MomentumOptions.com Pre-Market Update for 8/14/2017
Bears Gain Momentum
The market suffered its second worst week of the year despite Friday’s slight rebound that ended a three-session slide. The technical damage to the major indexes hit the small-caps the hardest with the Russell 2000 breaching its 200-day moving average before holding this level into the closing bell. Meanwhile, the S&P 500 and Nasdaq failed to recover their 50-day moving averages following Thursday’s close below these levels.
Sectors were mixed for the week with Energy, Basic Materials, Financials, and Industrials leading on the downside. Consumer Staples and the Utilities were the stronger sectors.
The Dow gained 14 points, or 0.1%, to close at 21,858 on Friday. The blue-chips held positive territory for much of the session before slipping 2 points to 21,842 ahead of the closing bell. Support at 21,800 held with risk to 21,600-21,550 and the 50-day moving average on continued weakness. Resistance is at 22,000-22,100.
The S&P 500 added 3 points, or 0.1%, to finish at 2,441. The index tested a low of 2,437 intraday with lower support at 2,440-2,435 holding. There is risk to 2,415-2,410 and the 100-day moving average on a move below 2,430. Resistance is at 2,450-2,460 and the 50-day moving average.
The Nasdaq advanced 39 points, or 0.6%, to end at 6,256. Tech dipped nearly a point to 6,216 on the open with support at 6,200 holding. Backup help is at 6,150-6,100 and the 100-day moving average on a move below this level. Resistance is at 6,275-6,300 and the 50-day moving average.
The Russell 2000 climbed nearly 2 points, or 0.1%, to settle at 1,374. The small-caps traded to a low of 1,368 intraday with shaky support at 1,370-1,365 holding. A move below the latter could lead to 1,360-1,350. Resistance is at 1,395-1,400 and the 100-day moving average.
The S&P 500 Volatility Index ($VIX, 15.51, down 0.53) stayed relatively calm through much of Friday with the low reaching 14.50. Lower support at 15-14.50 held before a surge to 17.28 ahead of the closing bell. The second-straight close above the 15 level keeps resistance to 17.50-20 in play.
A closer look at the VIX shows the index cleared the summer double top near 16-16.25 and marked a new high for the year and a 9-month peak. The move may have cleared out some complacency since the election, with volatility a step closer to its immediate post-election high above 23. It is too early to say if a pop past 20 is coming but it will be an important area to watch, if cleared.
The major moving averages are starting to curl higher on the VIX and the bulls will need to recover the 13.50 level this week to reverse the current momentum. If the VIX can start the week with a close below current support at 15-14.50, and then 13.50, another buying opportunity might present itself.
As far as sector rotation, we wanted to cover a number of industries for possible trade setups. The strongest and weakest stocks in these sectors will pave the way for our next batch of option trades. Regular August options expire this Friday so we will likely be using September, October, and possible November calls and puts going forward.
The Basic Materials sector has been in a nasty downtrend since late July after reaching a peak of $55.92. The chart below shows the Materials Select Sector Spider (XLB) tumbling to a low of $53.41 on Friday. Support from early June at $53.25-$53 and the 100-day moving average held with risk to $52-$51.75 on a move below the latter. Current resistance is at $54-$54.50 and the 50-day moving average.
The Industrials Select Sector Spider (XLI) has been struggling to hold its 50-day moving average since late July following last week’s close back below this level. Support is at $67.50-$67 and the 100-day moving average with Friday’s low tapping $67.78. Current resistance is at $68-$68.50.
The Technology Select Sector Spider (XLK) made another attempt to clear upper resistance at $57.50-$58 midweek but levels that have been holding since late July. The retreat towards support at $57-$56.50 and the 50-day moving average will need to hold this week with risk to $55.25-$55 and the 100-day moving average on a close below the latter.
The Consumer Staples Select Spider (XLP) is trapped between its 50/100-day moving averages following the bearish outside reversal day from 10 trading sessions ago. The high reached $55.87 before a swift backtest to $54.57 intraday. A mini trading range between $55-$55.50 has since developed with lower highs and lower lows over the past four sessions. Resistance is at $55.50-$55.75. Support is at $55.25-$55.
A closer look at the chart shows a symmetrical triangle has formed and usually indicates a major breakout, or breakdown, is pending. This pattern can quickly play out with explosive moves to the upside or downside. The 50-day moving average is shows signs of a downtrend with a move below double-nickels ($55-$54.95) giving a possible early signal of a breakdown.
The Technology Select Spider (XLK) traded higher on Friday following a 3-day pullback off the recent 52-peak of $58.33. Support is at $56.75-$56.50 and the 50-day moving average with risk to $55.50-$55.25 and the 100-day moving average if $56 fails. This would retrace the early July breakout above the 50-day moving average. Resistance is at $57.50-$58 with a move above the latter likely signaling a run towards $58-$60.
The number of S&P 500 stocks trading above their 50-day moving average is just above 40% and levels last seen in mid-April and mid-May. Both times, the recovery back above the 50% level came in three and two sessions, respectively. A move below 40% would signal further weakness in the index as this level has held since early November 2016.
The iShares Russell 2000 ETF (IWM) held its 200-day moving average after trading down to $135.77 intraday. IWM has been holding its 200-day moving average since June 2016 and a close below $135.50-$135.25 could provide a shorting opportunity. Resistance is at $137-$137.50. A move back above $138-$138.50 and the 100-day moving average would signal the selling pressure has abated with a possible opportunity to go long.
The IWM September 135 puts (IWM170915P00135000, $2.25, down $0.10) can be targeted by bearish traders on a move below $135.25. Bullish traders can targets the IWM September 137 calls (IWM170915C00137000, $2.55, up $0.10).
There are less expensive out-of-the-money calls and puts along with weekly and further out monthly options available to trade on IWM. However, given the whipsaw action and likely continued short-term volatility, these are the options I’m targeting for a possible index trade.
Momentum Options Play List
Closed Momentum Options Trades for 2017: 43-19 (68x%). 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.
TiVo (TIVO, $18.45, up $0.25)
TIVO October 20 calls (TIVO171020C00020000, $0.65, up $0.05)
Entry Price: $0.70 (8/8/2017)
Exit Target: $1.40
Stop Target: None
Action: Lower resistance at $18.50-$18.75 and the 50-day moving average held on Friday’s run to $18.48. A move above $19 and the 200-day moving average would be a bullish development. Support is at $18-$17.75.
3D Systems (DDD, $12.76, up $0.16)
August 16 puts (DDD170818P00016000, $3.20, down $0.20)
Entry Price: $0.55 (8/2/2017)
Exit Target: $4 (Limit Order) (closed half @ $1.10 on 8/3/2017)
Return: 291% ($2.15 current avg. closing price)
Stop Target: $3 (Stop Limit)
Action: Friday’s peak reached $12.81 to clear lower resistance at $12.75-$13. Support is at $12.50-$12.25. The 50-day moving average is in a nasty downtrend and is signaling another leg lower towards $10 and single-digits. However, these options expire this Friday. We can still try for our $4 Exit Target but the other half will close if shares make a run towards $13 to start the week.