Dear Momentum Options Subscriber,

The bears took advantage of the quadruple-witching Friday last week, which is when index futures, stock index options, stock options and single stock futures expire on the same day. While these are normally bullish days, the selling pressure during the opening weakness carried over into the closing bell to keep the bulls at bay. However, despite the whipsaw action, the bulls got the weekly win.

Volatility stayed subdued and weakened on Friday, but it will surely be back in play this week as the Federal Open Market Committee (FOMC) prepares its decision on interest rates. Financial stocks will likely be on the move, for better or worse, following the announcement on Wednesday. Oil could also play a role in market direction after hitting a fresh two-week low, adding another headwind for the bulls.

The Dow dropped 88 points, or 0.5%, to close at 18,123 on Friday. The blue-chips traded down to 18,070 intraday, with upper support at 18,000-17,800 and the 100-day moving average holding. This level held throughout last week and during the prior Friday pullback, with the lows reaching 17,994 last Monday and 17,992 mid-week. This could represent a short-term “double-bottom” on paper, but a close below 18,000 could lead to 17,800-17,600 and the 200-day moving average. Short-term resistance is at 18,200, followed by 18,350-18,400 and the 50-day moving average. A move above the latter could lead to 18,600.

The S&P 500 fell 8 points, or 0.4%, to end at 2,139. The index opened a point lower at 2,146 while trading down to 2,131. Support at 2,125-2,120 and the 100-day moving average held strong, but there is risk to 2,100-2,080 if those levels are breached. The close below 2,140 was a slightly bearish, and resistance is at 2,150-2,160. A move above the latter could lead to a run towards 2,170-2,175 and the 50-day moving average.

The Nasdaq slipped 5 points, or 0.1%, to settle at 5,244. Tech tested a low of 5,218 shortly after the open, with fresh support at 5,225-5,200 holding for the second-straight session. A move below the latter could lead to 5,175-5,150 and the 50-day moving average and would likely signal a short-term market top. The rebound to 5,248 on Friday missed positive territory by a point. While I was pulling for a close above 5,250, the slight pullback still keeps the 52-week and all-time high of 5,287 in play. A move above 5,275 could lead to a short-term run to 5,300-5,325.

The Russell 2000 dipped 2 points, or 0.2%, to finish at 1,224. The small-caps did see positive territory on the open by a fraction of a point but stalled at 1,227. Upper resistance is at 1,235-1,240. The backtest to 1,218 breached near-term support at 1,225-1,220 and the 50-day moving average. There is risk to 1,210-1,200 if 1,215 fails to hold. A close below the latter could lead to 1,180-1,175 and the 100-day moving average.

The S&P 500 Volatility Index ($VIX, 15.37, down 0.93) made a run to resistance at 16.75-17.50 and the 200-day moving average after pushing 17.10 during the first half of trading. The backtest to 15.28 and support at 15-14.50 and the 100-day moving average was a bullish signal, but these levels held into the closing bell. A move below the latter could lead to 13.50-12.50 and the 50-day moving average.

The aforementioned charts show the Nasdaq and Russell 2000 holding their 50-day moving averages, with the Dow and S&P defending their 100-day moving averages. Coming into last week, I mentioned that my focus would be on tech, the small-caps and the VIX.

With the 50-day moving averages (and 100-day moving averages) holding up the technical picture, the market still looks bullish. However, if the bears regain these levels and push lower lows than last week, the bulls will likely be playing defense for the rest of the month.

Monday’s bullish rebound in the VIX was desperately needed, with volatility holding the 20 level. The stretch to 20.51 and sudden free-fall to 14.76 was the first positive sign the bulls needed to show last week. However, the close at 15.16 failed to hold the 15 level.

Tuesday’s pullback raised concerns about a continued market selloff, with the VIX testing a high of 18.97 on more interest-rate debate. The whipsaw action held Monday’s high, but the close above 17.50 at 17.85 left little doubt that the bears weren’t going away.

Wednesday’s close at 18.14 and Thursday’s finish at 16.30 came as the VIX made lower highs and lower lows over those two sessions. Friday’s action gave the same clues, but the bulls and bears are waiting until after the Fed news to bet more chips. This means that a crystal-clear advantage from either side won’t be achieved until the bulls hold 15-14.50 for consecutive sessions or the bears hold 20 on back-to-back sessions.

I wanted to include my VIX commentary in my opening statements, as a lot of the slick-talking pros only bring it back into focus when they are calling for a market selloff and it pops past 20. The problem is that these clowns are always late to the party, as the pullback may have already occurred.

The VIX touched a low of 11.65 seven trading sessions ago, and the 80% surge to 20.51 came over two trading days. The blink-of-an-eye move got more investors bearish than bullish, which is why it would have been a mistake trying to play the volatility last week.

To play continued volatility, astute investors could trade the iPath S&P 500 VIX Futures ETN (VXX, $38.91 down $0.47) on a move above $40 or drop below $37.50 over the near term. These are the resistance and support levels that I will be watching throughout the week for a possible bullish or bearish trade.

If VXX trades back above $40-$42.50 and the 50-day moving average, a possible run towards $47.50-$50 could come. The VXX October 44 calls (VXX161021C00044000, $2.20, down $0.45) traded over 5,000 contracts on Friday, as did the VXX October 49 calls (VXX161021C00049000, $1.40, down $0.35). The latter call options would double if VXX clears $51.80, technically, by Oct. 21. The VXX October 44 calls would double from current levels if shares clear $48.40.

The VXX October 35 puts (VXX161021P00035000, $1.65, down $0.10) could be targeted if VXX falls below $37.50-$35. If the bulls get below $35, fresh 52-week lows south of $33.32 and a test to $32.50-$30 could occur. These puts options would double from current levels if VXX falls below $31.70 by late October.

A “strangle” option trade using the aforementioned calls and puts looks tempting, but the premiums have become juiced over the past few weeks as volatility became elevated. The VXX October 44 calls and the VXX October 35 puts would cost a combined $3.85-$4, with the breakeven levels at roughly $48 and $31.

Another possible trade that is still near the top of my list is in American Airlines Group (AAL, $35.49, down $0.96). I covered the stock in last Monday’s Pre-Market Update and mentioned that there could be a chance to go long or short once a clear trend was established.

I was targeting a possible bullish trade if shares could hold $37 and their 200-day moving average on a continued pullback. These levels were breached during Monday’s low of $36.62, with shares closing at $38.34 following the wild volatility. AAL lost $0.15 from Friday’s close and $0.97 on Tuesday to tap a low of $37.22. Wednesday’s bottom tapped $36.25, and Thursday’s low reached $35.85, with both sessions holding the 50-day moving average.

Friday’s close below crucial support could lead to additional weakness to $34 over the near term, with longer-term risk to $33-$31. Consecutive closes back above $37 could lead to a run towards $39-$40.

The AAL October 38 calls (AAL161021C00038000, $0.65, down $0.30) and the AAL November 39 calls (AAL161118C00039000, $0.90, down $0.25) could be targeted by bullish traders on a rebound above $36.75-$37. Bearish traders could use the AAL October 33 puts (AAL161021P00033000, $0.73, up $0.20) or the AAL November 32 puts (AAL161118P00032000, $1.00, up $0.20) on continued weakness to $34.50-$34.

Oil could play a role in the direction of AAL stock and the overall market this week, as the International Energy Agency (IEA) lowered its oil-demand forecasts for 2016 and 2017 due to signs of softness in Asia. This has led to lower oil prices, as the price of black gold fell 6% last week.

The FOMC meeting starts on Tuesday, and Wednesday’s decision on interest rates will be released in the afternoon. Needless to say, there will likely be sudden, knee-jerk reactions in the major indices based on what the Fed does or doesn’t do or what the zombies say in their commentary.

Following three-months of slack action and a trickle to higher highs, I warned that last week would be very volatile following the prior Friday’s close, which was the first major bearish attack since late June. I have talked tirelessly about boring trading ranges throughout the summer, but I got super excited last weekend, as my watch list was exploding with bearish and bullish setups.

The portfolio has done extremely well this year, as it is registering a win rate of nearly 75%. For the month of September, the portfolio has posted a 6-1 record, and it is 9-2 since mid-August. However, this doesn’t get us out of the woods with some of the current trades.

The good news is that I still believe all of them could become profitable, depending how the whipsaw action plays out this week. I have updated our current trades with a number of adjustments below, so please be sure to update them in your trading accounts as well. I could also have a New Trade ahead of today’s Mid-Market Update, so stay locked and loaded in case I take action.

From desk to press, futures look like this: Dow (+87); S&P 500 (+10); Nasdaq 100 (+16); Russell (+7).

Momentum Options Play List

Closed Momentum Options Trades for 2016: 70-24 (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).

 

Chicago Bridge & Iron (CBI, $27.42, down $0.42)

CBI October 27.50 puts (CBI161021P00027500, $1.30, up $0.17)

Entry Price: $1.11 (9/14/2016)

Exit Target: $2.25

Return: 17%

Stop Target: $1.15 (Stop Limit)

Action: Set a Stop Limit at $1.15 to protect profits.

Shares traded to a fresh 52-week low of $27.32 on Friday. Longer-term support is at $27-$26.50. Resistance is at $27.75-$28.

 

Xilinx (XLNX, $53.36, down $0.21)

XLNX October 57.50 calls (XLNX161021C00057500, $0.80, down $0.02)

Entry Price: $0.71 (9/12/2016)

Exit Target: $1.45

Return: 13%

Stop Target: $0.74 (Stop Limit)

Action: Set a Stop Limit at $0.74 to protect profits.

XLNX made a run to resistance at $53.75-$54, reaching $53.98 on Friday. Support at $53.25-$53 held on the pullback to $53.05. The major moving averages are still in a strong uptrend. If we get stopped out, we can get back in at a later date if shares fall below $53 and make a backtest towards the 50-day moving average.

 

Viavi Solutions (VIAV, $7.34, down $0.13)

VIAV December 8 calls (VIAV161216C00008000, $0.26, down $0.07)

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

Exit Target: $1.05

Return: -37%

Stop Target: $0.15 (Stop Limit)

Action: Set a Stop Limit at $0.15 to save the remaining premium.

Friday’s low of $7.31 and close below the 50-day moving average was a bearish development. Backup support is at $7.25-$7.20, but a close below the latter will likely trigger the Stop Limit. Near-term resistance is at $7.50-$7.75.

 

Kroger (KR, $31.08, down $0.17)

KR October 30 puts (KR161021P00030000, $0.46, flat)

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

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

Return: -41%

Stop Target: None

Action: Support is at $31-$30.75. A move below $30.50 and last week’s low of $30.45 should lead to a test to $29-$28. Resistance is at $31.25-$31.50.

 

Vuzix (VUZI, $8.50, down $0.32)

VUZI October 10 calls (VUZI161021C00010000, $0.40, down $0.05)

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

Exit Target: $1.40

Return: -41%

Stop Target: $0.25 (Stop Limit)

Action: Support is at $8.50-$8.25. A close below $8 and the 50-day moving average will likely trigger the Stop Limit. Resistance is at $8.75-$9.

 

Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options