Dear Momentum Options Subscriber,
The bulls kept their post-election momentum going on Friday, as the market closed higher for the third-straight week. With three trading days left in the month of November and the bears still in hibernation, record highs are still possible, as fund managers will be forced to chase as they come back from a holiday week.
The Dow jumped 69 points, or 0.4%, to end at an all-time high of 19,152 on Friday. The blue-chips traded in positive during the shortened session after opening at 19,093 and going out at its session high. Resistance remains at 19,200-19,325, with the possibility of blue-sky territory to 19,500-19,600 at some point in December. Rising support is at 19,000-18,900, with a move below 18,800 being a bearish development.
The S&P 500 added 8 points, or 0.4%, to close at 2,213. The index opened 2 points higher at 2,206 while ending the session on its highest note. My upper fluff targets of 2,225-2,250 remain in play on continued momentum. Support is trying to move up to 2,200-2,190, with a close below 2,185 being a warning sign.
The Nasdaq climbed 18 points, or 0.3%, to finish at 5,398. Tech slipped a point to 5,379 on the open, with fresh support at 5,375-5,350 easily holding. A move below 5,325-5,300 might signal a near-term top, which is something we need to watch for this week on a pullback. I have talked about a run towards 5,400 over the last few weeks, with an outside shot at 5,500 coming into play by year-end.
The Russell 2000 leaped 5 points, or 0.4%, to settle at 1,347. The small-caps also dipped into negative territory after testing rising support at 1,340. Backup help is at 1,330-1,325, with a close below the latter signaling a possible top. My near-near-term target of 1,350 is just a field goal away, with room to run to 1,375-1,400 into late December or early January.
The S&P 500 Volatility Index ($VIX, 12.34, down 0.09) tested a high of 12.74 before closing below the 12.50 level for the fourth-straight session. This is a major area to watch this week and into December. Resistance remains at 13-13.50, with a close above the latter signaling a possible short-term market top. Upper support is at 12-11.50, with continued closes below the latter likely leading to single digits.
To say the most-hated rally in history continues would be an understatement, as I mentioned that last week has been historically bullish for the market. I often mention that when the suits-and-ties are away, the bulls like to play, and last week was no different. For the fund managers that have been talking about and hoping for a pullback, they have been wrong for basically 15 days, as the small-caps haven’t skipped a beat.
In fact, the Russell 2000 is on its longest winning streak ever — surging a mind-boggling 15% over the past 15 sessions. The index’s prior best performance was a 12% spurt over a 10-day period back in 1991. The Russell’s gain seems fitting, as it had the worst loss in October of the four major indices, falling nearly 5%, and another 2% over the first four days of November.
With the major indices closing at record highs, I thought it would be good to review some of my February forecasts. Each year, I do my year-end predictions on where the market could close, and I like to wait until after January’s price action. The main reason is that the first month is usually a good indicator of how the rest of the year might play out. While this past January witnessed a major pullback, I was prepared for the action following a failed Christmas rally.
The Santa rally is usually mistaken by the talking heads if the market is rising ahead of Christmas, but it is a convenient excuse to explain the gains. However, I often remind my readers that this event occurs after the holiday and during the first few days of January. The other reason I wait until February to make my year-end predictions is that I like to focus on the “January Effect” after it’s run its course, but that’s a subject for a later issue.
As far as my 2016 targets, we must first remember that the market was in a tailspin for much of January before rebounding somewhat into February. However, I wanted to see if a possible “double bottom” would come into play into month-end and hold. It did, as the major indices rallied into mid-April.
Following a May pullback and a four-month trading range, the market once again was challenging fresh highs in July. On July 18, I had this to say:
“To start, I got great clues that the market would rally off of the “double bottom” that formed in mid-February. The charts I drew mid-month showed major downtrend lines, and I predicted that once they were cleared, a run towards the major moving averages would come.
The snapshot from February showed that the 10-year charts were in the process of forming “rounding top” patterns, and these are bearish developments. Rounding tops can take a very long time to consolidate, and this helps explain the previous four-month trading range.”
These comments were a predictor of what was to come following another trading range into August. This was followed by another lower trading range that held throughout September/October and into the early part of November.
Heading into the week of the election, I said that the market was oversold and that a rebound rally was in store. I wasn’t worried about a Donald Trump presidency, as I was one of the early market forecasters that predicted he would win the election. Although he might not have been America’s most beloved candidate going in, I knew his business philosophy would actually be bullish for the market.
The confirmation of a rebound rally would come the night of the election, as I mentioned that Dow futures were down over 800 points before recovering. To be honest, I was expecting a major pullback if Hillary Clinton had won the presidency, as the major indices were on the verge of cracking their 200-day moving averages.
In any event, the run to record highs is here, and my original price targets have been exceeded.
On Feb. 29, I wrote these comments about the Nasdaq and the chart:
“The upside appears to be limited to 5,000-5,250, which would represent gains of 9%-14%. That’s asking a lot of the bulls in an election year, but it’s possible. The neckline for the Nasdaq is at 4,250, which will likely trigger if the index fails at 4,500 again. From there, it will be important for the 4,000 level to hold. A test to 3,250 and the 100-month moving average would represent a loss of 29% from current levels.”
The bulls have cleared and held the 5,250 level for eight sessions, and I have talked about a possible run towards 5,500. While I do believe this is clearly possible, I also want to go on record, again and early, that Nasdaq 6,000 could come into play next year.
Obviously, a lot of things have to go right for tech to continue its amazing run, and remember that it’s important to play the cards as they are dealt. However, keep Nasdaq 6,000 in the back of your mind. My chart work from 2016 for the other major indices were slightly lower than my 2015 price targets, but in February 2015 I had penciled in Dow 20,000, S&P 2,350-2,400 and Russell 1,400-1,450.
I didn’t want to take up too much time reviewing those charts, as I will be covering the 10-year charts in a few months. For now, it has been great to enjoy the rally following what has been, overall, a much longer trading range. Last week, I listed downside targets of:
- Dow: 18,600
- S&P: 2,160
- Nasdaq: 5,250
- Russell: 1,280
These levels are key areas of support and ones to continue watching going forward. While fresher levels of support will try to hold on a near-term basis on a pullback, and the ones I covered on the major indices earlier, there is no reason to worry about going “short” or “buying insurance” until my original lower price targets are breached.
For historian buffs like myself, I often stay humble by reminding myself that “the market can stay irrational longer than I can stay solvent”. Of course, John Maynard Keynes was talking about you and I, but having a game plan often keeps you focused.
Everyone knows that the market can stay irrational longer than you can stay solvent. However, don’t count on the slick-talking pros to make the rational play. This means that the market may stay irrational for a while longer, which is why higher highs could continue despite the fact that “we have come too far, too fast.”
I have updated the parameters for Friday’s bullish trades on Chicago Bridge & Iron (CBI) and T-Mobile (TMUS), so let’s get to it. I could also have another New Trade ahead of the Mid-Market Update, so stay locked and loaded after the open in case I take action.
From desk to press, futures look like this: Dow (-52); S&P 500 (-6); Nasdaq 100 (-8); Russell (-3).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 80-33 (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).
Chicago Bridge & Iron (CBI, $33.68, down $0.07
CBI January 35 calls (CBI170120C00035000, $1.18, down $0.12)
Entry Price: $1.25 (11/25/2016)
Exit Target: $2.50
Stop Target: None
Action: The Exit Target is at $2.50, but it is not a Limit Order at this time. There is no Stop Target at this time.
Resistance is at $34. Support is at $33.50-$33. These options were active on Wednesday, as nearly 1,000 contracts traded. The close just below the 200-day moving average remains slightly bearish, but this is an area I would like to see cleared and held today.
T-Mobile (TMUS, $54.59, up $0.25)
TMUS December 56 calls (TMUS161216C00056000, $0.83, up $0.12)
Entry Price: $0.75 (11/25/2016)
Exit Target: $1.50
Stop Target: None
Action: The Exit Target is at $1.50, but it is not a Limit Order at this time. There is no Stop Target at this time.
Resistance is at $55, with blue-sky territory to $57.50-$60 on continued strength. Support is at $53-$52. All of the major moving averages are in a solid uptrend, and higher highs look doable on continued momentum.
Imax (IMAX, $34.50, up $0.40)
IMAX January 36 calls (IMAX170120C00036000, $0.95, up $0.04)
Entry Price: $0.90 (11/23/2016)
Exit Target: $1.80
Stop Target: None
Action: Resistance is at $35, with a run towards $38-$40 being possible on a “triple-top” breakout. Near-term support is at $34-$33.50. The 50-day major moving average is on a rapid rise and is on track to clear the 200-day moving average in the coming weeks. This would be a very bullish signal.
The company recently matched earnings expectations for a profit of $0.12 a share, but revenues north of $86.6 million topped forecasts for $73.25 million. Additionally, theater signings and installations have been strong in recent months and should continue into 2017. While box office sales have been sluggish, trends should start improving this quarter and over the next 6-12 months.
The company also has exclusive partnerships with a number of players in the industry, including Walt Disney (DIS). Imax also has an overseas presence worthy of envy and an expanding presence in the virtual-reality world. These factors make the company an easy takeover target and one I have talked about for a number of years since I began following the company. I have also looked at LEAP options on this possibility, and I could add additional call options on a breakout.
Microsoft (MSFT, $60.53, up $0.13)
MSFT December 62.50 calls (MSFT161216C00062500, $0.26, down $0.01)
Entry Price: $0.45 (11/22/2016)
Exit Target: $1.00
Stop Target: None
Action: Short-term support is at $60.50-$60. There is risk to $59-$58 and the 200-day moving average on a close below the latter. Resistance is at $60.75-$61, with a move above the latter likely leading to fresh all-time highs north of $61.37.
Tower Semiconductor (TSEM, $18.27, down $0.14)
TSEM January 19 calls (TSEM170120C00019000, $0.70, flat)
Entry Price: $0.50 (11/16/2016)
Exit Target: $1.00
Stop Target: $0.45 (Stop Limit)
Action: Friday’s low tapped $18.22. Support is at $18.25-$18. Resistance is at $18.50-$18.75.
Lattice Semiconductor (LSCC, $7.25, down $0.11)
LSCC December 7.50 calls (LSCC161216C00007500, $0.05, flat)
Entry Price: $0.30 (10/12/2016)
Exit Target: $0.60 (Limit Order)
Stop Target: None
Action: Support is at $7.25. Resistance is at $7.50. I would like to see a close back above $7.50 this week, as the market makers are forcing our hand. Although the premium was only $0.30, the trade is running the risk of expiring worthless as long as shares stay below $7.50.
Editor and Chief Options Strategist