Pre-Market Update for 1/30/2017

Small-Caps and Curveballs

8:00am (EST)

The market traded in another tight range on Friday but posted a strong week as the bulls continued to push record highs. The small-caps are still a step behind the other major indexes as far as fresh all-time peaks but volatility continues to slide and has become a hot topic.

This week’s action promises to be just as fast paced with another heavy dose of earnings and executive actions. Although the market hates uncertainty, Wall Street has been giddy on President Trump’s call to action and the prospects of an economy growing north of 4%. The Debbie Downs and still skeptic slick talking pros continue to wait for that magical 5%-10% pullback, but I mentioned it could be a few more weeks before momentum starts to fade.

The Dow dipped 7 points, or 0.04%, to settle at 20,093 on Friday. The blue-chips traded to a high of 20,115 shortly after the open with near-term resistance at 20,200-20,350 holding. The 28-point pullback to 20,072 easily held support at 19,900-19,800 following the third-straight close above 20K. Additional help is at 19,700-19,600 and the 50-day moving average. Last Thursday’s record peak reached 20,125.58 with the weekly gain at 266 points.

The S&P 500 slipped 2 points, or 0.1%, to close at 2,294. The index made a run to resistance at 2,300-2,325 on the open but the 3-point pop stalled at 2,299. Support is at 2,275-2,270 with Friday’s low reaching 2,291. Additional support is at 2,250-2,245 and the 50-day moving average on a move below 2,270. The S&P reached an all-time high of 2,300.99 last Thursday and added 23 points for the week.

The Nasdaq advanced 5 points, or 0.1%, to end at 5,660. Tech tested a high of 5,667 in the opening minutes with lower resistance at 5,675-5,725 holding. Short-term support is at 5,625-5,575 with Friday’s low checking-in at 5,643. Last Thursday’s lifetime high touched 5,669.61 with a triple-digit weekly jump of 105 points.

The Russell 2000 fell nearly 5 points, or 0.4%, to finish at 1,370. The small-caps showed little enthusiasm following a third-point pop to 1,375 with resistance at 1,385-1,400 easily holding. Lower support at 1,370-1,365 was tested with the midday trip to 1,366. There is stretch to 1,355-1,350 and the 50-day moving average on a move below the 1,365. A shorting opportunity will come near the 1,345-1,340 level. The index advanced 19 points for the week and tested a high of 1,384 last Thursday. The all-time high is at 1,392.71 set on December 9th, 2016.

The S&P 500 Volatility Index ($VIX, 10.58, down 0.105) tested a low of 10.30 intraday with multi-year support at 10-9.75 holding. The high of 10.82 held resistance at 11-11.50. I talk more about the VIX below.

Although January has been a bullish month with a breakout to fresh all-time highs, the most concerning developing action is the inability of the small-caps to follow suit. The all-time high from early December was challenged a month later with the Russell 2000 testing 1,388 and 1,387 on January 4th/5th. The December high before and after the all-time peak reached 1,386 and 1,388 on December 8th/12th. Last week’s tops were at 1,383 and 1,384.

The earlier chart for the index and the aforementioned commentary should have you envisioning a possible triple-top. It will be crucial for the middle and lower trading range at 1,360 and 1,340 holding on a continued pullback. The index is down two-straight and had a 3-session slide to start 2017 along with a 4-day pullback in late November. Otherwise, it has been smooth sailing since the election.

A lower Monday close in the small-caps should be watched closely for possible weakness into Tuesday. If this action were to unfold, Wednesday would be a key turnaround day, especially if the 1,345-1,340 level comes into play. If the bulls can hold this level, another bullish setup could be in play. If the bears get below 1,340, short-sellers will certainly target 1,300-1,290 and the 100-day moving average.

I covered last week’s high’s of 1,383 and 1,384 and lower resistance at 1,385-1,400 in the index and chart update. If the bulls can make a move above 1,385-1,390 this week, it might represent another opportunity to go long. In any event, the action in the small-caps will be this week’s most important clue.

The 5-year chart below shows the 30-month low in the VIX just above the 10 level from mid-2014. A double-bottom occurred over a very short time period before a surge past 30 by late October 2014. This is likely a pattern that will play out at some point in 2017 and we will have plenty of time to prepare for it while possibly making a boatload of money. In the meantime, I mentioned this would become the big story but we are already ahead of the talking heads.

The iPath S&P 500 VIX Futures (VXX, 18.97, down 0.20) came into last week at 20.71 and set lower lows throughout daily with Friday’s bottom reaching a fresh 52-week and multi-year low.

For traders that went long the VXX February 20 puts (VXX170217P00020000, $1.63, up $0.17), these options have doubled after coming into last week at 81 cents. If you are in them, consider closing half the trade for a triple-digit profit while setting a trailing stop at $1.40. These puts were at 81 cents coming into last Monday’s open.

The VXX March 19 puts (VXX170317P00019000, $1.62, up $0.10) were just over $1 and are up roughly 60% in a week’s time. If you entered this trade, exit half at $2 and continue to ride the rest while setting a stop at $1.35. Although both aforementioned put options weren’t official recommendations, I got a lot of happy emails asking what to do, or how to manage the trades.

I may add a VXX recommendation to the portfolio at some point this week, but I don’t trade it as much as I do individual stock and index options. It has been one of the reasons for my slight hesitation but I continue to think the VIX has a few more weeks of possibly testing single-digits. This could get the VXX down to the mid-teens, or 17-16, if the two continue to push lower lows.

The Monday/ Friday Dow closes have been somewhat weak this month and there have been a number of closed Monday’s over the past month due to a holiday. The blue-chips have fallen the two Monday sessions the market was open this month and the Tuesday’s afterwards have been mixed.

The Dow Friday closes have also been mixed throughout January with much bigger up days with very small losses on the down days. This can be interpreted as a possibly bullish signal as money appears to be still moving into the market. Lower Monday/ Friday closes with significant pullbacks can be a warning sign for money moving out of the market.

Mixed Monday/ Friday closes can indicate trading ranges with stretch to the upside and downside. The indexes went through this for 6 weeks with stretch to the downside and are now flexing to the upside. A deeper look at the volume is also needed to get a more accurate assessment if money is moving into, or, our of the market. I have kept track of the Dow start and end of week closes for many years and this indicator is currently neutral to lightly bearish.

This week’s big event will be Apple’s (AAPL, $121.95, up $0.01) earnings with the company announcing after Tuesday’s closing bell. The recent bubbling and close above the $120 level (now support) was a very bullish development along with last Thursday’s 52-week high of $122.44. The major-moving averages are in a solid uptrend with the 50-day MA turning significantly higher this month.

Wall Street is expecting Apple to earn a profit of $3.22 a share on revenue of $77.38 billion. The high estimate has earnings pegged at $3.33/ $86.73 billion with low estimates at $3.11/ $75.1 billion. Obviously an earnings beat, or miss, along with positive or negative guidance, will sway stock movement.

I often mention I don’t like shorting strong stocks or buying put options against them, especially ahead of an earnings announcement. Call options can be risky and expensive despite trader bullishness so it is also important not to overpay if you decide to swing the bat on an earnings trade.

The AAPL February 125 calls (AAPL170217C00125000, $1.02, down $0.14) look tempting at current levels but expire in less than three weeks. I often call this the danger zone as time premiums start to erode at a more rapid pace. In order for these options to return a triple-digit profit, shares of Apple would need to clear $127, technically, by February 17th.

If shares stay below $125 over the same time period, these options would expire worthless. While there are weekly and other monthly options available to trade on Apple, I don’t like the risk/ reward or current setups in any of them. It doesn’t mean I’m bearish as I’m still hopeful the company reports a blowout quarter with the chance of $125 clearing.

The stock is heavily weighted in the Dow and other indexes and will have a major impact on Wednesday’s trading. Good, bad, or flat. I will be on the sidelines with AAPL as there are many other compelling opportunities to play without the risk of an earnings announcement.

From desk to press, futures look like this: Dow (-84); S&P 500 (-11); Nasdaq 100 (+2).


Momentum Options Play List

Closed Momentum Options Trades for 2017: 4-0 (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.


Viavi Solutions (VIAV, $9.23, up $0.13)

VIAV March 9 calls (VIAV170317C00009000, $0.65, up $0.10)

Entry Price: $0.50 (1/25/2017)
Exit Target: $1.00
Return: 30%
Stop Target: None

Action: Resistance is at $9.25-$9.50. Friday’s high tapped $9.29 and the 52-week high is at $9.40. Short-term support is at $9-$8.75.

Earnings are due out on Tuesday and Wall Street is looking for a profit of $0.07 a share on revenue just south of $198 million. The company has topped expectations the past four quarters by 2 cents, a penny twice, and four cents, respectively.

The February 9 calls were very active on Friday as bullish traders took the shorter-dated options with nearly 2,000 contracts exchanging hands. This can be considered a bullish sign but earnings are tricky to trade.

TherapeuticsMD (TXMD, $5.65, down $0.12)

TXMD June 7.50 calls (TXMD170616C00007500, $0.65, down $0.05)

Entry Price: $0.75 (1/18/2017)
Exit Target: $1.50
Return: -13%
Stop Target: None

Action: Friday’s high reached $5.88 but shares closed lower. Support is at $5.25-$5. Near-term resistance is at $5.75-$6.

Transocean (RIG, $14.90, down $0.28)

RIG March 17 calls (RIG170317C00017000, $0.30, down $0.07)

Entry Price: $0.66 (1/13/2017)
Exit Target: $1.35
Return: -55%
Stop Target: 20 cents (Stop Limit Order)

Action: Shares tested a low of $14.67 with lower support at $15-$14.75 holding. Resistance is at $15.25.

Tower Semiconductor (TSEM, $21.45, up $0.10)

TSEM February 21 calls (TSEM170217C00021000, $1.00, flat)

Entry Price: $0.65 (1/11/2017)
Exit Target: $1.50 (closed half at $1 on 1/27/17, Limit Order on other half)
Return: 54%
Stop Target: 90 cents (Stop Limit)

Action: I wanted to close half the trade on Friday because these are February options that will expire in less than three weeks. Despite a low of $21.29, shares rebounded to close in positive territory.

Support is at $21.25-$21. Resistance is at $21.50-$21.75.

Green Dot (GDOT, $26.64, down $0.06)

GDOT March 25 calls (GDOT170317C00025000, $2.40, flat)

Entry Price: $1.30 (1/6/2017)
Exit Target: $5 (closed half at $3 on 1/26/17)
Return: 108%
Stop Target: $2 (Stop Limit on other half)

Action: Friday’s high reached $26.82. Resistance is at $26.75-$27 with breakout potential to $30. Last Thursday surge to $28.99 was a fresh 52-week peak. Support is at $26.25-$26.

Sony (SNE, $30.52, down $0.60)

February 27 puts (SNE170217P00027000, $0.10, flat)

Entry Price: $0.65 (12/23/2016)
Exit Target: $1.30 (closed half at 10 cents on 1/23/17)
Return: -85%
Stop Target: None

Action: Support is at $31-$30.75. Friday’s low checked-in at $30.40. Resistance is at $31-$31.25.