MomentumOptions.com Pre-Market Update for 1/23/2017
Earnings Season Heats Up
The bears opened the shortened weak with a win as the recent bullish Tuesday’s were outweighed by a shaky dollar. News that then President Elect, Donald Trump, said in an interview with the Wall Street Journal the US dollar was “too strong” led to some uneasiness and overall market weakness.
The rest of the week was shaky as December lows came into play but Friday’s action kept the bottom of the trading ranges intact. With fourth-quarter earnings season coming into full swing, the bulls will need to show continued strength while trying to regain momentum for another possible run at all-time highs.
The Dow jumped 94 points, or 0.5%, to finish at 19,827 on Friday. The blue-chips held positive territory throughout the session with the high reaching 19,843. Resistance at 19,900-20,000 held tight with a close into this level a bullish start for the week. A move above the latter gets 20,200-20,350 in play. Support is at 19,800-19,725 with a move below 19,700 likely leading to 19,600-19,500 and the 50-day moving average. For the week, the index fell 58 points but is still up 65 points for the year.
The S&P 500 climbed 7 points, or 0.3%, to settle at 2,271. The index made a run to 2,276 shortly after the opening bell to clear lower resistance at 2,275-2,300. Although this level failed to hold, the close above 2,270 was semi-bullish. Support is at 2,260-2,250. A move below the latter could lead to a continued backtest to 2,240-2,235 and the 50-day moving average. The S&P 500 fell 3 points for the week, and is 33 points, year-to-date.
The Nasdaq added 15 points, or 0.3%, to close at 5,555. Tech raced to a high of 5,574 on the open with lower resistance at 5,575-5,600 holding by a point. Support remains at 5,525-5,500 with last week’s lows reaching 5,527 on Tuesday and 5,528. If these levels hold throughout the week, we can say it was a “double bottom”. However, a breech of either aforementioned numbers would be a bearish development. The Nasdaq fell 19 points last week and for 2017, is showing a 172-point gain.
The Russell 2000 popped a 6-pack, or 0.5%, to end at 1,351. The small-caps traded up to 1,355 midday but failed fresh resistance at 1,360-1,365. The lower highs and lower lows throughout last week pushed lower support at 1,345-1,340 and the 50-day moving average. There is additional risk to 1,325-1,320 if this level fails to hold over the near-term. Last week’s 21-point dip led the overall market pullback with the index now showing a 6-point loss for the year.
The S&P 500 Volatility Index ($VIX, 11.54, down 1.24) stayed deflated throughout Friday’s session with the low tapping 11.53. The 10% pullback and close just outside of support at 11.50-11 looked bullish. The 52-week low is at 10.93 with 10 and single-digits looking possible on a move below 10.75. Resistance is at 12.50-13.50 and the 50/100-day moving averages with continued closes above the latter leading to 14.50-15 and a breech of the 200-day moving average.
I often talk about stretch in the indexes and last week’s pullback to fresh lows was clearly a warning sign. Obviously, Friday’s rebound looked good on paper and today’s action will be imperative in keeping the bears at bay. The bulls will need to keep volatility low as traders were heavily buying February protection throughout last week.
The VIX options pits were very active last week as traders are loading up for a 3%-5% pullback in the market over the next month, or by mid-February. There are a number of ways to trade the VIX and I often profile trades when the time feels right. Premiums on VIX call and put options can be somewhat expensive but rightly so because of the direct hit or profit they make on unusual and highly volatile trading sessions.
The “crowd” has been focusing on the action in the iPath S&P 500 VIX Futures (VXX, 20.71, down 0.83) despite shares continuing to set fresh 52-week lows. The major moving averages are still in a major downtrend with risk to the high teens on continued weakness. Fresh support is at 20.50-20. Resistance is at 21.50-22.
Traders were buying the VXX February 25 calls (VXX170217C00025000, $0.40, down $0.25) and the VXX February 30 calls (VXX170217C00030000, $0.17, down $0.11) throughout last week. The losses in both aforementioned call options were pushing 40% on Friday alone as hype of a selloff was just around the corner played like a broken record.
I have been mentioning the current trading range could last into February and why I have stayed away from buying “protection”. While the slick talking pros say you need it as buying VXX call options protects your portfolio, it’s like buying insurance when playing blackjack. When I play 21, I have to feel the environment and how my stack is going before wasting money on insurance.
I also don’t like paying for insurance because timing the VIX can also lead to a triple-digit return with the right options. Given the technical setup and the chance for the low high teens to come into play, perhaps put options are the way to go. Remember, if I feel the market is going to sink, I sometimes buy put options on the indexes.
The VIX is different in a way that we are buying put options on hopes of a higher market. The will cause the VXX to continue its slide along with the VIX that I have said has the chance to test 10 and possibly single-digits.
There are weekly and regular monthly call and put options that trade on the VXX but the monthly provide more liquidity with tighter bid/ask prices. The VXX February 20 puts (VXX170217P00020000, $0.81, up $0.18) jumped nearly 30% on Friday after opening at 69 cents. If VXX trades down to 18 by mid-February, these put options will easily double as they will be at least $2 in-the-money. Over 4,000 contracts traded on Friday.
The VXX March 19 puts (VXX170317P00019000, $1.02, up $0.14) gained over 15% on Friday after opening at 92 cents. If VXX trades below 17 by mid-March, these put options will double as they would also be at least $2 in-the-money. This will also give the trade an additional month to play out and they are roughly two months away from expiration.
One of the major clues I said to watch for was the action in Goldman Sachs (GS, $235.74, down $8.56). Shares fell 3.5% to start last week’s shortened session while holding the $235 going into earnings ahead of Wednesday’s close. The company topped expectations but shares spent the latter part of the week defending the $230 level.
I highlighted the $250 level as an area the bulls needed to clear as a signal for a continued run to fresh 52-week peaks, and for the Dow to possibly test 20,000. It was crucial the 50-day moving average held on the pullback and all of the major moving averages remain in an strong uptrend. If shares can recover $235 and the bottom of the prior trading range, there might be a good opportunity to play the GS February 245 calls (GS170217C00245000, $2.50, down $0.25) for a continued rebound.
The top of the trading range is at $245 and shares would need to clear $247.50, technically, by mid-February for the trade to breakeven. However, a push past $250, technically, would get these call options to $5 in-the-money for a double from current levels. Although the allure of a 100% return is tempting, I tend to shy away from higher-priced options and ones that are entering three weeks away from expiration.
Options with less than four weeks away from expiring are also in a danger zone as time premiums will start to decay rapidly as expiration nears. There are a few trades in the portfolio that are in this situation and I’m watching them closely. I still believe there is a chance they can still be profitable, and I will send out Trade Alerts if action is needed or taken.
I mentioned the uproar the President created when he said the dollar looked too strong and the comments likely accelerated the pullback below the 50-day moving average and fresh support at $100.50-$100. A weaker dollar or stronger dollar will debated about how it should or shouldn’t effect the market but the trend still looks higher. All of the major moving averages are in a bullish uptrend and a move back above $101.50-$102 will get another run at $103-$104 back in the mix.
I don’t trade the dollar so no possible trades to preview. However, I do believe the action with the dollar and the small-caps trade in tandem at times. If the dollar can recover the 50-day moving average, and the VIX continues to slide, I’m looking at a bullish trade in the Russell 2000.
The iShares Russell 2000 ETF (IWM, $134.44, up $0.69) held last week’s slide to $133.25-$133 and the 50-day moving average. A close below $132 and backup support would be a bearish development but a short-term rebound could be in store if $135 clears.
Bullish traders can target the IWM February 137 calls (IWM170217C00137000, $1.07, up $0.05) or the IWM March 138 calls (IWM170317C00138000, $1.75, up $0.05). Bearish traders can add the IWM March 130 (IWM170317P00130000, $1.90, down $0.40) on a move below $132.
I could have a New Trade and/ or possible Trade Alerts this morning so stay close to your email inboxes. As you can see, my Watch List is full of bullish and bearish plays and we just have to wait for the action to come to us.
From desk to press, futures look like this: Dow (-26); S&P 500 (-5); Nasdaq 100 (-13); Russell (-4).
Momentum Options Play List
Closed Momentum Options Trades for 2017: 3-0 (100%). 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 8am and 12pm–2pm (EST) updates. Also, I will usually give you a heads-up if I think I’m going to send an Trade Alerts outside of these time frames.
TherapeuticsMD (TXMD, $5.46, down $0.16)
TXMD June 7.50 calls (TXMD170616C00007500, $0.70, up $0.05)
Entry Price: $0.75 (1/18/2017)
Exit Target: $1.50
Stop Target: None
Action: Support is at $5.25-$5. Near-term resistance is at $5.75-$6. Friday’s low reached $5.45.
Transocean (RIG, $15.31, up $0.22)
RIG March 17 calls (RIG170317C00017000, $0.45, up $0.05)
Entry Price: $0.66 (1/13/2017)
Exit Target: $1.35
Stop Target: None
Action: Shares tested $15.52 on Friday. Near-term resistance is at $15.75-$16. Support is at $15.25-$15.
Tower Semiconductor (TSEM, $20.36, up $0.24)
TSEM February 21 calls (TSEM170217C00021000, $0.65, up $0.05)
Entry Price: $0.65 (1/11/2017)
Exit Target: $1.30
Stop Target: None
Action: The two week trading range is still intact with resistance at $20.50-$20.75. Support is at $20-$19.75. Shares kissed $20.62 ahead of the weekend.
Green Dot (GDOT, $25.58, up $0.29)
GDOT March 25 calls (GDOT170317C00025000, $1.65, up $0.10)
Entry Price: $1.30 (1/6/2017)
Exit Target: $2.60
Stop Target: $1, raise to $1.35 (Limit Order)
Action: Raise the Stop Target from $1 to $1.35 with a Limit Order to protect profits.
Resistance is at $25.75-$26. The 52-week high is at $25.82 with Friday’s peak reaching $25.65. Support is at $25.25-$25.
Sprint (S, $8.93, down $0.04)
S February 9 calls (S170317C00009000, $0.50, down $0.04)
Entry Price: $0.54 (1/6/2017)
Exit Target: $1.10
Stop Target: None
Action: resistance is at $9-$9.25. Short-term support is at $8.75-$8.50.
Sony (SNE, $30.50, up $0.10)
February 27 puts (SNE170217P00027000, $0.15, flat)
Entry Price: $0.65 (12/23/2016)
Exit Target: $1.30
Stop Target: 10 cents (Limit Order on half)
Action: Resistance is at $30.75-$31 with a move above the latter triggering the Limit Order on half. Support is at $30.50-$30.25.