Dear Momentum Options Subscriber,
The market was oversold as it came into last week following a two-week pullback and backtest to the major moving averages. While a rebound was nearly a given on a Hillary Clinton win, a Donald Trump presidency wasn’t, and that caught Wall Street off guard.
The night of the election was dark and gloomy, as Dow futures were down over 800 points and heading towards a 5%+ pullback. However, the Dow posted its best week in five years following the election, rallying over 5% the other way as optimism about the prospects for a business-friendly Trump administration started making sense to the naysayers.
The Dow gained 39 points, or 0.2%, to close at 18,847 on Friday. The blue-chips were weak throughout the first half of action and tested a low of 18,736. Rising support at 18,700-18,600 held, with additional help at 18,400-18,350 on a close below the latter. The rebound to 18,855 failed to clear fresh resistance at 18,900-19,000. Thursday’s all-time intraday high reached 18,873.
The S&P 500 fell 3 points, or 0.1%, to finish at 2,164. The index traded in negative territory throughout Friday’s session, with the low checking in at 2,152. Near-term support at 2,150-2,140 and the 50- and 100-day moving averages held, but a close below the latter would likely signal a near-term top. Resistance remains at 2,170-2,175, with a move above the latter leading to 2,190-2,200. The all-time high is north of 2,193.
The Nasdaq jumped 28 points, or 0.5%, to settle at 5,237. Tech traded down to 5,179 shortly after the open, with support at 5,200-5,175 and the 100-day moving average holding. A close below the latter could lead to another backtest to 5,150-5,100. The recovery to 5,241 pushed resistance at 5,250 and the 50-day moving average. Continued closes back above the latter should get 5,275-5,300 back in the picture.
The Russell 2000 zoomed 30 points, or 2.5%, to end at 1,282. The small-caps slipped a point to 1,250 at the start of trading before a steady uptrend into the closing bell. The close above 1,280 and session highs gets 1,290-1,300 and all-time highs back in the mix. Short-term support has moved up to 1,275-1,270.
The S&P 500 Volatility Index ($VIX, 14.17, down 0.57) tapped a high of 16 intraday, with resistance at 15-15.50 and the 50- and 200-day moving averages getting stretched. The close below 14.50 and the 100-day moving average was a bullish sign, and near-term support is at 13.50.
The technical outlook for the market dramatically improved following last week’s reversal and the run towards record highs. The major moving averages were in severe downtrends, with mini “death crosses” forming on the Dow and S&P 500. Last week’s action corrected these issues, for the most part, with the major indices reclaiming their 50-day moving averages.
The one index that failed to clear its 50-day moving average, by a point, was the Nasdaq. Although this doesn’t appear to be a big deal at the moment, it was a slightly bearish sign worth noting.
The biggest story from last week was the surge in the financial sector, as some individual stocks broke out to 8-year highs. As far as the Financial Select Sector SPDR (XLF, $21.67, up $0.06), it traded to a fresh 52-week and multi-year high of $21.70 on Friday.
The 11% surge in XLF last week was breathtaking, and the option chains were busy. The 5-year monthly chart shows short-term resistance at $22, with fluff to $24-$25 at some point in early 2017. Support is at $21-$20.
The XLF December 22 calls (XLF161216C00022000, $0.38, up $0.28) traded over 10,000 contracts on Friday, while the XLF December 23 calls (XLF161216C00023000, $0.11, up $0.10) had volume of nearly 18,000 contracts. These options have over a month of time premium and could be targeted by bullish traders. I would wait for a possible pullback, however, while watching the January 2017 call options to see if they get cheaper.
There are weekly call and put options available to trade on XLF, but an 11% move in a week is hard to chase. However, momentum can never be underestimated, and the banks will likely enjoy a higher-interest-rate environment down the road.
Bank of America (BAC, $19.02, up $0.26) surged 15% last week while tapping a fresh 52-week high of $19.03 on Friday. The 5-year chart below shows the breakout above multi-year resistance at $18 that will now try to hold as near-term support. A run past $20 appears imminent on continued momentum.
The BAC December 18 calls (BAC161216C00018000, $1.30, up $0.88) traded over 88,000 contracts on Friday, while gaining a crisp 210%. The BAC December 19 calls (BAC161216C00019000, $0.67, up $0.52) had volume of over 30,000 contracts.
The regular January options have an extra month of time premium over the December options, which provides bullish or bearish trades more time to play out. The BAC January 20 calls (BAC170120C00020000, $0.49, up $0.37) zoomed over 300% on Friday, with volume reaching a staggering 117,000 contracts.
If BAC continues to hold $19 this week and doesn’t gap higher, I might target the aforementioned call options for a trade.
Aside from the strength in the financial stocks, I would like to see continued follow-through in tech and the small-caps this week. The other major clue I will be watching for is the action in the VIX.
The bulls likely need to get the VIX below 13.50 while holding upper resistance at 15-16 to start the week. Longer-term, the VIX could trade down to 12.50-11.50, but it’s too early to say if single digits will come into play. However, it is possible, and that’s something I thought might happen over the summer. The 52-week low on the VIX is at 11.02.
This morning, I have a New Trade on a biotech stock listed below, along with a Profit Alert for Microsoft (MSFT). I have also lowered the Limit Order on Lattice Semiconductor (LSCC) and raised the Stop Limit for Viavi Solutions (VIAV), so let’s get to it.
From desk to press, futures look like this: Dow (+47); S&P 500 (+1); Nasdaq 100 (-6); Russell (+6).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 78-31 (72%). 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).
Array BioPharma (ARRY, $6.74, up $0.01)
Buy to open the ARRY January (2017) 7 calls (ARRY170120C00007000) for a maximum price of $0.95.
Action: I like these call options at current levels, and you can use a Limit Order up to $0.95 to get the best fills this morning.
These are the regular monthly options that expire on Jan. 20, 2017. I will provide the parameters of the trade in today’s Mid-Market Update.
Resistance is at $7. Support is at $6.50.
Microsoft (MSFT, $59.02, up $0.32)
MSFT December 57.50 puts (MSFT161216P00057500, $0.89, down $0.19)
Entry Price: $0.86 (11/1/2016)
Exit Target: $1.75 (Closed first half at $1.09 on 11/10/16)
Stop Target: $0.90 (Stop Limit)
Action: The Stop Limit at $0.90 on the second half of the trade was triggered into Friday’s close, and we are now out of the position.
I will keep MSFT on my watch list for another possible bullish or bearish trade in the coming days.
Lattice Semiconductor (LSCC, $7.72, up $0.06)
LSCC December 7.50 calls (LSCC161216C00007500, $0.33, up $0.03)
Entry Price: $0.30 (10/12/2016)
Exit Target: $0.70, lower to $0.60 (Limit Order)
Stop Target: None
Action: Lower the Limit Order from $0.70 to $0.60.
I would like to get the position filled so that we can move on to another trade. The return will still be 100% if our orders are filled.
Resistance is at $7.75-$8. The 52-week peak is at $7.99. Support is at $7.50.
Viavi Solutions (VIAV, $7.80, up $0.05)
VIAV December 8 calls (VIAV161216C00008000, $0.22, up $0.03)
Entry Price: $0.51 (8/19/2016)
Exit Target: $1.05
Stop Target: $0.05, raise to $0.14 (Stop Limit)
Action: Raise the Stop Limit from $0.05 to $0.14.
This has been the longest-running trade of the year for the portfolio. Shares have teased us for over two months on attempts at a run past $8, and the breakeven price is at $8.51.
These options still have a month of time premium left, but I’d rather save the remaining premium in case resistance at $8 holds. Support is at $7.60-$7.50.
Starbucks (SBUX, $53.93, up $0.36)
SBUX January 47.50 puts (SBUX170120P00047500, $0.37, down $0.05)
Entry Price: $0.95 (11/3/2016)
Exit Target: $1.90
Stop Target: None
Editor and Chief Options Strategist