MomentumOptionsTrading.com Morning Update for 1/6/2014
Bulls Rebound but Bears Loom
9:00am (EST)
“The bulls took a breather on Friday as Wall Street worried over interest rates but while the 10-year Treasury Note did close above the all-important 3% level, the losses were minimal. At some point, higher interest rates and a tapering Fed could become bearish headwinds for the market but with only 2 more trading days left in 2013, the bulls will be trying to end the year with a bang.” (from 12/29/2013 Weekly Wrap…)
The bulls put a feather in their December cap with the indexes ending higher for the 10th time in 12 months in 2013. The market ended the year at record highs but the bears won the week and are making some noise to start 2014. (continued…)
The Dow advanced 28 points, or 0.2%, to close at 16,470 on Friday. The blue-chips traded to a high of 16,588 intraday on the last trading day of the year and came within a 12-pack of triggering our 16,600 fluff target. We mentioned a close above this level could lead to Dow 16,800-17,000 but we warned the first day back could be trouble for the market. The index fell 135 points on Thursday after testing a low of 16,416 and support at 16,400-16,350 before rebounding on Friday. The low of 16,439 also held support but a break below these levels could lead to a quick test to 16,200-16,000. The 20-day MA is at 16,155 and the 50-day MA is 15,944. For the week, the Dow fell 8 points, or 0.05%, and is down 107 points, or 0.6%, for 2014.
The S&P 500 The S&P 500 slipped six-tenths of a points, or 0.03%, to settle at 1,831.27. The index made a run at our yearend fluff target of 1,850 from November and reached a peak of 1849.44 on December 31 intraday before closing at 1,848. We warned of a possible back test to 1,825 on the first day back and Thursday’s low checked-in at 1,827.74. Friday’s bottom was 1,829.13. Another run and close above 1,850 is possible on a rebound and if cleared could lead to 1,875-1,900 over the near-term. However, if the bears crack 1,825 expect a test to 1,810-1,800. The 20-day MA is at 1,811 and the 50-day MA is at 1,792. The S&P 500 came into the week at 1,841 and dropped a dime, or 0.5%, by Friday’s close. For the year, the index is off 17 points, or 0.9%.
The Nasdaq declined 11 points, or 0.3%, to finish at 4,131. We had a fluff zone of 4,150-4,200 for the index on the close above 4,000 in late November and Tech pushed 4,177.73 intraday on the last trading day for 2013. We warned of the battleground forming at 4,150 and said a close below this level might trigger 4,125-4,100 over the near-term. A close below this level would likely lead to a back test to 4,050-4,000. Thursday’s low reached 4,131 and Friday’s low was 4,124.96. If this represents a temporary double-bottom, a run towards 4,200 could come by month’s end. A close above this level could lead to 4,400-4,500 on a possible euphoric top. The 20-day MA is at 4,087 and the 50-day MA is 4,010. For the 4 trading sessions, the Nasdaq was down 24 points, or 0.6%, and is lower by 45 points, or 1.1%, year-to-date.
The Russell 2000 gained 5 points, or 0.5%, to end at 1,156. The small-caps pushed 1,165 and came within 1% of triggering our 1,175-1,200 upper yearend targets again as the 1,200 level was tripped on December 23. We will talk more about this short-lived volatile ride next week but for now these levels ate still in play as long as 1,150 holds as support. Thursday’s low reached 1,146.60 but the close at 1,150.72 held the bears in check. This was a good clue a short-term bottom could be in but a close below 1,150 will likely lead to a back test to 1,125-1,100. The 20-day MA is at 1,136 and the 50-day MA is 1,122. The 100-day MA is at 1,090. These levels will provide EXCELLENT clues for a test to lower levels if triggered. The Russell dipped 5 points, or 0.4%, for the week and is down 7 points, or 0.65%, YTD.
The S&P 500 Volatility Index ($VIX, 13.76, down 0.47) is still in rocky territory but the 3% drop on Friday was bullish. The VIX pushed 14.35 by yearend and we said “don’t flinch until 15 trips”. We used this rally cry in October, November, and into December to guide us through the volatility and we have a good feeling the VIX will help us to continue to provide pinpoint accuracy for the market as we have reviewed. At this point, it feels like the market is holding Ace-Eight unsuited as a close above 15 favors the bears while a close below 12.50 would get the bulls headed back to higher highs. We talk more about the VIX below but these will be the levels to watch this week and into next. With the bulls and bears playing poker, this week’s flop could determine next week’s turn and river and how much money is risked to win the pot.
The bulls enjoyed a sweet December as the Dow gained 490 points, or 3%; the S&P 500 soared 43 points, or 2%; the Nasdaq jumped 117 points, or nearly 3%; the Russell 2000 added 21 points, or 2%.
The final numbers for 2013 are impressive: The Dow was up 3,472.56 points, or 26.5%; the S&P 500 surged 422.17 points, or 29.6%; the Nasdaq zoomed 1,157.08 points, or 38.3%; the Russell 2000 rocketed 314.29 points higher, or 37%.
Other sectors that did well include the S&P Spiders Biotech Index (XBI, $130.42, down $0.42) as it roared 50% higher:
And the S&P Spiders Broker Index ($XBD, $160.91, up $1.03) as it went on a parabolic 70% rise.
June and September were the only down months in 2013 and the indexes have held their 100-day MA’s for more than xx months.
The official results of the Santa Claus rally are now in the books and while there was an appearance with a few gifts, the market also got some coal in its stocking.
The Dow was at 16,294 at the start of the Santa Claus rally and added 175 points while the S&P 500 closed at 1,827.99 on December 23rd and added 3 points over the seven trading sessions. The Nasdaq started at 4,148.90 and was DOWN 17 points while the Russell 2000 was at 1,157 and slipped a point. The Dow’s 1% gift was the only present worth mentioning as the overall results weren’t much to cheer about.
Last year’s Santa Claus Rally was jolly as the S&P 500 gained 2% over the 7-day trading period and went on to post a zippy 30% in 2013.
The theory is if stocks fail to rally during the holiday season, it often foreshadows a difficult year ahead for the market. In some cases it could signal the start of an outright bear market. The S&P’s 3-point pop was positive but not much to write home about.
Gold fell 28% in 2013 after finishing just above the $1,200 level. The yellow-metal tested a low of $1,181.40 in late December nearly fell into our yearend $1,175-$1,150 target zone from July.
Silver tested a low of $18.72 in late December and came with a buck and change of triggering our yearend target of $17.50.
Both Gold and Silver may have made short-term and possibly longer-term bottoms but any closes below the December lows will rekindle our lower-end price targets.
First Five Days of January are another important market tell and usually dictate how January might play out. The first two days of 2014 are favoring the bears so the bulls will need to get off to a good start on Monday.
If the market is up over the first five trading days of the New Year, it often leads to more gains for the rest of the year. Since 1950, when the market rose during the first five trading days, the S&P 500 went on to post full-year gains 85% of the time.
However, if the market trades lower over the first five trading days, it can be a good tell on how the year might finish by yearend. Since 2000, the market has began the year lower five times. In the years 2000, 2001, 2005, 2007 and 2008, the average loss for the S&P 500 was -11% following a lower first five trading days of the year. If the bulls don’t rebound by Wednesday, they could have a hard time with history class in 2014.
The market will have plenty of news to trade on this week as earnings season gets underway and with Friday’s Nonfarm Payroll report. We have listed the major companies reporting this week in our Earnings section of the Weekly Wrap but we will likely wait until next week to trade options.
We wanted to cover our prior 15-year charts for all of the indexes this week as well as we showed you the near-term charts, first, to give you a better view of where the indexes could be headed while showing new subscribers how we came up with our Price Targets. We also like to wait until January finishes up before making our yearend predictions and we do want to show you last year’s chart for the Dow (and other indexes) as we were probably THE ONLY newsletter that predicted a 3,000 point gain for the blue-chips. The index cleared this level mid-November and we said a run to 16,500-16,600 could come on fluff.
Here were our thoughts in the February 4, 2013 Weekly Wrap:
we expect maybe another 2% rise over the next few weeks, followed by a 5%-10% dip by April. By then, we should know if the economy is “growing” or “stimulating” the way the zombies expect.
The one aforementioned sentence we want to remind you of this:
“The gains can be even staggering during post-election years as some periods have seen the market move 20% higher.”
A less than bullish, but still double-digit gains from here would be Dow 15,400; S&P (500) 1,650; Nasdaq 3,500; Russell (2000) 1,000 for 2013. These targets are roughly 10% from current levels with some adjustments.
To get to our 2013 yearend targets, we took all of the bullish (and bearish) factors and split the difference of an advance of 10%-20% higher along with the price channels we have drawn for you.
Now for the drumroll…
Dow 16,000; S&P (500) 1,700; Nasdaq 3,800; Russell (2000) 1,025
(END)’’
Final 2013 Results: Dow 16,576; S&P 1,848; Nasdaq 4,176; Russell 1,163.
Here was our chart work for the S&P and we penciled-in a rise to 1,700:
Here was our chart work for the Nasdaq and 3,800:
And one last chart on one of the BEST technical indicators, the S&P Volatility Index:
As you can see, we had factored in a move to 11-10 for the VIX and the 52-week low of 11.05 was hit by mid-March. The recent low of 11.69 was triggered the day after Christmas. The VIX is currently at 13.76 and this week or next could see a pop past 15 or a drop below 12.50 as we mentioned earlier.
We will talk more about the technical warnings we have been seeing over the past few weeks and months in our next issue of the Weekly Wrap and by then we will know how the first five days played out. We will also take a peak at the longer-term charts as well.
Last week’s volume was weak so there is a chance buyers step in to start the week as most of Wall Street returns back to work following their long holiday vacations. However, a weaker Monday needs to be watched along with Wednesday’s close to see if the bears are gaining momentum. If they are, we can expect extreme volatility going forward as the bulls face reality.
Earnings, Fed Speak and Nonfarm payrolls will be the market moving headlines this week.
As we head to press, futures are showing a slightly lower open on weaker China economic data: Dow futures are down 14 points to 16,393 while the S&P 500 futures are lower by 2 points to 1,823. The Nasdaq 100 futures are off a point to 3,531.
MEMBERS AREA
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 tradesor “Exit Orders” in your brokerage account unless we list one. We will send out a “Profit Alert” or “New Trade” if we want you to close a position OR if a new trade comes out. Otherwise, follow instructions at all times in the 9am and 1pm updates. Also, we will usually give you a heads-up if we think we are going to send an email outside of these time frames. Closed Trades for 2014: 3-0- the Weekly Wrap is 1-0 for 2014 (86-7 since 2011) and is designed for traders that want to use options with less risk.
Pulte Group (PHM, $20.04, down $0.04)
February 22 calls (PHM140222C00022000, $0.40, down $0.02)
Entry Price: $0.40 (1/3/14)
Exit Target: $0.80
Return: 0%
Stop Target: None
Action: We are expecting a push past push past $22 by mid-February. Support at $20 and we will stick with the trade as long as $19 holds as support. held yesterday and we would like to see $20 hold or a higher close into the weekend.
H&R Block (HRB, $29.28, down $0.10)
February 30 calls (HRB140222C00030000, $0.70, up $0.05)
Entry Price: $0.65 (1/3/14)
Exit Target: $1.30
Return: xx%
Stop Target: None
Action: We have been waiting for a close above $29.50 that we said would lead to a run past $30 and up to $31.50-$32. Shares could be waking up. We are expecting a run past $31 that should get us 100% return as long as $28.50 holds on any back test.
Ariad Pharmaceuticals (ARIA, $7.15, down $0.11)
January 7 calls (ARIA140118C00007000, $0.65, down $0.15)
Entry Price: $0.45 (12/3/13)
Exit Target: $0.90-$1.35 (closed a quarter @ $0.90 on 12/20/13, quarter @ $1 on 1/2/14)
Return: xx%
Stop Target: 45 cents (Stop Limit)
Action: Ariad traded down to $5.92 to start the week but closed at $6.55. Tuesday’s rebound reached $6.98 but failed to clear short-term resistance at $7. However, Thursday’s run to $7.75 matched the December 20 intraday high and is serving as a “double top”. A close above this level will likely get $10 and the 100-day MA in play. Support is at $7 with risk to $6-$5.50. We have set a stop limit at $0.45 to protect profits.
Galena Biopharma (GALE, $5.09, up $0.01)
January 2.50 calls (GALE140118C00002500, $2.60, up $0.10)
Entry Price: $0.30 (11/11/13)
Exit Target: $0.90 (closed a quarter @ $1 on 11/21/13, closed a quarter @ $1.50 on 12/10/13)
Return: 542%
Stop Target: $1.75 on remaining half position, raise to $2 (Stop Limit)
Action: Shares cleared $5 on the last trading day of the year and reached an intraday and 52-week high of $5.30. We have been in this trade since November and our near-term target of $5 has been cleared. We mentioned Oppenheimer recently initiated coverage of the stock with a Price Target of $6 and we believe a run to $7 could come as we will re-raise Opperheimer a buck to sweeten the pot.
We will continue to adjust our Stop Limit if shares move higher. If there is a back test to $4.50 we will likely be stopped out. We need to be out of the remaining half of the trade by NEXT Friday as we want to close the position instead of exercising the call options as they will be in-the-money.
There is little analyst coverage on the Street but the company is starting to get noticed.
Other 2014 Portfolio OPEN positions (0): These are trades that are still open in the portfolio but are down over 50%. They have longer expiration dates and are on “hold” but are not worth mentioning until they turn around. This means we would not open any new positions. We are still keeping track of the trades and we will record the results, accordingly, when we close them or if the options expire. Click on the 2013Portfolio link in the Members Area to view ALL open/ closed trades.
WATCH LIST SECTION
These trades are NOT recommendations. They are trades that we like but have not added to the portfolio as an official recommendation because of market conditions or because we are waiting for better entry prices. We try not to have more than 12-15 open trades at any one time which is why we created a Watch List. We will not list entry prices because these stocks are on the verge of breaking out or they could sell off but these are the trades we are watching as new candidates.
PowerShares QQQ (QQQ, $86.64, down $0.63)
January 87 calls (QQQ140118C00087000, $0.70, down $0.50)
February 90 calls (Qqq140222C00090000, $0.50, down $0.15)
Thoughts: The break below $87 could lead to a near-term test of $85 on further weakness. We will likely wait for a break above $88 before going long.
Morgan Stanley (MS, $31.03, down $0.33)
February 32 calls (MS140222C00032000, $0.75, down $0.10)
Thoughts: If Support holds at $30.50 along with the Financial sector, we like these calls for a push past $32.
iShares Russell 2000 (IWM, $114.69, up $0.58)
January 116 calls (IWM140118C00116000, $0.70, up $0.05)
January 111 puts (IWM140118P00111000, $0.35, down $0.15)
Thoughts: We could go short on a close below $112.50 or long on a pop past $115. At current levels the options together might make a good strangle trade.
Imax (IMAX, $29.28, up $0.15)
February 31 calls (IMAX140222C00031000, $0.70, up $0.05)
March 33 calls (IMAX140322C00033000, $0.55, up $0.05)
Thoughts: Shares have cleared the 50-day MA and we believe Imax is a takeover target in 2014. Open Interest on the January 30’s is over 7,000 contracts so the action is pointing to a test to these levels. If cleared a run to $32 could come quickly.
We have covered the company since shares were under $3 in 2008 and said it would be a $10-$20 and then a $30 stock before we suggesting selling it. Disney is an obvious choice as a partner but a Chinese company could make a sweet offer north of $40 for a 33% premium from current levels.
Sony (SNE, $17.18, up $0.12)
February 18 calls (SNE140222C00018000, $0.50, down $0.05)
April 19 calls (SNE140419C00019000, $0.55, down $0.05)
April 15 puts (SNE140419P00015000, $0.40, flat)
July 13 puts (SNE140719P00013000, $0.30, flat)
Thoughts: There is risk down to $16.50 but Sony could be a buyout candidate in 2014. Apple would be a perfect match. We may wait for $18 and the 50-day MA to clear before going long. We have listed some put options as well in case shares do fall below $16.50. Notice the Island Clusters in the chart. This shows extreme volatility but a break above the major MA’s could lead to a run to $20.
Cliff’s Natural Resources (CLF, $25.05, down $0.78)
January 26 calls (CLF140118C00026000, $0.50, down $0.35)
February 28 calls (CLF140222C00028000, $0.80, down $0.40)
Thoughts: If shares can clear $26.75-$27 we may send out a New Trade Alert. There could also be a back test to $25.50 and the 50-day MA so we may have to wait for it to complete.
Dominion Diamond (DDC, $14.27, down $0.18)
February 15 calls (DDC140222C00015000, $0.30, flat)
May 15 calls (DDC140517C00015000, $0.80, flat)
Thoughts: Shares are in a nice uptrend and could make a push towards its 52-week high of $17 over the next month or two. The bid/ask is wide so if we do decide to get into this trade we will have to use strict limit orders.
Osiris Therapeutics (OSIR, $16.16, up $0.16)
February 19 calls (OSIR140222C00019000, $0.60, flat)
Thoughts: We will have to use strict limit orders to get into this trade as the bid/ask is a little wide. We are expecting a run past $20 over the near-term.
PowerShares QQQ (QQQ, $86.64, down $0.63)
March 80 puts (QQQ140322P00080000, $0.65, up $0.05)
April 79 puts (QQQ140419P00079000, $0.80, up $0.10)
Thoughts: We want to show you early how to prepare and play a possible downside slide and these puts have done well since last week when we profiled them. If the QQQ’s test $90 like we hope they will, we can follow different puts on the way up to maximize our entry point on a pullback that may take a few weeks.
Twitter (TWTR, $67.50, up $3.85)
February 90 calls (TWTR140222C00095000, $3.55, up $0.35)
February 45 puts (TWTR140222P00045000, $1.20, down $0.10)
Thoughts: We may have to wait a few more weeks but there could be an earnings trade coming.
Gold Shares (GLD, $119.29, up $1.29)
January 115 puts (GLD140118P00115000, $0.40, down $0.35)
January 119 calls (GLD140118C00119000, $1.75, up $0.45)
Thoughts: We would love to see a back test to $120 before a possible drop to $110. Shares traded to a low of $114.46 on the open but rebounded to clear $117. The options traded up to $2.25 before falling to a low of $1.19. We have listed a bullish call option as a way to play a the possible rebound to $120.
International Business Machines (IBM, $186.64, up $1.11)
January 180 puts (IBM140118P00180000, $0.45, down $0.20)
January 190 calls (IBM140118C00190000, $0.65, up $0.20)
Thoughts: We will get a chance to short this stock at some point and we may take a swing if $187.50 holds.