Dear Momentum Options Subscriber,
The bears pushed lower lows to end last month, and November also started off weak, with a break below the October lows ahead of the Fed news mid-week. The zombies’ decision to leave interest rates unchanged was certainly not a shocker from a hand that has been read worse than a fish at a poker table filled with sharks.
The weakness continued following the Fed announcement and into the rest of the week, with a less-than-stellar jobs report. This week’s volatility could heighten ahead of the presidential election and afterwards, depending on which candidate wins.
The Dow declined 42 points, or 0.2%, to close at 17,888 on Friday. The blue-chips tested a high of 17,986 intraday, with near-term resistance at 18,000-18,100 easily holding. It was the eighth-straight negative close, and a mini death cross formed last week. Support at 17,900-17,800 and the 200-day moving average was tested but held following the low of 17,883 late in the day. A close below the latter would open up risk to 17,600-17,500 this week.
The S&P 500 fell 3 points, or 0.2%, to finish at 2,085. The index traded to a high of 2,099 but failed to clear near-term resistance at 2,100 by a point. Additional hurdles remain at 2,125-2,150. A mini death cross is in the process of forming, with the 50-day moving average on track to fall below the 100-day moving average. Support is at 2,075-2,050 on a close below 2,080 and the 200-day moving average.
The Nasdaq gave back a 12-pack, or 0.2%, to settle at 5,046. Tech’s mid-day run to 5,087 failed to clear resistance at 5,100, with the bulls needing to clear 5,150 and the 100-day moving average to regain momentum. The backtest to 5,034 and close below 5,050 keep 5,000-4,950 and the 200-day moving average in play.
The Russell 2000 gained 6 points, or 0.6%, to end at 1,163. The small-caps were the lone bright spot, as they held positive territory throughout the session and reached a peak of 1,174. Resistance at 1,170-1,175 held, with a close above the latter being a bullish development. Support remains at 1,160-1,150 and the 200-day moving average.
The S&P 500 Volatility Index ($VIX, 22.51, up 0.43) traded higher for the ninth-straight session while testing a high of 23.02. The close above 22.50 keeps risk open to 25-27.50 over the near term. Support has moved up to 21.50-20. The 50-day moving average has crossed above the 100-day moving average and is signaling higher highs over the longer term.
The results from October were bearish and continued into the first week of November. Last month, the Dow fell 165 points, or 0.9%, to extend its monthly losing streak to three. The S&P 500 dropped 42 points, or 1.9%, and is also down three-straight months. For November, the Dow is down 252 points, while the S&P 500 is lower by 41 points, or nearly 2%.
The Nasdaq tumbled nearly 123 points, or 2.3%, while snapping a three-month win streak in October. The Russell 2000 continues to be the most volatile of the indices after falling 60 points, or 4.8%, in October and closing lower for the first time since July. The Nasdaq has fallen 143 points this month, while the Russell 2000 has dropped 28 points. The losses are pushing 3% for both indices.
The small-caps traded lower for the first two months of the year, giving back over 9%, and that followed a negative December 2015 in which the index fell over 5%. March, April and May saw the Russell 2000 gain 7.8%, 1.5% and 2.1%, respectively. A pullback in June of 3 points, or 0.3%, was followed by advances of 5.9% in July, 20 points, or 1.6%, in August and nearly a 12-point gain, or 1%, in September.
The Dow Monday/Friday closes have also favored the bears in recent months, as the blue-chips have closed lower during five of the past seven Mondays. A lower close today would be the second-straight lower Monday finish and likely another bearish development.
Negative Dow closes on Fridays have extended to three-straight, and seven of the past nine sessions have seen the blue-chips finish lower. Since mid-August, the index has closed lower during 10 of the past 13 Friday sessions.
The market appears to be oversold to the slick-talking pros and, while there is the chance of a rebound, the technical picture continues to worsen. The 200-day moving averages on the indices have held on the current pullback, but they are still in play. Given the tightening of the presidential race, a continued backtest to these levels will likely extend into Tuesday’s close, and Wednesday’s session should be very volatile.
One sector I will be watching this week is transportation, as it will likely hold the early clue on a bullish rebound or a breakdown to lower lows. The Dow Jones Transportation Average ($TRAN, 8,075, up 22) has been holding support at 8,000-7,975 and the 50-day moving average since mid-September. Last month’s dip below this level held, with the index trading higher in six of seven sessions since then.
The major moving averages are in a nice uptrend, with near-term resistance at 8,100-8,150. A close above the latter would be a very bullish development and could help turn around the Dow’s fortunes. A close below 7,950-7,900 would be a bearish development and would represent a major move out of the current five-week trading range.
The chart for FedEx (FDX, $174.80, up $1.15) looks bullish, with all of the major moving averages also trending higher. Near-term resistance is at $175-$177.50, with the recent 52-week high at $177.36. Support is at $172.50, followed by $170 and the 50-day moving average.
By comparison, the technical setup for United Parcel Service (UPS, $106.94, down $0.54) looks bearish, with the 50-day moving average on the verge of falling below the 100-day moving average. Near-term support is at $106, with risk to $105-$104 and the 200-day moving average on a close below this level. Resistance is at $108-$108.50.
The option premiums for bullish FDX call options are expensive, while the UPS put options are reasonably priced for possible bearish trades.
For example, the FDX November 175 calls (FDX161118C00175000, $3.25, up $0.50) expire in less than two weeks, or next Friday. Shares will need to make a run past $178.25 to fresh highs for the trade to break even. A move past $181.50 would double the calls from current levels, but that scenario is unlikely to happen.
The UPS November 105 puts (UPS161118P00105000, $1.35, up $0.42) are “cheap” and could be targeted by bearish traders on continued weakness. However, shares will need to fall below $103.75, technically, by Nov. 18 for the trade to break even. A double would occur if shares fall below $102.30. This makes the trade a little risky given the short amount of time for the trade to play out.
The UPS December 105 puts (UPS161216P00105000, $2.10, up $0.37) would give a bearish trade another month of time premium and a breakeven point of $102.90. A double would occur if UPS shares fall below $100.80, technically, by mid-December.
With the portfolio light, we are in a great position to play continued weakness or a pending rebound this week. I want to be careful with new positions over the next day or two, as I’m looking for the current trend to continue into Tuesday’s closing bell. We can take advantage of a possible short-term rebound afterwards or stand pat with our current positions depending on the action.
From desk to press, futures look like this: Dow (+230); S&P 500 (+28); Nasdaq 100 (+71); Russell (+21).
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 8:00 a.m. EST.
I hereby disclose that I will be participating in the following trade(s).
Microsoft (MSFT, $58.71, down $0.50)
MSFT December 57.50 puts (MSFT161216P00057500, $1.26, up $0.13)
Entry Price: $0.86 (11/1/2016)
Exit Target: $1.75
Stop Target: $0.95, raise to $1.05 (Stop Limit)
Action: Raise the Stop Limit from $0.95 to $1.05.
Shares tapped a low of $58.52 on Friday. Support is at $58.50, followed by $58.25-$58 and the 50-day moving average. Resistance is at $59-$59.25.
You can read my previous comments on MSFT in the Oct. 31 Mid-Market Update.
Starbucks (SBUX, $52.75, up $0.98)
SBUX January 47.50 puts (SBUX170120P00047500, $0.59, down $0.36)
Entry Price: $0.95 (11/3/2016)
Exit Target: $1.90
Stop Target: None
Action: Friday’s low reached $50.84 before the rebound to $53.74 afterwards. Resistance is at $53.75-$54 and the downward slopping 50-day moving average. Support is at $52.50, followed by $51-$50.75.
Lattice Semiconductor (LSCC, $7.75, up $0.20)
LSCC December 7.50 calls (LSCC161216C00007500, $0.35, up $0.05)
Entry Price: $0.30 (10/12/2016)
Exit Target: $0.70 (Limit Order)
Stop Target: None
Action: Resistance is at $7.75-$8. Friday’s high reached $7.77. Support is at $7.50.
You can read my previous comments on LSCC and the buyout offer of $8.30 a share in Friday’s Pre-Market Update.
Viavi Solutions (VIAV, $7.30, up $0.06)
VIAV December 8 calls (VIAV161216C00008000, $0.12, up $0.02)
Entry Price: $0.51 (8/19/2016)
Exit Target: $1.05
Stop Target: $0.05 (Stop Limit)
Action: Resistance is at $7.40 and the 50-day moving average. Shaky support is at $7.25-$7.20 and the 100-day moving average, followed by $7.10-$7.
Editor and Chief Options Strategist