Dear Momentum Options Subscriber,
The bulls and bears survived a volatile September, and both sides seem to be feeling good about the action. Friday’s rebound gave the bulls the weekly win, and momentum is on their side heading into this week as well. The bears will be looking for some October magic, but, while this month has been known for some massive selloffs, it has been historically bullish.
The Dow jumped 164 points, or 0.9%, to close at 18,308 on Friday. The blue-chips opened 38 points higher at 18,181 and spent the entire session in positive territory. The push to 18,369 tested resistance at 18,350-18,400 and the downward sloping 50-day moving average. A close above the latter would be a bullish development. Near-term support is at 18,200-18,150 and the 100-day moving average. Continued closes below 18,100-18,000 this week would be a bearish development.
The S&P 500 surged 17 points, or 0.8%, to end at 2,168. The index pushed lower resistance at 2,170-2,175 and just barely held the flattening 50-day moving average. A close above 2,180 would be a bullish development, and there is fluff up to 2,190-2,200 and all-time highs. Support is at 2,150-2,140. A move below 2,135-2,130 and the 100-day moving average would be a cause for concern.
The Nasdaq rallied 42 points, or 0.8%, to settle at 5,312. Tech traded to a high of 5,325, with lower resistance at 5,325-5,350 holding. The record high is at 5,342, with blue-sky territory up to 5,400-5,500 on a continued closes above 5,350. Rising support is at 5,300-5,250, followed by 5,225-5,200 and the 50-day moving average. A close below the latter could signal a short-term top.
The Russell 2000 added roughly 14 points, or 1.1%, to finish at 1,251. The small-caps reached a peak of 1,255 and closed above lower support at 1,250-1,260. This was a bullish sign, but there are additional hurdles at 1,270-1,275. A move above the latter should get 1,280 and all-time highs back in play. Support is at 1,240-1,235. A close below 1,230-1,225 and the 50-day moving average would be a bearish setup.
The S&P 500 Volatility Index ($VIX, 13.29, down 0.73) fell 5% to close below near-term support at 13.50. Friday’s low tapped 12.53, with additional help at 13-12.50 and the 50-day moving average holding. Another move below this level should lead to a continued backtest to 11.50-11. Resistance is at 14.50-15 and the 100-day moving average. A move above the latter could lead to 16.50-17.50 and the 200-day moving average.
The Nasdaq posted a gain of 98 points, or 1.9%, for September, with the Russell 2000 adding nearly 12 points, or 1%. The Dow fell 92 points, or 0.5%, and the S&P 500 slipped roughly 3 points, or 0.1%, last month.
Tech and the small-caps have closed higher for the past three months and in four of the past five. The blue-chips and the S&P 500 have closed lower the past two months following their five-month win streaks.
For the third quarter, the Dow advanced 378 points, or 2%, while the S&P 500 surged 69 points, or 3%. The Russell 2000 rallied nearly 100 points, or 9%, and the Nasdaq jumped 470 points, or 10%.
For 2016, the Dow is up 883 points, or 5%, while the S&P 500 has climbed 124 points, or 6%. The Nasdaq is higher by 305 points, or 6%, and the Russell 2000 has advanced 115 points, or 10%.
As far as the Monday/Friday closes go, they were mixed last month, indicating a continued trading range that is favoring the bears. The Dow has closed lower in each of the past two Mondays and in seven of the past nine. The blue-chips closed higher on the Tuesday following the Labor Day holiday, but this trend shows an ongoing bearish development.
The Friday closes on the Dow have not been much better, as the index has closed lower in three of the past four cases. Last Friday’s higher close was slightly bullish, but, since the end of July, the blue-chips have closed in the red for seven of the past 10 Friday sessions.
Up Monday/Friday closes usually signal that money is moving into the market, while negative closes often reflect Wall Street’s nervousness to stay long over the weekend. Mixed Monday/Friday finishes can lead to extended trading ranges.
The current trend needs to improve this month, as earnings season is approaching next week. If the bulls are going to push higher highs and record all-time peaks across the board, the Monday/Friday closes need to improve. Otherwise, it will be best to stay a little cautious.
One of the current themes throughout this year and last has been the inability of the financial stocks to break out to fresh highs. The sector has been a market laggard due to incredibly low interest rates over the past five to 10 years.
Some of you might have done a double-take when looking at the Financial Select Sector SPDR (XLF, $19.30, up $0.26) after seeing shares below $20. There wasn’t a “selloff” in the sector, as I had been watching prior support at $24 throughout last month. Instead, there was a 1231:1000 stock split on Sept. 19 when XLF closed at $23.62.
As you can see, XLF shares traded to a low of $19.25 ahead of the Fed news on Sept. 21, but it held its 50-day moving average. Last week’s move below this level has near-term support at $19 and the 100-day moving average in play on a continued closes below $19.25-$19.20. Resistance is at $19.40-$19.50. A move above $19.60 could be an opportunity to go long, as the adjusted 52-week high is at $20.28. The major moving averages are flattening out, and I will be watching to see if they start to curl higher or lower in the coming weeks.
There are weekly and monthly options available to trade on XLF, and I may target the XLF November 19 calls (XLF161118C00019000, $0.70, up $0.10) if shares clear $19.50-$19.60 over the near term. These options would double from current levels if XLF shares clear $20.40, technically, by Nov. 18.
Bearish traders could focus on the XLF November 19 puts (XLF161118P00019000, $0.35, down $0.15) if shares fall below $19. These options were super active on Friday, as nearly 9,000 contracts traded hands. These options would return 100% from current levels if XLF shares trade below $18.30, technically, by mid-November.
The financial stocks have been tarnished by the Wells Fargo (WFC, $44.28, down $0.09) fiasco and the debacle at Deutsche Bank (DB, $13.09, up $1.61). Both stocks pushed fresh 52-week lows last week, with WFC kissing $44.10 on Friday and DB setting an all-time low of $11.19 last Thursday.
The chart for WFC shows that all of the major moving averages are in a nasty downtrend, and it is too early to say if a potential “double bottom” is trying to hold at $44. In late June, shares tested a bottom of $44.50 before topping out at $51 the first day of September.
Continued closes above $44.50-$44.75 might tempt bullish traders to target the WFC November 45 calls (WFC161118C00045000, $0.95, down $0.10) if upper resistance is cleared and hold. To be safe, I would wait for continued closes above the $45 level before going long.
Bearish traders could target the WFC November 43 puts (WFC161118P00043000, $1.05, flat) on continued closes below $44 and fresh 52-week lows. Two-year support is also at $44, and the three-year chart below shows risk to $42-$40 if the bears can clear and get below this level.
The aforementioned put options would return at least 100% if WFC shares fall below $41.90, technically, by Nov. 18. The WFC December 42 puts (WFC161216P00042000, $1.00, down $0.05) could also be targeted on continued closes below $44, and these options would allow the trade an additional month of time premium. These options would double if WFC shares drop below $40, technically, by mid-December.
I will be watching the action in the financial stocks this week, and I would like to see higher Monday/Friday closes as well. Additionally, I would like to see the Dow and S&P 500 at least keep up with or outperform any continued gains in the Nasdaq and Russell 2000. Otherwise, keep an eye on the VIX, as continued closes above 15 would be a bearish development.
I have a number of trades I’m targeting this week following a fabulous September in which the portfolio went 10-2. For the quarter, the portfolio went 22-7, including a July performance of 9-1 and a volatile August record of 3-4. For the year, the portfolio has a 75% win rate.
With earnings season coming up next week, the market is poised for a possible breakout or pullback to fresh monthly lows. I have made several parameter adjustments to our current trades below, so let’s go take a look. Also, stay close to your email inboxes in case I take action ahead of the Mid-Market Update today.
From desk to press, futures look like this: Dow (-29); S&P 500 (-4); Nasdaq 100 (-7); Russell (-4).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 74-25 (75%). 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).
Halozyme Therapeutics (HALO, $12.08, up $0.18)
HALO November 13 calls (HALO161118C00013000, $1.10, up $0.25)
Entry Price: $1.07 (9/27/2016)
Exit Target: $2.15
Stop Target: $0.50, raise to $0.55 (Stop Limit)
Action: Raise the Stop Target from $0.50 to $0.55 and make it a Stop Limit.
Resistance is at $12.25-$12.50. Near-term support is at $12-$11.75. Friday’s low tapped $11.68.
You can read my detailed write-up on HALO in last Wednesday’s Mid-Market Update.
Goodyear Tire & Rubber (GT, $32.30, up $0.57)
GT October 33 calls (GT161021C00033000, $0.57, up $0.17)
Entry Price: $0.75 (9/22/2016)
Exit Target: $1.50
Stop Target: $0.30 (Stop Limit)
Action: Set a Stop Limit at $0.30.
Resistance is at $32.50-$32.75. A close above the latter would be a bullish development for a possible push to $34-$35. The 52-week peak is at $35.30. Support is at $32-$31.75. A close below $31.50 would be a bearish development.
You can read a more detailed write-up on GT in last Monday’s Mid-Market Update.
Viavi Solutions (VIAV, $7.39, up $0.13)
VIAV December 8 calls (VIAV161216C00008000, $0.20, down $0.05)
Entry Price: $0.51 (8/19/2016)
Exit Target: $1.05
Stop Target: $0.15 (Stop Limit)
Action: Shares traded to a low of $7.24 on Friday, with the calls testing a low of $0.18. These options have over two months before expiration, and I would like to see our Stop Limit hold up.
Resistance is at $7.45-$7.50 and the 50-day moving average. Friday’s peak reached $7.40. Support is at $7.25-$7.20. A move below the latter on a continued backtest to $7.10-$7 and the 100-day moving average will likely trigger our Stop Limit.
The chart still looks bullish, but the pullback from early September into the recent trading range has weighed on the premium. This trade has been running for six weeks and, although it has lost steam, I’m still hoping it can turn a profit.
Editor and Chief Options Strategist