MomentumOptions.com Pre-Market Update for 5/1/2017
Nasdaq Up Six-Straight Months
The bulls continued their climb up the wall of worry while setting record highs during the back half of April to get the monthly win. The bears frustrations are clearly visible as they came close to cracking major support levels for the indexes, with the Dow falling below its March lows. Volatility also reached its highest level of the year last month but collapsed last week.
May is often viewed as a bearish month by Wall Street and can be hard to trade if a bullish trend is still intact. The chatter of a market top will certainly continue as the “sell in May and go away” rhetoric gets reiterated by the same market pundits that continue to be wrong. At some point, a true “double-digit” selloff or pullback could come, but the slick talking pros missed the 6% pullback in March to get back in.
The Dow fell 40 points, or 0.2%, to close at 20,940 on Friday. The blue-chips opened at 20,987 and the high for the session with resistance at 21,150-21,200 easily holding. A move above the latter could lead to a continued breakout to 21,400-21,450. The backtest to 20,926 in the afternoon held support at 20,800-20,700 and the 50-day moving average. A close below the latter would be a bearish development.
The S&P 500 slipped 4 points, or 0.2%, to finish at 2,384. The index also opened at its high of 2,393 but the 5-point pop failed upper resistance at 2,390-2,400. The all-time high is a point above the latter with fluff up to 2,425-2,450, if cleared. The steady fade to 2,382 afterwards held support at 2,375-2,370 but the close below 2,385 was a red flag. I have mentioned a move below 2,365 (and the 50-day moving average) would be a slightly bearish development and a level that needs to hold on any weakness this week.
The Nasdaq dipped a point, or 0.02%, to end at 6,047. Tech traded to another all-time peak of 6,074 after opening at 6,072. I have been highlighting resistance targets at 6,075-6,100 on continued momentum with the bulls coming within a point of pushing on Friday. Support remains at 6,000-5,950. There is wiggle room down to 5,900-5,875 and the 50-day moving average on panic with a close below the latter also representing a possible near-term top.
The Russell 2000 sank 16 points, or 1.2%, to settle at 1,400. The small-caps made a 2-point run to 1,419 at the start of trading but failed resistance at 1,425 and fresh record highs. Upper support is at 1,400-1,395 held on the test to 1,399. A move below the latter opens up risk to 1,380-1,375 and the 50/100-day moving averages.
The S&P 500 Volatility Index ($VIX, 10.82, up 0.46) traded down to 10.29 in the opening minutes with support at 10.50-10 holding for the fourth-straight session. The high reached 11.16 but held near-term resistance at 11.50 for the fourth-straight session, as well. There is risk to 12.50-13.50 and the 50/100-day moving averages on stretch and an overshoot on continued weakness.
The major indexes returned to the monthly win column, although Tech never left, as the Nasdaq has closed higher every month since November, including April’s 2% pop, or 136 points. The Russell 2000 gained 14 points, the S&P 500 added 22 points, and the Dow climbed 277 points. The 1% advances were nice but the small-caps gave back half their monthly gains on Friday’s pullback.
It’s important to remember, the S&P 500 and Russell 2000 only needed a point apiece to finish March higher and the overall uptrend remains intact despite the nervousness of April. I mentioned in my opening commentary the pullback off the early March high on the Russell 2000 reached 6%.
The index peaked at its prior all-time high of 1,414.82 intraday on March 1st and I talked about the “double-bottom” that occurred at 1,335 on March 22nd and 27th, afterwards. The nearly 6% pullback looked shaky and would be tested again.
In mid-April, I mentioned the 1,345 level could also have signaled a double-bottom as the bears pushed these levels intraday on April 13th and 17th. With the Russell 2000 at 1,400 and current levels, a return to 1,345-1,335 would represent a 4%-5% pullback.
While I do hope higher market highs are in store through May, I bring these two levels up on the small-caps as a reference point. If the bulls do lose momentum, there could be a short-term trade using index options on the Russell 2000. However, I want to stress the bigger money might be made on continued closes below 1,345-1,335 down the road and when I might change my bullish thesis.
With first-quarter earnings season winding down over the next few weeks, the catalysts for higher highs will turn more towards economic news and something that will be hard to judge. In the meantime, another 2%-3% upside move could come before a possible 3%-5% downturn.
It would be hard not to stay bullish following the market’s best weekly gains of the year but it doesn’t mean we can’t be cautious, either. There are a number indicators I cover on a daily and weekly basis and this has helped me navigate the market better than most traders.
One concerning trend from April were the negative closes on the Dow to end the week. The index has closed lower the past four Friday’s and can signal money is nervous or worried to stay long over the weekend.
The start of the week closes have been much better for the blue-chips as the Dow has closed higher the past three Monday sessions. For new subscribers, up Monday/ Friday closes tend to indicate money is moving into the market. Down Monday/ Friday closes can signal money is moving put of the market. Mixed finishes to start and end the week can signal trading ranges.
A very interesting sign were the powerful up Monday’s to end last month. The Dow had its first move of more than 1% after coming close once in February. The other up Monday was nearly a 1% move. If Friday’s start moving up or down, in 1% tandems, it would be an early sign of a continued breakout, or, the possible start of a 10%-15% correction Wall Street has been begging for all year and since last November.
Our focus will continue to be on the Russell 2000 and the VIX, this week. The best way to trade the small-caps is by using the iShares Russell 2000 (IWM) and for the VIX, I like using the iPath S&P 500 VIX Futures (VXX).
The all-time high for IWM reached $141.82 last Wednesday with current resistance at $140-$142. Bullish traders can target the IWM May 140 calls (IWM170519C00140000, $1.35, down $1.20) if shares clear $140.25-$140.50 over the near-term. However, these options expire in less than three weeks.
The IWM June 142 calls (IWM170616C00142000, $ 1.60, down $0.90) would give a bullish trade more time to play out if $140.25-$140.50 clears. These options would would double from current levels if IWM is trading above $145.20 by mid-June, technically.
Bearish traders can target the IWM May 137 puts (IWM170519P00137000, $1.00, up $0.35) on continued weakness and on a move below $138.50-$138.25. These options would also be considered a short-term trade due to expiration.
The IWM June 135 puts (IWM170616P00135000, $ 1.50, up $0.35) would give a bearish trade more time to play out if $138.50-$138.25 is breeched. These options would would double from current levels if IWM is trading below $132 by June 16th, technically.
As far as VXX, the index traded to a fresh 52-week low of 14.97 last week. While I don’t actively trade VXX, I did look at some longer-term setups to play an eventual move above 16.50-17 and a retest of the 50-day moving average. While there could be an opportunity to trade VXX to lower lows, I think there is more upside to VXX than downside at the current moment.
The VXX June 16 calls (VXX170616C00016000, $0.85, down $0.05) were active on Friday as nearly 2,000 contracts exchanged hands. Open interest is above 28,000 and these options are liquid with a penny or two spread on the bid/ ask. These options would double from current levels if VXX is above 17.70 by mid-June.
The VXX September 20 calls (VXX170915C00020000, $1.05, flat) have nearly 4 months before they expire and offer “long-term” protection as many slick talking pros often tout. However, I wouldn’t actively seek a trade on the VXX until 15.25-15.50 is cleared and held for several sessions.
The most important earnings announcement this week comes from Apple (APPL) following Tuesday’s closing bell. Given its weight in the major indexes, Wednesday will be an exciting, and possible pivotable, day to watch.
I could have a New Trade as early as this morning but, as usual, it will depend on market conditions and near-term support/ and resistance levels holding, or not holding.
Momentum Options Play List
Closed Momentum Options Trades for 2017: 24-10 (71%). All trades are dated and time stamped for verification. New subscribers can look at the past history to see how the trades have played out or to research our Track Records.
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 a Trade Alert outside of these time frames.
Oracle (ORCL, $44.96, up $0.19)
ORCL June 46 calls (ORCL170616C00046000, $0.60, up $0.05)
Entry Price: $0.55 (4/26/2017)
Exit Target: $1.10
Stop Target: None
Action: Shares closed at a session high on Friday. Resistance is at $45-$45.50 with a move above the latter being a bullish development as it would signal a breakout of the current trading range. Support is at $44.50-$44.25.
Cisco Systems (CSCO, $34.07, up $0.32)
CSCO May 34 calls (CSCO170519C00034000, $0.70, up $0.12)
Entry Price: $0.42 (4/25/2017)
Exit Target: $0.85 (closed 1/3 @ 60 cents on 4/27/2017)
Stop Target: 48 cents, raise to 60 cents (Stop Limit)
Action: Raise the Stop Limit from 48 cents to 60 cents on the remaining 2/3rd’s of the trade.
Fresh resistance is at $34.25-$34.50 with the 52-week peak at $34.53. Support is at $33.75-$33.50 and the 50-day moving average if $34 fails to hold.
Earnings are due out in a couple of weeks but aren’t a risk over the near-term. Cisco is the king of the “penny beat” and what the company reported last quarter. However, they have topped earnings estimates by 2, 3 and 2-cents the previous three quarters.
Snap (SNAP, $22.55, up $0.54)
SNAP May 23 calls (SNAP170519C00023000, $1.45, up $0.25)
Entry Price: $0.75 (4/21/2017)
Exit Target: $1.50, raise to $2 (Limit Order on half)
Stop Target: $1, raise to $1.15 (Stop Limit)
Action: Raise the Limit Order on half the trade from $1.50 to $2. Friday’s high on the calls tapped $1.46. Raise the Stop Limit from $1 to $1.15 to protect profits.
Fresh resistance is at $22.75-$23 following Friday’s run to $22.59. Rising support is at $22.25-$22. Although there isn’t much history on the recent IPO, the 5/ 10-day moving averages are in very bullish uptrends and have produced mini golden crosses on last week’s move above the 20-day moving average.
Earnings are due out May 10th. I could “piggy-back” this trade with June options if shares clear $23 this week but I often mention earnings trades are tricky. If we can continue to make profits with these options, the risk/ reward will also continue to rise as we can play with house money.
Cypress Semiconductor (CY, $14.01, down $0.39)
CY June 14 calls (CY170616C00014000, $0.75, down $0.25)
Entry Price: $0.85 (4/20/2017)
Exit Target: $1.70
Stop Target: None
Action: Despite a very impressive earnings report, shares fell to a low of $13.65 on Friday. Support at $14-$13.75 and the 50-day moving average held. Resistance is at $14.25-$14.50. Friday’s high on the open tapped $14.58.
Square (SQ, $18.24, up $0.01)
SQ June 18 calls (SQ170616C00018000, $1.25, down $0.05)
Entry Price: $0.95 (4/20/2017)
Exit Target: $1.90 (closed half at $1.20 on 4/28/2017)
Stop Target: $1.05 (Stop Limit)
Action: Friday’s low reached $17.94 on the stock and $1.09 on the calls.
Support is at $18-$17.75. Resistance is at $18.50-$18.75 with the 52-week high at $18.45. Earnings are due out Wednesday and I will cover their numbers in the next day or two.