Bulls Continue 8-Year Run

8:00am (EST)

The bears ruined the ringing in of the New Year with a Friday win and are trying to deny the typical Santa Claus rally that has another two days to run. However, it was the bulls that capped off a winning 2016 to keep their eight-year streak intact following a strong fourth-quarter rally.

The action picks back up this week as Wall Street gets back to reality following their extended vacations. Most of the suit-and-ties have missed the recent run to record highs and are the same ones that were saying the market had peaked in the summer and after the election.

While the slick talking pros have been begging for a pullback for the past two months, it remains to be seen if it will be ahead of, during, or, after fourth-quarter earnings season. This will be the catalyst, along with possible geopolitical concerns, that will shape what could be a very volatile January.

The Dow dropped 57 points, or 0.3%, to end at 19,762 on Friday. The blue-chips tested a high of 19,852 on the open but failed lower resistance at 19,900-20,000 for the second-straight session. The fade to 19,718 and close below near-term support at 19,800 was a slightly bearish development. Additional help is at 19,600-19,550.

The S&P 500 fell 10 points, or 0.5%, to finish at 2,238. The index traded into lower resistance at 2,250-2,275 but stalled at 2,253 within minutes of the opening. The backtest to 2,233 breeched lower support at 2,240-2,235. There is additional risk to 2,225-2,220 with a close below the latter a likely opportunity to go short with put options. We can possibly go long with call options on a close back above 2,260.

The Nasdaq stumbled 49 points, or 0.9%, to settle at 5,383. Tech made a 9-point run to just under 5,442 but fell shy of recovering resistance at the 5,450 level. Fresh hurdles are at 5,400-5,425 and levels the bulls need to recover today. Near-term support is at 5,350-5,300 and the 50-day moving average nestled in between the two.

The Russell 2000 lost 6 points, or 0.4%, to close at 1,357. The small-caps popped two-points higher at the start of Friday’s action but the trip to just below 1,365 failed lower resistance at 1,370-1,375. Support at 1,360-1,350 is back in play following the intraday test to 1,353. Backup support is at 1,340-1,335.

The S&P 500 Volatility Index ($VIX, 14.04, up 0.67) fell to a low of 13.05 during Friday’s open with support at 12.50-11.50 easily holding. The close above 13.50 and test to 14.68 violated all of the major-moving averages with the 200-day holding. The close above the 50/100-day moving averages bears caution on a close above upper resistance at 14.50-15.

The Dow gained 639 points, or 3.3%, in December while the S&P 500 added 40 points, or 1.8%. The Nasdaq advanced 59 points, or 1.1%, and the Russell 2000 jumped nearly 35 points, or 2.6%.

For 2016, the Dow was up 2,238 points, or 13.3%, and the S&P 500 climbed nearly 195 points, or 9.7%. The Nasdaq zoomed over 375 points, or 8.2%, and the Russell 2000 soared 221 points, or 19.4%.

All of the major indexes are on two-month winning streaks. This follows prior 3-month losing streaks for the Dow and S&P 500 from August through October. Aside from October, the Nasdaq and Russell 2000 have traded higher in five of the past six months.

The Dow Theory trends I have been discussing have played out well over the past two-months as the blue-chips cleared a “triple-top” in early November. These types of chart patterns can be bullish or bearish and this one has been super bullish on the breakout. The Dow peaked in July and August while holding a lower trading from September throughout October.

I talked about the first 3 Dow Theory patterns throughout December that took place with the Transports breaking out to new highs, volume picking up in November and early December, and the bullish trend staying intact through the mini-trading range.

The other 3 main Dow Theories are “movement”, “phase” and the fact the market is discounting all news, good or bad, for the most part. The main movement the Dow could be entering is considered the primary movement of a major trend that can last from less than a year to several years.

The overall Dow Theory also shows major market trends are composed of three phases: 1) an accumulation phase that has already occurred, or hasn’t matured. 2) a public participation, or absorption phase, that has yet to happen and should ignite at Dow 20,000. 3) and a distribution phase.

The accumulation phase is what we have seen for much of 2016 and is a period when smart people are buying while others are selling and the general opinion of the market is negative. During this phase, the market can trade flat or appear to be correcting as astute traders are in the minority camp buying stock that the market is supplying. There were dozens of famous market pretenders that called for a market peak throughout all of 2016 and were wrong into late December.

Phase two is when the market catches on to what the astute traders like you and I are doing and a rapid price change occurs. This is what the Dow could now be experiencing, or has experienced, as trend followers and other technically oriented traders are now jumping on the bulls’ bandwagon.

“Stock is hard to buy”, so they say, and this phase should continue for awhile until rampant speculation occurs. This is something we haven’t seen yet. We will know when that occurs once the local waiter and Uber driver start to give stock tips.

The last and third phase kicks in as the astute investors begin to close their positions into a blowoff top rally that could be coming at some point in 2017.

The last part of the Dow Theory I will cover is the news. The market is starting to react to new information as soon as it becomes available and is absorbing it as quickly as its released. Twitter, Facebook, and other non-traditional news feeds have become just as important as headline market news reported on business channels.

This is usually bullish until it isn’t and a lot will be happening this month, mainly earnings and the ushering in of a new President. The market has been bullish on Donald Trump’s proposed ideas and business acumen along with policy changes to clean up the swamp.

A lowering corporate tax rate, a cutback in the insane amount of regulations to opening new businesses, should help grow a sluggish economy that didn’t seen 3% growth in eight years of the current President. Policy changes are always hard to implement but if all goes well, the bulls could run for a ninth-straight year. If not, the bears could get aggressive as they try to take a double-digit bite out of the market.

I could have a New Trade shortly after the open so stay close to your email inboxes.

From desk to press, futures look like this: Dow (+93); S&P 500 (+9); Nasdaq 100 (+30).

Momentum Options Play List

Closed Momentum Options Trades for 2017: 0-0 (0%). 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.
Sony (SNE, $28.03, down $0.12)

January 27.50 puts (SNE170120P00027500, $0.40, up $0.05)

Entry Price: $0.30 (12/23/2016)
Exit Target: $0.60
Return: 33%
Stop Target: None

February 27 puts (SNE170217P00027000, $0.75, up $0.10)

Entry Price: $0.65 (12/23/2016)
Exit Target: $1.30
Return: 15%
Stop Target: None

Action: Support is at $28-$27.75 with a move below the latter getting $27-$26 in play. Resistance is at $28.25-$28.50.

The 50-day moving average is still on track to take out the 200-day moving average and would confirm the bearish death cross I have been predicting since we got into the trade. Friday’s low tapped $27.91 and the December low is at $27.72.

Array Biopharma (ARRY, $8.78, up $0.10)

ARRY March 10 calls (ARRY170317C00010000, $1.00, up $0.10)

Entry Price: $0.85 (12/21/2016)
Exit Target: $1.70
Return: 18%
Stop Target: None

Action: The close above lower resistance is at $8.75-$9 was bullish. Friday’s high tapped $8.99 and fell a penny shy of the recent 52-week high. Support at $8.50-$8.25.

If shares close above $9, I could “piggy-back” this trade with additional call options.