Pre-Market Update for 12/19/2016

Another Mixed Week

8:00am (EST)

The market ended mixed for the second-straight week although the Dow extended its weekly win streak to six-straight. The choppiness on Friday and lower closes across the board left Wall Street still calling for a market top. However, this week could offer a free lunch and next week is the official start of a possible Santa Claus rally.

The Dow dipped 8 points, or 0.04%, to finish at 19,843 on Friday. The blue-chips opened at 19,909 and traded up to 19,923 intraday. Upper resistance at 19,800-20,000 held for the fourth-straight session with a close above the latter being a bullish development. The backtest to 19,821 held near-term support at 19,800 for the third time in the past four sessions. There is additional help at 19,700-19,600 if 19,800 fails to hold.


The S&P 500 slipped 4 points, or 0.2%, to close at 2,258. The index tested a high of 2,268 on the open with lower resistance at 2,275-2,300 easily holding. Near-term support at 2,250 held on the fade to 2,254 afterwards with 2,240-2,235 waiting in the wings on a move below this level.


The Nasdaq fell 19 points, or 0.4%, to settle at 5,437. Tech made a run to 5,474 shortly after the open with upper resistance at 5,450-5,475 holding by a point. Upper support at 5,425-5,400 also held by a point on the intraday low of 5,426. This was a neutral reading along with the close between 5,450-5,425.


The Russell 2000 gave back 2 points, or 0.2%, to end at 1,364. The small-caps held positive territory for much of the session after reaching a peak of 1,379. The breech of lower resistance at 1,375-1,400 was a bullish signal despite the negative close. The move into negative territory during the final 15 minutes of trading tapped 1,362. Upper support at 1,360-1,350 held with a move below the latter being a bearish development.


The S&P 500 Volatility Index ($VIX, 12.20, down 0.59) bubbled up to 12.95 with resistance at 13.50 holding for the 9th-straight session. There is risk to 14.50-15 on a close above this level and a possible trade waiting, if so. The intraday low of 12.15 and close below upper support at 12.50 was a bullish sign. Lower support at 11.50 remains in play with a shot at 10 and single-digits on a move below this level.


The Dow gained 86 points, or 0.4%, last week and reached a lifetime peak of 19,966 last Wednesday. It represented the 17th record close for the blue-chips since the election and 26th for 2016. However, the triple-digit loss into the closing bell was also the first since president elect Donald’s Trump’s victory. The S&P 500 reached an all-time high of 2,277 on Tuesday followed by Wednesday’s trip to 2,276 but slipped just over a point last week.

The Nasdaq lost 7 points for the week after trading to an all-time high of 5,486 last Tuesday and 5,485 on Thursday. The Russell 2000 stumbled 23 points, or 1.7%, and was the weakest link. The small-caps failed in its efforts to push higher highs following the previous Friday’s lifetime peak to 1,392.

The lower highs on the back half of last week for the Dow and S&P 500 were a little concerning but not alarming. It is too early to say if a mini-trading range has formed, overall, in the market but the small-caps made a higher high on Friday to keep this theory alive. Naturally, a rebound today with a positive close would help the bulls reestablish a little momentum along with a continuing falling VIX.

The Financial sector cooled off following the Fed’s decision to raise rates by a quarter-point, taking the current rate to 0.50%. This was widely expected but what spooked Wall Street was the “dot plot”, or the forecast for future rate increases.

Before last Wednesday, forecasts were for two rate increases in 2017, two in 2018, and two in 2019. The zombies have now penciled-in for three rate increases in 2017, two-three in 2018, and three in 2019. This means the maximum Fed Funds rate, assuming a 0.25% increase each time the Fed hikes rates, would be 2.75%-2.85% by the end of 2019. On as side note, the Fed also increased its long-term rate target to 3%, still below the 2007 Fed Funds rate of 5%.

The Financial Select Spiders (XLF, $23.36, down $0.20) reached a fresh 52-week peak of $23.87 last week and remain on track to test $24-$25 as long as $23-$22.50 holds over the near-term.


The U.S. Dollar ($USD, $102.92, down $0.19) continued its rapid rise following the first rate hike in a year. The dollar index measures the greenback against a basket of currencies and tapped a fresh 14-year high of $103.56 following news. The major moving averages are in a strong uptrend with a possible run to $105 looking like a good bet over the near-term.


Commodities took it on the chin midweek with copper, gold and silver pulling back to multi month lows. Gold ($GOLD, $1,137.40, down $7.60) may have hit a short-term bottom with shaky support at $1,120 holding into the weekend. The chart below shows a possible, but suspect, return to resistance at $1,160 over the near-term. If Gold fails to hold the $1,120 level, there could be an opportunity for a continued shorting opportunity in the yellow-metal.


The talking heads will likely mention a possible Santa rally this week if the market can rebound and with Christmas coming on Sunday this year. The market is open for a full session on Friday but will be closed next Monday. As good as the month of December has been to the bulls, the “official” Santa Claus rally, if there is one, starts after Christmas and lasts into the first two trading days of January.

Although there isn’t a guarantee of higher market highs this week, or next, the smart money will be looking for a free lunch on beaten down names. The idea is that “quality” names that have been beaten down will rebound on continued market momentum. I’m not sure what sectors will be hot but my first guess is the suit-and-ties could be looking at the healthcare sector.

One stock on my Watch List from the sector, and one of my favorite names to trade, is CVS Health (CVS, $79.57, up $1.27). Shares are down from a 52-week peak north of $106 but have shown some strength this month. A bullish trade could be in the cards if shares can clear resistance at $80.50-$80.75 and the 50-day moving average.


The chart also shows a gap down from $84-$82 to nearly $70 at the beginning of November and these levels represent additional hurdles. Another drop below $76 would negate a bullish setup and offer an opportunity to possibly go short.

The CVS January 82.50 calls (CVS170120C00082500, $0.72, up $0.17) can be targeted by bullish traders on a move or close above $80.75 this week, or next. These options were active on Friday along with the CVS January 80 calls (CVS170120C00080000, $1.65, up $0.45) so stay locked-and-loaded in case I take call action on CVS.

The CVS January 77.50 puts (CVS170120P00077500, $1.25, down $0.60) can be targeted by bearish traders if $78 fails to hold but I would wait for a breakdown below $76 to ensure additional weakness and a possible drop below $75 is coming next month.

There are only nine trading days for the year and I’m still expecting a continued rally into year end. This week major clues will be the VIX staying below 13.50 and the action in the small-caps. If the Russell 2000 can recover its losses from last week over the next few weeks, it should help the overall market return to all-time highs.

I could have a New Trade shortly after this morning’s open so stay close to your email inboxes in case I take action.

From desk to press, futures look like this: Dow (+35); S&P 500 (+3); Nasdaq 100 (+4); Russell (+2).
Momentum Options Play List

Closed Momentum Options Trades for 2016: 86-36 (70%). 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.

Spider Gold Shares (GLD, $108.05, up $0.71)

GLD January 107 puts (GLD170120P00107000, $1.60, down $0.35)

Entry Price: $0.75 (12/142016)
Exit Target: $2.50-$3.50
Return: 113%
Stop Target: $1.30 (Stop Limit)

Action: GLD traded to a high of $108.78 on Friday with the put hitting a low of $1.35.

Resistance is at $108.75-$109 with a move above the latter likely triggering the Stop Limit. Support is at $107-$106.50.


Viavi Solutions (VIAV, $8.38, down $0.15)

VIAV March 9 calls (VIAV170317C00009000, $0.35, down $0.05)

Entry Price: $0.37 (12/8/2016)
Exit Target: $1.00
Return: -5%
Stop Target: None

Action: Short-term support is at $8.40-$8.35 followed by $8.25-$8. Resistance is at $8.50-$8.75.


TiVo (TIVO, $20.90, flat)

TIVO January 22.50 calls (TIVO170120C00022500, $0.35, flat)

Entry Price: $0.33 (11/30/2016)
Exit Target: $0.70
Return: 6%
Stop Target: None

Action: Support is at $20.50-$20 and the 50-day moving average. Resistance is at $21.25-$21.50.