9:00 a.m. (EST)
The bears gave Wall Street a scare last week as more slick-talking pros jumped ship, which culminated with Thursday’s test to the major moving averages (MAs).
Friday was setting up to be a disaster, as overnight futures were showing a panic-like open, but, as the saying goes, “it’s always darkest before the dawn.”
Indeed it was, as Wall Street had a sunny session and ended the week in positive territory.
The Dow zoomed higher by 185 points, or 1.1%, to finish at 16,554 on Friday. The blue-chips stayed within a tight range on the open but held support at 16,350 following the 4-point dip to 16,364. I have talked about further risk to 16,200-16,000 on a close below this level, and the weekly low reached 16,333. Resistance is at 16,600, but the bigger hurdles are at 16,800-17,000.
The S&P 500 surged 22 points, or 1.2%, to close at 1,931. The index held 1,909 by the slimmest of margins (1,909.01) following a half-point loss during the first hour of trading. I warned there could be further risk to 1,900-1,875 on a close below 1,909. However, the bulls are now focused on resistance at 1,940-1,950 after clearing 1,925-1,930 ahead of the weekend.
The Nasdaq added 36 points, or 0.8%, to end at 4,370. Tech held the 4,325-4,300 level following a test to 4,327 an hour after Friday’s open. I cautioned risk to 4,300-4,200 following the close below 4,400 the previous week, and this level will serve as resistance going forward, followed by 4,425-4,450. The bears pushed a low of 4,321 on Thursday’s pullback.
The Russell 2000 jumped 11 points, or 1%, to settle at 1,131 ahead of the weekend. The small-caps slipped a point to 1,118 to start the session but held steady to clear 1,125-1,130 by the closing bell. The bears failed to push a lower weekly low after testing 1,107 the previous Friday, as Monday’s low of 1,108 was their best effort. The bulls aren’t out of the woods yet, as multiple layers of resistance are at 1,140-1,150, followed by 1,160.
The S&P 500 Volatility Index ($VIX, 15.77, down 0.89) fell 5% on Friday after trading higher to 17.07 on the open. The VIX closed in between 15-17.50 throughout the week, with a low of 14.69 on Monday and an intraday high of 17.25 on Thursday. A close above 17.50 will likely send Wall Street running for cover, while a close under 15 might entice buyers back into the market.
Before Friday’s rebound, some suit-and-ties were patting themselves on the back following the start of the August selling pressure. After seven months of being wrong and saying they told us a pullback was coming, they were barking they told us so. Those same knuckleheads are now second-guessing themselves following Friday’s rebound by saying that the selling pressure is over. Maybe they should become weather forecasters because their opinions seem to mimic them.
I have been able to stay a step ahead of Wall Street by charting “fluff” targets from December, which nearly triggered in March and were finally reached in June and early July following May’s tight trading range.
I warned when analysts started raising their year-end price targets in late June that there could be a short-term top, and there was by the July 4 holiday. This was clearly an omen and had been playing out like a fiddle before Friday’s back test to resistance.
Predicting a market “bottom” is just as hard as picking market “tops” and, while the charts have made me look better than most, it isn’t easy.
I talked about weakness coming into the month and possibly into this week, and geopolitical events had a lot to do with this. There were continued airstrikes by the United States on ISIS over the weekend, and that was (or is) the straw that almost broke the market’s back following Thursday’s close.
I will skip the politics, but I said back in late February that any threats of war could throw a monkey wrench into my year-end price targets. Although the longer-term charts are still bullish, there was some technical damage done that is unresolved at the moment.
First, I want to discuss the VIX and my comments from March 3, 2014:
“The VIX continues to be an excellent indicator for me despite the idiotic quotes some of the slick-talking pros have said this year. One well-known talking head says they pay no attention to the VIX until it gets over 20.
I have talked about the VIX on a Daily basis for a few years now because it really does help with market direction. For new subscribers, historically when the VIX is below 15, the market is bullish. A VIX over 20 usually indicates down markets and nervousness. I have talked about the VIX testing 11 and 52-week lows, and even the single-digits, so I still believe the bulls will ring that bell before there is a major pullback.”
The VIX touched a 52-week low of 10.28 on July 3.
More comments from March 3:
“I have talked about expecting a possible 10%-20% pullback at some point in 2014 – providing major support levels fail. I covered those last week and the 10-year uptrend lines are at: Dow (15,500); S&P 500 (1,750); Nasdaq (4,000); and Russell 2000 (1,100). If these downside levels trigger, then my lower end Price Targets for 2014 would become my focus.”
At the time of my early March comments, the Russell 2000 had ended February at 1,183. In mid-April, the index kissed 1,095 intraday and rebounded 5% over the next five trading sessions. The following week, or by the end of April, the small-caps were again pushing 1,100 and closed below this level by the first week of May.
While I mentioned that the longer-term charts are still bullish, this three-year chart for the Russell 2000 shows the close below its 50-week MA for the first time since late 2012:
The Monday/Friday closes on the Dow were positive last week, with the index making nice gains. The blue-chips added 76 points on Monday and are up two straight to start the week. They also ended a two-session Friday slide with the end-of-the-week, triple-digit rebound. These were bullish signs and are something to watch again this week.
I have been planning and haved talked about the possibility of a summer rally following some August weakness. The short-term “bottom” may have come a day earlier than I had anticipated if Monday is a bullish session and resistance is cleared.
I will be watching the VIX, Monday/Friday closes and this week’s action in the small-caps again this week as the main clues for market direction and the next possible trend. I have done well limiting and from committing myself to short positions and put options all year long until the levee breaks.
I have done extremely well in navigating the market again this year, and I’m once again averaging nearly a 70% success rate with my trades. The few put options I have taken have been good insurance, and I have avoided the pitfalls that most of the pros go through by chasing performance.
I take pride in outperforming the Wall Street pros every year and have learned not to get caught up in trading ranges or pending breakouts or breakdowns until they happen.
The indexes were on the verge of collapsing Friday and, while cooler heads may have prevailed for now, the bulls are certainly walking on eggshells. The wall of worry has gotten a little steeper and a lot more slippery, so extreme caution is still needed.
I expect another extremely busy week for both the Daily and Weekly Wrap portfolios, as both are in tremendous shape to play the August action that could be coming — good or bad. The Daily portfolio is showing a 111% return for closed trades, while the Weekly Wrap is up 30% for 2014, and I don’t work on Wall Street. The results are from triple-digit hours of homework and chart work every week.
While the devil on one shoulder is begging me to go short, the angel on the other blade is telling me to stick with the bulls.
Ahead of this morning’s open, futures look like this: Dow (+65): S&P 500 (+9): Nasdaq 100 (+23).
Closed Trades for 2014: 78-39 — the Weekly Wrap is 22-4 (85%) for 2014 (107-11, or 91% win rate, since 2011) and is designed for traders that want to use options with less risk. 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 takeall 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 9 a.m. and 12 p.m. – 1 p.m. updates. Also, I will usually give you a heads-up if I think I’m going to send an email outside of these time frames.
Exact Sciences (EXAS, $16.67, up $0.63)
September 18 calls (EXAS140920C00018000, $0.80, up $0.15)
Entry Price: $0.75 (8/8/2014)
Exit Target: $1.50
Return: 7%
Stop Target: None
October 19 calls (EXAS141018C00019000, $0.85, up $0.20)
Entry Price: $0.75 (8/8/2014)
Exit Target: $1.50
Return: 13%
Stop Target: None
Action: Shares traded to a high of $16.74 on Friday. Near-term support is at $16 and the 50-day MA. Shares have been in a longer-term trading range of $15.50 with resistance at $17.50. A close above $17.50 will likely lead to a run at $20 or higher. The 52-week high is at $17.74.
Previous comments from Aug. 8, 2014 “Longtime readers know that I like the prospects for this company, and I have talked about their pipeline of drugs. At the top of the list is Cologuard, a drug that should gain FDA approval for its molecular screening technology that detects colorectal cancer.
“Following a recent back test to $15, shares have been holding a trading range of $15-$17.50 since early June.
“Biotech stocks are risky investments because they can rise or fall dramatically as drugs go through different phases of approval. Naturally, an approval of a drug can send shares soaring 30%-50%, or more, while a veto can have the same effect.
“There could be some positive news in the coming months, and I have said this is a $20-$30 stock if Cologuard gains FDA approval.”
S&P 500 Spiders (SPY, $193.24, up $2.21)
September 180 puts (SPY140920P00180000, $1.00, down $0.35)
Entry Price: $1.25 (8/7/2014)
Exit Target: $1.90-$2.50
Return: -20%
Stop Target: None
Action: The S&P Spiders held the 100-day MA at $190.85, and a close below $190 could lead to $188-$186. Resistance is at $194-$195.
These options have over a month before expiration and were setting up for a mammoth gain ahead of the overseas markets opening on Friday. However, futures turned positive ahead of Wall Street’s open, and the 1,900 level was never really threatened after the bears could only get a half-point low in to 1,909.
I was right about weakness into August and possibly into this week, but Friday may have been a “turn around” day, and the time frame may be shortened if the bulls continue to rebound.
MGM Resorts (MGM, $24.73, up $0.26)
September 25 puts (MGM140920P00025000, $1.15, down $0.15)
Entry Price: $0.80 (8/6/2014)
Exit Target: $1.60 (closed half at $1.20 on 8/7/14)
Return: 47%
Stop Target: $1.00 (Stop Limit on other half)
Action: Shares traded to a high of $24.78 on Friday, and resistance is at $25. If cleared, the Stop Limit of $1.00 on the other half of the position will likely trigger.
Support is at $24 and the 200-day MA. This level was tested with Thursday’s trip to $24.25 and when I suggested closing half of the trade. A close back below this level will lead to additional profits for the trade.
World Wrestling Federation (WWE, $13.75, up $0.07)
September 15 calls (WWE140920C00015000, $0.40, flat)
Entry Price: $0.50 (8/6/2014)
Exit Target: $1.00+
Return: -20%
Stop Target: None
Action: Support is at $13.50, and a drop below this level will likely lead to $13. Resistance is at $13.75-$14, and a close above the latter would be bullish.
Pool (POOL, $56.32, up $1.02)
October 50 puts (POOL141018P00050000, $0.80, down $0.15)
Entry Price: $1.10 (7/16/2014)
Exit Target: $2.20-$3.30
Return: -27%
Stop Target: None
Action: A break below the July low of $54.16 would be bearish and could lead to $50 and fresh 52-week lows. Longer-term resistance is at $57 along with the 200-day MA.
The break-even point for the trade is at $48.90, technically, by mid-October. These options have over two months before they expire.
Other 2014 Portfolio Open positions (2): 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 I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly, when the trade closes or if the options expire. Click on the 2014 Portfolio link in the Members Area to view all open/closed trades.
Fortinet September 28 calls (from June 2013) — continue to hold — a close back above $25 would be bullish. Friday’s high was $24.97.
CVS Caremark September 82.50 calls (From July 2014) — continue to hold — a close above $78.50-$79 would be bullish. Friday’s high reached $77.92.
