Dear Momentum Options Subscriber,
Wall Street was hoping for a pullback last week during, as the final trading week in February has traditionally been a soft one for the market. The suit and ties were trembling from January’s selloff and were hesitant to put fresh cash to work despite the rebound off of the lows to start last month.
The slow drift upward to all-time and 15-year highs has been frustrating for investors who are out of the market. Although there was an opportunity to get long, support was tested on the market’s opens last week, and this kept traders on the sidelines.
The Dow dropped 81 points, or 0.5%, to settle at 18,132 on Friday. The blue-chips traded in negative territory from start to finish while ending at session lows. Support at 18,100 held for the sixth-straight time, and the index closed above the 18,000 level in nine of the past 10 sessions. Additional support is at 17,800-17,750 and the 50-day moving average. Continued closes above 18,200 keep my near-term targets of 18,300-18,500 in play.
The S&P 500 fell 6 points, or 0.3%, to close at 2,104. The index was choppy throughout the first half of trading but managed to reach an intraday high of 2,112. The fade to 2,103 into the close held near-term support at 2,100 for the sixth-straight session. Backup support is at 2,075-2,050 and the 50-day moving average. Resistance is at 2,115-2,125, with fluff up to 2,150 if the latter is cleared.
The Nasdaq declined 24 points, or 0.5%, to finish at 4,963. Tech made another run at 5,000 to end the week after reaching 4,989, but the two-point gain quickly evaporated. The bears pushed a low of 4,960 but were unable to crack support at 4,950 that has also held for six-straight closes. There is risk to 4,900-4,850 on a continued pullback, followed by 4,750 and the 50-day moving average. Fifteen-year resistance remains at 5,000-5,100.
The Russell 2000 slipped nearly 6 points, or 0.5%, to end at 1,233. The small-caps pushed a fresh all-time intraday high of 1,239.67 and fell just shy of clearing 1,240. I have mentioned that a close above this level will likely lead to run at 1,250-1,260. Support at 1,230-1,225 has been holding for nine-straight sessions. If the bears crack the lower end of this range, a test to 1,210-1,200 and the 50-day moving average could come quickly. A close below the 1,200 level would be bearish for a test to 1,175 and the 100-day moving average.
The S&P 500 Volatility Index ($VIX, 13.34, down 0.57) fell 4% and closed below 13.50 despite Friday’s overall market pullback. This was a very bullish development and the first close below this level since mid-December. I have been mentioning 13.50 as a key level for continued higher highs following the mid-February close below 15.
The close below 15 last month was the first of the year, and I’ve talked about the VIX testing 12.50 in March. It is too early to say if and when single-digits will come into play, but I do believe it will happen at some point this year. I predicted a single-digit VIX last year and came close after the index tested a low of 10.28 last July.
The one clue I focused on last week was the Transports. The Dow Jones Transportation Average ($TRAN, 9,024, down 57) came into the week on a roll above its 50-day moving average and tripped 9,214, mid-week. However, my enthusiasm dampened on the three-day pullback to 9,000. There is additional support at 8,950 and the 50-day moving average, but a close below these levels would be bearish.
I wanted to see the Transports challenge their recent 52-week peak north of 9,300, but that rally stalled. It is imperative that the index holds near-term support this week.
I mentioned that the Transports could lead the Dow into continued blue-sky territory, and that remains the case if there is a test to new highs this month.
The other bearish development was the financial stocks. The Financial Select SPDR (XLF, $24.35, down $0.09) was looking good on the push past $24.50 to a high of $24.60. The index will need to hold $24 and its 50-day moving average or else it will weigh on the market.
The Dodd-Frank bank “stress tests” will be released on Thursday, and the results are designed to show whether a bank can survive another recession. Additional bank stress tests will be released on March 11, after the market closes, and these results will be from the Federal Reserve.
The Fed will be assessing the banks’ plans for returning capital to their shareholders. Of course, the banks will also have to pass the recession test as well as other risk disclosures. These events will likely help or hinder the current rally.
The Dow came into February at 17,164 and added nearly 6%, or 968 points, for the month. The blue-chips reached an all-time peak of 18,244 last week following a February low of 17,037.
Here were my thoughts from Feb. 2:
“The Dow made three bottoms near 17,100 to end last week (end of January), which is why Monday’s action and close should provide a good first clue how this week’s action shakes out. There is a good chance that the Dow will move 1,000 points this month from current levels…”
This was a bold prediction, but it was my “game plan,” or plan A. Fortunately, I got it right. Although, I didn’t list a “backup plan,” or plan B, it was easy to read in that one paragraph that any closes below Dow 17,100-17,000 would have me quickly closing bullish positions.
In the aforementioned “notes” from Feb. 2, I also wrote this in the Pre-Market update:
“A close below Dow 17,000 and the 200-day moving average would spook Wall Street and favor the bears.”
The explosive move in February to the upside totally caught Wall Street off guard, as it represented the largest percentage gain for the blue-chips in two years.
While my game plan, or plan A, has called for additional Dow fluff to 18,500 over the near term, I still have to hold onto the football and not fumble while trying to score winning trades. If and when the Dow reaches this level, a new game plan will be forming, and we can take the huge gains from February and go on defense.
The important number to remember on any pullback will be 17,754. This is the Dow’s 50-day moving average. This would represent a 378-point, or 2%, loss from current levels. The talking heads will panic on a 300-point move if the first week of March starts with a pullback.
On the flip-side, a 368-point move to the upside also represents a 2% swing from current levels and would have the Dow pushing…drumroll please…18,500.
I could cover this scenario with the other indices, but the blue-chips’ triple-digit moves will capture more headlines. The good news is that I have covered the breakdown points for the other major indices, and there are other bearish signals I will be watching for as well.
For the record, the S&P also added nearly 6%, or almost 110 points, in February, while the Nasdaq zoomed 7%, or 328 points. The Russell 2000 roared 6%, or 68 points.
One worrisome sign from last week was the lower Monday/Friday closes on the Dow. Although the losses were minimal on Monday (down 24 points), and Friday’s loss was less than 1%, a lower Monday today would make three-straight lower Monday/Friday closes, which would represent a red flag on the risk board.
There were three-straight Monday/Friday closes to start January, and it was a clear warning sign then and it could be this week. As a reminder, the indices fell 3%, on average, in January. Monday will be subject to overseas news and geopolitical events, while this Friday will deliver the jobs report.
Another important tell will be the VIX. A continued push towards 12.50 this week would be bullish, but a backtest to 15 can’t be ruled out. A close above this level would be a yellow flag. If this were the case, a pop to 17.50 could flush out the weaker hands again. The possibility of a new bearish trend could also develop on multiple closes above 15.
For the Wall Street pros who went short last month, they have to be worried, as hype of Nasdaq 5,000 gains (and loses) steam. February was an incredible month for the market, and the current momentum is being questioned heading into March.
Chances are that a 2% move could come this week, as the bulls and bears will fight over what is setting up to be a volatile month.
While I will be riding shotgun with the bulls for another 2% giddy-up, the road could be rough if the bears get off to a good start today. A 2% drop, followed by a 4%-5% run to my higher price targets is also possible, and that is my “plan C.”
Hopefully, these ABCs produce continued gains for us, and I think I have covered everything but the kitchen sink. “Plan D” would be closes below the 50-day moving averages, but hopefully that conversation comes at a later date. The bottom line is that I’m still hoping for even better things to come, but I’m also watching the exit signs.
From desk to press, futures look like this: Dow (+1); S&P 500 (-0.25); Nasdaq 100 (+6).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 17-1 (94%). 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 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.
All prices given in this update are current as of 8:30 a.m. EST.
Every new Momentum Options recommendation is listed with the price at which I entered my own position. If the price is slightly different than my recommended entry or exit price when you receive the alert, don’t let that keep you from getting into or out of a trade. Occasionally, you might even get a better “fill” price than what is posted in the Open Trades and Closed Trades.
Additional notes: Nearly all of the current trades are bullish. There are Stop Limits in place to protect profits on some trades. The April expiration options have 46 days before they expire, while the May expiration options have 74 days before they expire.
The March options worry me, as they have less than three weeks, or 18 days, before expiration. I always call this the “danger zone” for options, as the premiums are prone to wild price swings. Obviously, not all of the March trades will be winners.
The portfolio is in great shape as the first quarter comes to a close. There is still risk/reward with the current trades, but I’ve limited our short-term exposure by using longer-term options
TiVo (TIVO, $11.18, up $0.15)
TIVO May 12 calls (TIVO150515C00012000, $0.47, up $0.07)
Entry Price: $0.42 (2/27/2015)
Exit Target: $0.85 (Limit Order on Half)
Return: 12%
Stop Target: None
Action: Set a Limit Order to close the first half of the trade at $0.85.
I would like to see this target reached after earnings are announced, which would make it a risk-free trade. Earnings are due out after Tuesday’s close, and the action in after-hours should carry over into Wednesday’s session. A move past $12 or a test to single-digits could be in the works.
If momentum sticks, we can possibly ride shares higher for continued gains. If momentum fades afterwards, I will have a stop limit in place.
Shares closed above their 50-day moving average on Friday after peaking at $11.20. The next waves of resistance are at $12 and the 100-day moving average. Near-term support is at $11-$10.75.
There is a good chance that TiVo moves 5%-10% this week, and Wall Street is looking for a profit of $0.04 a share on revenue of $89 million.
The company missed expectations by a penny the last time they confessed. Overall, the company has beat earnings expectations in two of the previous four quarters, so its history is a little choppy.
A beat-and-raise quarter this time around would be bullish news. The trade could take a hit on another miss and/or lowered guidance for the current quarter.
The activity in the TIVO March 11 and TIVO March 12 calls topped over 5,500 contracts each on Friday. Obviously, these were bullish bets on an upside earnings surprise.
I have used May options to lessen a blow from an earnings miss, but I also like this trade as a potential takeover target.
TiVo has a nice portfolio of intellectual properties that would be a great acquisition for a major cable provider. A buyout by May could be a reach, a stretch or a pipe dream, and it is pure speculation on my part, but it is possible.
With video-on-the-go continually increasing, TiVo is king when it comes to managing video content. The company’s market-cap is just north of $1 billion, and a bid of $1.5 billion from another company would get shares pushing $16-$17.
TiVo’s 52-week high is at $14.29. Shares have been in a tight two-year trading range, and a blowout quarter could lead an explosive move. Earnings trades are always tricky, but I’m keeping my fingers crossed that they knock the cover off the ball.
Yahoo! (YHOO, $44.28, down $0.17)
YHOO April 47 calls (YHOO150417C00047000, $0.70, down $0.10)
Entry Price: $0.80 (2/26/2015)
Exit Target: $1.60
Return: -13%
Stop Target: None
Action: Friday’s low reached $44.04. Shares are forming a solid base at $43-$44. A move above $45 could lead to a run to $46-$47.
The 50- and 100-day moving averages are just below $47, which is where a major battle could occur. I’m expecting a test to this level by mid-April as long as the 50-day moving average does not fall below the 100-day moving average. If $47 clears, shares could easily test $50. If shares fall below $43-$42, I will likely close the trade.
CH Robinson Worldwide (CHRW, $74.30, up $0.09)
CHRW April 75 calls (CHRW150417C00075000, $1.55, up $0.10)
Entry Price: $1.30 (2/26/2015)
Exit Target: $2.60
Return: 19%
Stop Target: $0.65, raise to $1.30 (Stop Limit)
Action: Raise the Stop Target from $0.65 to $1.30 and make it a Stop Limit.
Near-term resistance is at $75. Fresh support will try to hold at $73.50 and the 50-day moving average. There is additional help at $72 and the 100-day moving average. The 52-week high is at $77.49.
Given the higher premium in this trade, I wanted to keep a tight Stop Limit to reduce our exposure on a pullback.
Western Union (WU, $19.52, down $0.07)
WU April 20 calls (WU150417C00020000, $0.40, flat)
Entry Price: $0.36 (2/25/2015)
Exit Target: $0.75
Return: 11%
Stop Target: None
WU March 19 calls (WU150320C00019000, $0.75, down $0.05)
Entry Price: $0.40 (2/13/2015)
Exit Target: $0.80 (closed first half at $0.60 on 2/19/2015)
Return: 69%
Stop Target: $0.58 (Stop Limit)
Action: The late-day reversal on Friday was disappointing after shares reached a peak of $19.73. Support is at $19.50-$19.25. Shares are on the verge of tripping $20 once $19.75 clears. There is additional fluff from the six-year chart up to $22 on closes above $20.
American Express (AXP, $81.56, down $1.66)
AXP April 87.50 calls (AXP150417C00087500, $0.45, down $0.40)
Entry Price: $0.56 (2/25/2015)
Exit Target: $1.15
Return: -20%
Stop Target: $0.25
Action: Support is at $82-$81.50, followed by $80. The next layers of resistance for AXP are at $82.50, followed by $83.50-$84.
The position could be volatile over the next few weeks, but I like this trade longer term, which is why I used April call options.
Flextronics (FLEX, $12.18, down $0.10)
FLEX April 12 calls (FLEX150417C00012000, $0.55, down $0.05)
Entry Price: $0.67 (2/24/2015)
Exit Target: $1.35
Return: -18%
Stop Target: None
Action: Short-term support is at $12.25-$12. Resistance is at $12.50-$12.75. A close below $12 would be a bearish development.
Marvell Technology (MRVL, $16.12, up $0.02)
MRVL May 18 calls (MRVL150515C00018000, $0.35, flat)
Entry Price: $0.50 (2/18/2015)
Exit Target: $1.00
Return: -30%
Stop Target: None
Action: Near-term support is at $16. A close below this level could lead to a backtest to $15.75-$15.50 and the 50-day moving average. Resistance is at $16.25-$16.50.
Brocade Communications Systems (BRCD, $12.39, down $0.46)
BRCD March 13 calls (BRCD150320C00013000, $0.12, down $0.15)
Entry Price: $0.24 (2/13/2015)
Exit Target: $0.50-$0.75
Return: -50%
Stop Target: None
Action: Shares reached 52-week highs last week after trading up to $12.96 on Thursday. Friday’s pullback was disappointing on the close below $12.50. Support is at $12.25-$12 on a continued pullback, followed by the 50-day moving average.
JDS Uniphase (JDSU, $13.77, up $0.45)
JDSU March 14 calls (JDSU150320C00014000, $0.35, up $0.12)
Entry Price: $0.78 (1/8/2015)
Exit Target: $1.00
Return: -55%
Stop Target: None
Action: Shares danced with their 50-day moving average throughout the week before Friday’s 3% surge. The close above $13.75 was bullish and should lead to a run to $14+. Support is at $13.40 and the 50-day moving average on a pullback. The breakeven point for the trade is at $14.78. This is one of our longest running trades, and I would like to see a close above $14 this week.
Trades on Hold — other 2015 Portfolio Open positions (3): 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 Open Trades and Closed Trades pages to see all open and closed positions.
Philip Morris (PM) March 75 puts (From January 2015) — This trade is likely down on continued market strength, but I’m holding is as “insurance,” as shares still look weak — Continue to hold.
AT&T (T) March 36 calls (From February 2015) — Support is at $34 and the 200-day moving average. Resistance is at $34.75-$35 — Continue to hold.
CBOE Holdings (CBOE) March 67.50 calls (From February 2015) — Closed first half at $1.10 on 2/5/15. Friday’s close just above $60 was nasty, as shares could be setting up for a test to $55 and the 200-day moving average. I could close this trade this week and actually add put options. The loss was limited after closing half of the trade, but the second half is dead money and is suggesting we move on. For now, continue to hold the second half to see if there is a rebound and a close back above the 100-day moving average over the next day or two.
Trade on!
Rick Rouse
Editor and Chief Options Strategist
Momentum Options