Dear Momentum Options Subscriber,
The bulls started last week on another high note, with the Russell 2000 joining the Dow in setting fresh 52-week peaks. However, the divergence continued, as the broader market and tech showed weakness. The bears tried their best against rising support, but they struggled for back-to-back sessions.
The choppy action continued into mid-week before tech started to rebound with a slack in the broader market. Thursday’s session was mixed as a result of some Fed speak, while volatility fell below a key level of support. The small-caps were the real heroes, however, as they are now on an 11-session win streak.
The Dow fell 35 points, or 0.2%, to finish at 18,867 on Friday. The blue-chips made a run to 18,915, but the 12-pack pop fizzled shortly after the open. Lower resistance at 18,900-19,000 has been holding for five -straight sessions, with a close above the latter likely leading to additional blue-sky territory at 19,200-19,325. The backtest to 18,853 held rising support at 18,800-18,700 for the sixth-straight session. A close below 18,600 would signal a short-term top. Last week’s all-time peak reached 18,934.
The S&P 500 slipped 5 points, or 0.2%, to settle just under 2,182. The index came within a tenth of a point of clearing lower resistance at 2,190-2,200 at on the open, but it stalled at 2,189. I have talked about possible fluff to 2,225-2,250 on continued closes above the 2,200 level. The record high is just under 2,194, which was tapped in mid-August. The intraday low of 2,180 afterwards held support at 2,175-2,170. There is additional help at 2,160, but a move below this level would be a bearish development.
The Nasdaq gave back 12 points, or 0.2%, to end at 5,321. Tech traded to an all-time high of 5,346.80, which was a feat that basically went unnoticed by the talking heads. I have talked about the possibility of seeing 5,400 over the near term on continued closes above 5,350. I will talk more about the Nasdaq (and S&P 500) in my closing thoughts. The fade to 5,315 during the first half of Friday’s action held rising support at 5,300-5,275. A close below 5,250 and the 50-day moving average would also be reasons for caution.
The Russell 2000 gained 6 points, or 0.5%, to settle close at 1,315. The small-caps dipped a point to 1,308 on the open, with rising support at 1,300-1,290 holding for the fourth-straight session. Crucial support is at 1,280 on a move below the latter. I have talked about fresh resistance at 1,315-1,325 over the near term, and Friday’s high of 1,316 and close into this level was a very bullish sign.
The S&P 500 Volatility Index ($VIX, 12.85, down 0.50) fell 4% after the bears pushed a high of 13.74 on the open. Near-term resistance at 14 and the 100-day moving average easily held, with closes above 15 and the 50- and 200-day moving averages being another warning sign. Support remains at 12.50-11.50, with a move below the latter likely leading to 10 and possibly single-digits.
Wall Street stayed behind the eight ball last week, as fresh comments from out-of-touch legends like Carl Icahn predicted the market had peaked following the Trump rally. The suits-and-ties and hedge fund managers have been flabbergasted, as the Trump Train has pushed record highs while they have waited on the sidelines.
Although lifetime highs came into play over the summer, the one group that failed to test all-time highs was the small-caps. The underperformance and the “double-top” near 1,260 on the Russell 2000 in September was a warning sign I said to watch for. Heading into the week of Sept. 26, with the Russell 2000 at 1,240, I said:
“While my near-term outlook remains for another 3%-5% upside move for the major indices, a close below major support levels would nullify the current setup. I have repeatedly mentioned throughout the summer that the small-caps were the only index not to set fresh record highs. I still expect that they will, likely in October during earnings season, providing 1,225 holds on any pullback this week and next.”
The small-caps topped out at 1,255 on three-straight days to end the last week of September, which was clearly a warning signal. The index held 1,225 for back-to-back sessions in mid-October after closing at 1,227. However, it was all downhill into the end of the month, as the index closed at 1,191, with an additional test to 1,156 on Nov. 3 and 4.
The pullback below 1,225 was brutal, but it was one of the main reasons I mentioned that a rebound rally could possibly come after the presidential election.
Also from Sept. 26:
“The Nasdaq was at 5,213 to start the month and traded to a low of 5,097 on Sept. 12. The surge to fresh all-time highs throughout last week represented the ninth record close for 2016. The current rally has reached 208 points, or 4%, since the dip below 5,100. Factoring in an 8% move off of the low would have tech near 5,500, which is the year-end target I posted in February. It is crucial that the 5,200 level holds into October.”
Tech did well at holding 5,200, as there was a dip to 5,169 on Oct. 13 that ended with a close at 5,213. Two days later, the index tested a low of 5,196 but closed at 5,199. This was the bearish sign I didn’t want to see, but the bulls held up well as they rebounded by 1% the following session.
Meanwhile, the bears would have to wait until late October to get back below the 5,200 level, but they did so in a big way. The Nasdaq went on a six-session skid while testing lows of 5,053 and 5,034 into the Friday ahead of the election. Again, this was another solid signal that a near-term “double bottom” had been reached.
The other sector that I have talked about all year long, which will need to lead the next major breakout, would be the financial stocks. A stock I highlighted in mid-October was Well Fargo (WFC, $52.82, up $0.33), which had been beaten down like a rented mule following all of the scandals to get bonuses. However, the punishment was too good to pass up. On Oct. 17, with shares at $44.71 coming into the week, I said:
“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.”
The aforementioned call options expired at last Friday’s close and were nearly $8 in the money, or $7.82 per contract, technically. With an entry point under a buck, this would easily have been a mind-blowing trade. The whipsaw action was a doozy, however, and I apologize for not making this an official trade for the portfolio. However, there could be further upside momentum, and I could use December or January call options on continued strength.
WFC shares tested a high of $54.06 last Monday before making a backtest just below $51 by Thursday. Friday’s high tapped $52.98, and a move above $53.50-$54 would be another possible signal to go long.
I will be reviewing and covering my Feb. 29 predictions for the market this week, and new subscribers should take a moment now to read over that past issue. On a technical level, a “triple top” has formed on the Nasdaq, and this is usually a bullish setup that leads to higher highs. However, there are such things as triple top breakdowns, so the bulls still need to be careful.
The Sept. 22 high in tech tapped 5,342.88, and the Oct. 10 high was 5,340.52. Friday’s fresh high was still bullish despite the slight pullback. The S&P 500’s failure to clear its August high has been frustrating, but it should happen this week or next on continued momentum.
In review, the key levels of support to watch going forward are:
- Dow: 18,600
- S&P: 2,160
- Nasdaq: 5,250
- Russell: 1,280
Otherwise, we will continue to stay long and strong while possibly entering new positions. There could be a trade as early as this morning, so stay locked and loaded into and after the opening bell.
This week will be shortened due to the Thanksgiving holiday, but it typically favors the bulls. The market will be closed this Thursday and will re-open until 1 p.m. EST for a half-session on Friday. I plan to continue my regular publishing schedule through Wednesday, including a morning update on Friday. There won’t be a Mid-Market Update on Black Friday, but I will be watching our positions throughout the session, and I will send out Trade Alerts if needed.
From desk to press, futures look like this: Dow (+23); S&P 500 (+5); Nasdaq 100 (+12); Russell (+1).
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).
Tower Semiconductor (TSEM, $18.00, down $0.16)
TSEM January 19 calls (TSEM170120C00019000, $0.56, down $0.06)
Entry Price: $0.50 (11/16/2016)
Exit Target: $1.00
Stop Target: $0.39 (Stop Limit)
Action: Set a Stop Limit at $0.39.
Support is at $18-$17.75. Resistance is at $18.25-$18.50.
Array BioPharma (ARRY, $7.93, up $0.61)
ARRY January 7 calls (ARRY170120C00007000, $1.45, up $0.34)
Entry Price: $0.78 (11/14/2016)
Exit Target: $1.80, raise to $2.50-$3.00
Stop Target: $0.85, raise to $1.05 (Stop Limit)
Action: Raise the Exit Target from $1.80 to a range of $2.50-$3.00, but do not make these Limit Orders at this time. Raise the Stop Limit from $0.85 to $1.05.
Resistance is at $8, with Friday’s high reaching $7.96 and a fresh 52-week peak. Rising support is at $7.50-$7.25. The 3-year chart shows a major multi-month hurdle at $8.50. I have talked about a possible run towards $9-$10 into mid-January, and continued closes above $8.50 should do the trick.
Apple (AAPL, $110.06, up $0.11)
AAPL January 115 calls (AAPL170120C00115000, $1.71, down $0.07)
Entry Price: $1.24 (11/15/2016)
Exit Target: $2.50
Stop Target: $1.55 (Stop Limit)
Action: Resistance is at $112-$112.50 and the 50-day moving average on continued closes above $110. Support is at $108-$107.75 and the 100-day moving average.
Starbucks (SBUX, $55.77, down $0.08)
SBUX January 47.50 puts (SBUX170120P00047500, $0.18, down $0.03)
Entry Price: $0.95 (11/3/2016)
Exit Target: $1.90
Stop Target: $0.12 (Stop Limit)
Action: Resistance is at $55.75-$56 and a downward-sloping 200-day moving average. Support is at $55-$54.75 and the 100-day moving average. The 50-day moving average is curling higher, and a move above $56.25-$56.50 will surely trigger the Stop Limit.
Lattice Semiconductor (LSCC, $7.54, up $0.04)
LSCC December 7.50 calls (LSCC161216C00007500, $0.15, down $0.09)
Entry Price: $0.30 (10/12/2016)
Exit Target: $0.60 (Limit Order)
Stop Target: None
Action: Support is at $7.50. Resistance is at $7.75-$8. The 52-week peak is at $7.99. The chart shows the breakout following the acquisition, and the $7.50 level will likely hold into January, which is when the deal should be finalized.
This puts the trade at risk, as the market-makers are taking advantage of an arbitrage situation. At $7.80, the options will technically be $0.30 in the money, which is our breakeven point for the trade. In other words, we are at the mercy of the market on how this trade winds up in three weeks.
Viavi Solutions (VIAV, $7.94, up $0.05)
VIAV December 8 calls (VIAV161216C00008000, $0.20, up $0.02)
Entry Price: $0.51 (8/19/2016)
Exit Target: $1.05
Stop Target: $0.14 (Stop Limit)
Action: Resistance is at $8 and the recent 52-week high, with Friday’s peak reaching $7.99. Support is at $7.75-$7.60. The breakeven point for this trade is at $8.51, and this is one trade that has been running since mid-August. While the wait hasn’t been so much fun, I’m still hopeful that the trade can flip a profit.
Editor and Chief Options Strategist