Dear Momentum Options Subscriber,
Shares of Microsoft (MSFT, $60.38, up $0.51) recently broke out to a fresh 52-week and all-time high of $61.37 following a better-than-expected earnings report. Earlier this month, the company reported earnings of $0.76 a share on revenue of $22.3 billion. Wall Street was looking for a profit of $0.68 a share on revenue of $21.7 billion.
It was the second-straight earnings blowout for Microsoft, as the $0.08 beat followed an $0.11 beat when the company reported in July. The surge from $57.25 ahead of the news propelled shares past $60 afterwards earlier this month. Microsoft’s previous all-time high tapped $59.56 in 1999, which was at the peak of the “dot.com” bubble.
Analysts were quick to upgrade the stock and their price targets following the solid quarter, but few, if any, were pounding the table to buy the stock ahead of earnings. There were no upgrades for MSFT during October, with the Wall Street Journal saying that the company should report “decent” results.
Barclay’s raised its price target from $60 to $65, while Deutsche Bank upped its price target from $65 to $70. William Blair upgraded shares to “Outperform” from “Market Perform,” while Wunderlich upgraded the stock to a “Buy” with a $70 price target. One brokerage firm that boycotted the next-day parade was Jefferies, which said shares were “grossly overvalued.”
I’m not sure if I agree with the latter of the aforementioned comments, but I do believe shares are “fairly valued” at current levels. However, I often say that it is hard to short strong stocks with solid fundamentals. While the turnaround over the past two quarters has been impressive, the company missed earnings by $0.02 when it announced results in April. Overall, the company has topped estimates during three of the past four quarters.
The chart below shows the recent breakout and gap higher from $57 to $61. This has created an “island,” with the current cluster of action possibly offering great clues on when to go long or short. With the recent record high at $61.37, a move and continued closes above $61.25-$61.50 would be a bullish signal. A move, or consecutive closes, below $59.75-$59.50 would be a bearish development.
With the regular November options expiring in less than three weeks, they would provide the biggest bang for the buck on a breakout past resistance or a breakdown if support is breached. I’m currently targeting December call and put options for the pending move, and I will keep you updated if I decide to take action.
There are other bullish and bearish trades on my watch list, but I mentioned that the market could trade in a tight range into next week. If this is the case, I will be a cautious about getting too aggressive with our next batch of trades, as the trend will be our friend.
The Dow is currently higher by 13 points to 18,174, while the S&P 500 is gaining 5 points to 2,132. The Nasdaq is up 14 points to 5,204, and the Russell 2000 is climbing 2 points to 1,189.
I have updated our current trades below, so let’s go check the action.
Momentum Options Play List
Closed Momentum Options Trades for 2016: 77-31 (71%). 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 12:10 p.m. EST.
I hereby disclose that I will be participating in the following trade(s).
Lattice Semiconductor (LSCC, $6.09, up $0.03)
LSCC December 7.50 calls (LSCC161216C00007500, $0.22, up $0.03)
Entry Price: $0.30 (10/12/2016)
Exit Target: $0.60-$0.90
Stop Target: None
Action: Support is at $6.05-$6 and the 100-day moving average. A close below the latter could lead to $5.90-$5.75 and the 200-day moving average. Resistance is at $6.25-$6.30 and the 50-day moving average.
The company announces earnings next Monday, and I will have a preview ready later in the week.
Viavi Solutions (VIAV, $7.13, up $0.02)
VIAV December 8 calls (VIAV161216C00008000, $0.10, down $0.01)
Entry Price: $0.51 (8/19/2016)
Exit Target: $1.05
Stop Target: $0.05 (Stop Limit)
Action: Support is at $7-$6.90, with risk to $6.75 and the 200-day moving average on a move below the latter. Resistance is at $7.20-$7.25 and the 100-day moving average.
Earnings are due out tomorrow. Wall Street is expecting a $0.07 profit on revenue north of $208 million.
Editor and Chief Options Strategist