Dear Momentum Options Subscriber,

I often say that the longer the trading range goes on, the bigger the breakout or breakdown will be. Following a tight trading range that lasted throughout the summer, the bears sent a chilling reminder to the bulls on Friday that they should not get too comfortable. The incredible run by tech, the small-caps and the overall market off of the late-June lows was begging for a pullback, and the one we saw on Friday caught Wall Street off guard.

The Dow tanked 394 points, or 2.1%, to end at 18,085 on Friday. The blue-chips went out at their session low and closed a half of a point below their 100-day moving average. There is additional risk to 18,000-17,800, with a close below the latter leading to 17,600-17,550 and the 200-day moving average. Resistance is at 18,200, followed by 18,350-18,400 and the 50-day moving average.

The S&P 500 sank 53 points, or 2.5%, to settle at 2,127. The index held backup support at 2,125-2,120 and the 100-day moving average, and there is additional help at 2,100. A move below this level could lead to 2,080-2,060 and the 200-day moving average. Near-term resistance is at 2,140, followed by 2,150-2,160 and the 50-day moving average.

The Nasdaq got rocked for 133 points, or 2.5%, to finish at 5,125. Tech closed 9 points below its 50-day moving average, and there is risk to 5,100-5,050 on continued weakness. A move below the latter will likely lead to a test to 5,000-4,975 and the 100-day moving average. Resistance is at 5,150-5,175. A recovery of the 5,200 level this week would be a slightly bullish signal, as it would mean a recovery of the prior trading range from early August.

The Russell 2000 dropped 39 points, or 3.1%, to close at 1,219. The small-caps held their 50-day moving average by 2 points, with 1,210-1,200 coming into play on a drop below 1,215 this week. A close below 1,200 will likely lead to weakness to 1,180-1,175 and the 100-day moving average. Resistance is at 1,235-1,240.

The S&P 500 Volatility Index ($VIX, 17.50, up 4.99) zoomed 40% and tested a high of 17.54 while clearing multiple layers of resistance and the 200-day moving average. This opens up risk to 20-22.50 this week, and a move above the latter would be a very bearish development. If cleared, a run to 25-30 could come quickly. Support is at 16.50-15, which are levels the bulls need to challenge early this week.

There had not been a 1% move in the S&P 500 in 43 days leading up to Friday’s debacle. The index had been locked into a 1.5% trading range for 37 days, which was the longest in over 50 years. While I was hoping for continued stair-stepping to higher highs by the bulls, I have also been warning that September is historically a volatile month, and the bears usually like to take the elevator to lower lows.

Friday’s technical damage was certainly bearish, but it remains to be seen if the slick-talking pros will start nibbling at current levels or if they will wait for lower lows. Investors taking bets on this morning’s open might offer some clues for this week’s direction, but today’s session will be all about where the indices close and not the mid-market volatility that could occur today.

The fact that the small-caps held their 50-day moving average and the Nasdaq came close were slightly bullish signs in an otherwise dismal session. If these two indices can hold the fort today without losing ground, then there is a chance of a rebound this week. The VIX closing right at 17.50 also offered some hope to start this week, but I wouldn’t be surprised if the low 20s come into play. These are the three things I will be watching for at this morning’s open and into today’s closing bell.

Of course, there are some other sectors that will need to stand strong this week, like the financial and transportation stocks.

The Financial Select Sector SPDR (XLF, $24.04, down $0.46) held the $24 level on Friday’s selloff, but there is risk to $23.75 and the 50-day moving average on continued weakness. Resistance is at $24.25-$24.50.

With many of the Fed zombies chiming in on interest rates last week, some of the weakness can be blamed on the back-and-forth rhetoric ahead of next week’s Federal Open Market Committee (FOMC) meeting.

This means that we could see extreme volatility as the debate to raise or not to raise interest rates takes full focus this week and into next Tuesday and Wednesday. A rate hike would be good for the financial stocks, which is why they hold a clue to this week’s action. If the group does trade higher and provides support, a surprise quarter-point hike could be in the cards.

If XLF can clear $24.25, I could go long the XLF October 24 calls (XLF161021C00024000, $0.50, down $0.25) or the XLF November 24 calls (XLF161118C00024000, $0.70, down $0.22).

If XLF shares fall below $23.75, I could add the XLF October 23 puts (XLF161021P00023000, $0.30, up $0.13) or the XLF November 23 puts (XLF161118P00023000, $0.45, up $0.15). The aforementioned options would double from current levels if XLF falls to $22.40 by late October or below $22.10 by mid-November.

The Dow Jones Transportation Average ($TRAN, 7,822, down 254) finished just below its 50-day moving average on Friday following what appeared to a mini-breakout and a push towards 8,100 on Wednesday and Thursday. A “golden cross” formed in late July, with the 50-day moving average crossing above the 200-day moving average. This was followed by a “mini” golden cross, with the 50-day moving average also clearing the 100-day moving average earlier this month.

There is continued risk to 7,800-7,775 and the 100-day moving average, and a close below the latter would be a very bearish signal. Resistance is at 7,900-8,000, which are levels the bulls need to recover this week.

The transportation stocks will likely influence the airline sector, which is another sector worth watching for bullish or bearish trades. American Airlines Group (AAL, $38.49, down $0.86) broke above $37 and its 200-day moving average last week, and I have the stock on my watch list for potential trades.

If shares can hold $38 and Friday’s low of $38.17, there could be an opportunity to go long. Resistance is at $38.75-$39, and a run to the low $40s is possible on another close above the latter. I have the AAL October 39 calls (AAL161021C00039000, $1.65, down $0.45) and the AAL November 40 calls (AAL161118C00040000, $1.75, down $0.35) on my radar if upper resistance is cleared.

If AAL shares fall below $37.50-$37 and back below the 200-day moving average, I might aggressively seek out put options.

This week is also September expiration week, as the regular September monthly option chain expires on Friday’s close. This could bring added volatility, and this week already has a history of wild price swings.

The portfolio held up well on Friday for the most part, as some of our bearish trades were showing nice gains. Some of the call positions could be stopped out today, however, and I have made a number of adjustments to our trades below, so please adjust your accounts accordingly.

From desk to press, futures look like this: Dow (-70); S&P 500 (-8); Nasdaq 100 (-23); Russell (-3).

Momentum Options Play List

Closed Momentum Options Trades for 2016: 67-24 (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).

 

Vuzix (VUZI, $9.20, down $0.49)

VUZI October 10 calls (VUZI161021C00010000, $0.76, down $0.17)

Entry Price: $0.68 (9/7/2016)

Exit Target: $1.40

Return: 12%

Stop Target: $0.70 (Stop Limit)

 

VUZI October 7.50 calls (VUZI161021C00007500, $2.15, down $0.25)

Entry Price: $0.95 (8/23/2016)

Exit Target: $3.00

Return: 126%

Stop Target: $2.00, lower to $1.95 (Stop Limit)

Action: Set a Stop Limit at $0.70 on the VUZI October 10 calls. Friday’s low reached $0.72.

Also, lower the Stop Limit on the VUZI October 7.50 calls from $2.00 to $1.95 to give the trade a little wiggle room. This will still ensure a 100% return from our entry price. Friday’s low tapped $2.05.

Support is at $8.75-$8.50 on a close back below $9. Resistance is at $9.50-$10. Friday’s low reached $9.10.

 

Sotheby’s (BID, $37.09, down $1.80)

BID October 37 puts (BID161021P00037000, $1.80, up $0.60)

Entry Price: $1.05 (9/1/2016)

Exit Target: $2.10, raise to $2.50

Return: 71%

Stop Target: $1.50 (Stop Limit)

Action: Raise the Exit Target from $2.10 to $2.50, but do not make it a Limit Order at this time. Also, set a Stop Limit at $1.50 to protect profits. Friday’s low on the stock reached $36.98, with the puts kissing $1.86.

I mentioned when we got into this trade that I was looking for shares to make a backtest to $34.50-$34 and the 50-day moving average. The gap above $34 in early August came on a blowout earnings quarter. However, the lower highs and lower lows inside of the trading range to start the month were the clues to go “short.”

Fresh support is at $37-$36.50, and a close below the latter will likely lead to $35-$34. Resistance is at $37.50-$38.

 

Kroger (KR, $31.51, up $0.20)

KR October 30 puts (KR161021P00030000, $0.48, down $0.27)

Entry Price: $0.78 (9/7/2016)

Exit Target: $1.60 (Limit Order on first half)

Return: -38%

Stop Target: None

Action: Friday’s peak reached $31.91. Resistance is at $31.50-$32. Support is at $31-$30.50. The major moving averages are still in a nasty downtrend, and these options have nearly five weeks before they expire. I still like the trade going forward as long as upper resistance at $32-$32.25 holds.

 

Viavi Solutions (VIAV, $7.60, down $0.17)

VIAV December 8 calls (VIAV161216C00008000, $0.37, down $0.17)

Entry Price: $0.51 (8/19/2016)

Exit Target: $1.05

Return: -27%

Stop Target: None

Action: Support is at $7.50-$7.25 and the 50-day moving average. Resistance is at $7.75-$8.

 

Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options