Dear Momentum Options Subscriber,
The bulls got off to a good start last week, but trading was choppy heading into the mid-week Fed minutes. Although the market closed with mixed results on the news, Thursday’s pullback was another reminder of how close the bears are to making this a nasty October. However, Friday’s rebound is keeping the bulls in the game, and earnings season will start to pick up steam in the coming weeks.
The Dow gained 39 points, or 0.2%, to close at 18,138 on Friday. The blue-chips made a run to 18,261 during the opening 30 minutes of the action, with the bulls clearing near-term resistance at 18,200 and the 100-day moving average. Continued closes above these levels should get 18,350-18,400 and the 50-day moving average in play. Support is at 18,000-17,800. A close below the latter would get the June lows back in play.
The S&P 500 added half of a point, or 0.02%, to end just under 2,133. The index reached a peak of 2,149 during the first half of trading, with upper resistance and the 100-day moving average at 2,140-2,150 holding. A move above the latter should get 2,160-2,165 and the 50-day moving average back in the mix. Support is at 2,125-2,120, with risk to 2,100 on a close below the latter.
The Nasdaq advanced almost a point, or 0.02%, to settle at 5,214. Tech tested a high of 5,258 on the morning surge, with resistance at 5,250-5,275 and the 50-day moving average getting pushed. The fade to 5,313 held positive territory by a smidge, with support at 5,300-5,275 waiting in the wings. Another move below the latter could lead to a backtest to 5,200-5,175.
The Russell 2000 fell 3 points, or 0.3%, to finish at 1,212. The small-caps traded to a high of 1,226, with lower resistance at 1,225-1,230 holding. The bulls need to clear 1,235-1,240 and the 50-day moving average this week to regain momentum. The closing stumble to the low of the session held near-term support at 1,210-1,200 and the 100-day moving average. There is risk to 1,175-1,170 on a close below 1,200-1,190.
The S&P 500 Volatility Index ($VIX, 16.12, down 0.57) tested a low of 15.25 during the morning action, with the bulls failing to clear support at 15-14.50 and the 100-day moving average. The mid-day high of 16.50 kissed lower resistance at 16.50-17.50 and kept the bears at bay.
Last week’s pullback put the bears on a two-week win streak, but there were a number of bullish developments that the market ignored. I mentioned that I wanted to see positive closes on the Dow for Monday and Friday, and this mission was accomplished, although the blue-chips and the S&P 500 fell roughly 1% for the week.
I also said that both indices need to outshine the Nasdaq and the Russell 2000 on a return to higher highs. Tech and the small-caps declined 2% last week, so the losses to the broader market were better contained. The other positive sign was that the September lows held on Thursday’s pullback despite being stretched.
The financial sector gave back 1% last week despite better-than-expected earnings from a number of players in the space. The Financial Select SPDR (XLF, $19.42, up $0.09) traded up to $19.81 to start last week before tumbling and closing below its 50-day moving average on Thursday and Friday. Resistance remains at $19.75-$20, with the 52-week high at $20.28. Support is at $19.25-$19.
In the coming days or weeks, we could trade XLF with November call or put options on continued closes above $19.75 or below $19. For now, I’m still staying on the sidelines.
Wells Fargo (WFC, $44.71, down $0.04) reported earnings of $1.03 a share on revenue of $22.33 billion. This was $0.02 above analyst forecasts and above the expected revenue figure of $22.22 billion, but the chart is still bearish for WFC, as the major moving averages are still in nasty downtrends. Near-term support is at $44.25-$44. Resistance is at $45-$45.50.
A rebound of 3%-4% could occur over the next month, as shares tend to outperform following an earnings beat. This would carry shares towards $46.25-$46.50. Friday’s peak reached $45.52. Bullish traders could target the WFC November 45 calls (WFC161118C00045000, $0.87, down $0.17) this week if shares show strength and clear $45. These options would double from current levels, technically, if WFC shares trade past $46.74 by Nov. 18.
Bearish traders could target the WFC November 44 puts (WFC161118P00044000, $1.00, down $0.24) if shares fall below $44.25-$44 in the coming days. These options would double from current levels if WFC shares fall below $42, technically, by Nov. 18. The recent 52-week low is at $43.55, with a “double bottom” holding at $43.50.
Elsewhere, Citigroup (C, $48.61, up $0.14) reported earnings of $1.24 a share on revenue of $17.8 billion, which topped expectations for $1.16 a share on revenue of $17.34 billion. The $0.08 beat surprised a lot of the suits-and-ties, as spirits were also down for this banking giant.
The chart for C looks much better than WFC’s chart, and it is probably a better bullish trade given the negative publicity surrounding Wells Fargo right now. Shares reached a peak of $49.95 on Friday, which missed matching its recent multi-month high by a penny. The 50-day moving average is in a strong uptrend, and a move above $50 would be a very bullish signal. Support is at $48-$47.75 on a pullback. A close below the latter would void the bullish setup.
The C November 47.50 calls (C161118C00047500, $2.10, down $0.05) look attractive for a short-term trade if shares can clear $48.75-$49 this week. These options would double from current levels if C shares trade past $51.70, technically, by Nov. 18.
The C November 50 calls (C161118C00050000, $0.85, down $0.09) have a lower premium than the aforementioned calls, but they would also double from current levels if shares clear $51.70 by mid-November. As a side note, it is rare when you see this type of relativity between two options with a $2.50 strike price difference.
The bid/ask spreads are usually within a nickel when trading options on Citigroup, but it can depend on the strike price. The C November 50 calls traded over 5,000 contracts on Friday, with the high reaching $1.47. Open interest is approaching 24,000 contracts, meaning they are very liquid. The C November 47.50 calls had volume just south of 2,000 contracts on Friday and kissed a high of $3.15 on WFC’s run at $50. The two aforementioned options are on my watch list, so stay locked and loaded in case I take action after this morning’s open.
The key triggers to go “short” in the coming weeks or months will be consecutive closes on the Dow below 18,000-19,000, S&P 2,110-2,100, Nasdaq 5,175-5,150 and Russell 1,210-1,200. Otherwise, I’ll likely stay focused on longer-term call options.
Although the overall market did not show a lot of strength last week, I was expecting a slight dip and that the current trading range would stay intact. The VIX also tested the 16.50-17.50 area and stayed elevated throughout the week, with the high reaching 17.95.
The 50-day moving averages on the Dow and S&P 500 are in sloping downtrends, which is a slightly bearish signal. The 50-day moving averages on the Nasdaq and Russell 2000 are also flattening out. To my naked eye, “symmetrical triangle” patterns appear to have formed in the charts of the major indices, and the start of a major market move could be forthcoming. The 200-day moving average on the VIX was stretched but held last week, and the bulls will need to get it back below the 100-day moving average.
On a three-year technical level, the 50- and 100-day moving averages on the VIX held, and the major moving average on the indices are still in solid uptrends. The major moving averages are flattening on the VIX, as are the 50- and 100-day moving averages on the small-caps. The 200-day moving average on the Russell 2000 is still in a rising uptrend, but the bulls need to recover the longer-term weekly 200-day moving average on the VIX this week.
I would like to see the market finish higher today and the VIX close back below 14.25 in the coming days. This would confirm my continued thesis for a possible two- or three-week rally into the end of the month or the first week of November. If lower lows come into play, however, October could continue to favor the bears.
I could have a new trade after the opening dust settles, so stay locked and loaded in case I take action.
From desk to press, futures look like this: Dow (-16); S&P 500 (-2); Nasdaq 100 (-7); Russell (-2).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 74-28 (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).
PowerShares QQQ ETF (QQQ, $117.14, up $0.14)
QQQ November 120 calls (QQQ161118C00120000, $0.86, down $0.09)
Entry Price: $0.99 (10/13/2016)
Exit Target: $2.00
Stop Target: None
Action: The QQQs tested a high of $118.05 on Friday, with the calls kissing a high of $1.24.
Resistance is at $117.25-$118 and the 50-day moving average. Support is at $117-$116.
Lattice Semiconductor (LSCC, $6.01, down $0.05)
LSCC December 7.50 calls (LSCC161216C00007500, $0.25, down $0.05)
Entry Price: $0.30 (10/12/2016)
Exit Target: $0.60-$0.90
Stop Target: None
Action: Near-term support is at $6.00-$5.90 and the 100-day moving average. A close below the latter could lead to a test to $6.25 and the 200-day moving average. Resistance is at $6.25 and the 50-day moving average.
Apple (AAPL, $117.63, up $0.65)
AAPL November 125 calls (AAPL161118C00125000, $0.97, up $0.04)
Entry Price: $1.10 (10/11/2016)
Exit Target: $2.20
Stop Target: None
Action: Friday’s peak reached $118.05. Resistance is at $118-$118.25. Support has moved up to $117-$116.50.
Finisar (FNSR, $28.88, down $0.44)
FNSR November 31 calls (FNSR161118C00031000, $0.56, down $0.13)
Entry Price: $1.28 (10/10/2016)
Exit Target: $2.60
Stop Target: $0.30 (Stop Limit)
Action: Fresh support is at $28.75-$28.50. Resistance is at $29-$29.25.
Viavi Solutions (VIAV, $7.26, down $0.02)
VIAV December 8 calls (VIAV161216C00008000, $0.18, up $0.01)
Entry Price: $0.51 (8/19/2016)
Exit Target: $1.05
Stop Target: $0.05 (Stop Limit)
Action: Support is at $7.25-$7.150 and the 100-day moving average. Resistance is at $7.45-$7.50 and the 50-day moving average.
Editor and Chief Options Strategist