, by Sept. 16 to break even or possibly make a profit. Support has moved up to $13.75-$13.50.
Editor and Chief Options Strategist