March Madness Almost Over - Momentum Trades

Dear Momentum Options Subscriber,

The market ended mixed to start last week, as the Dow’s Monday winning streak ended at three with the slight pullback. Biotech stocks were weak after Wall Street said the sector was “overvalued,” and transport stocks pulled back as well, which was a warning that trouble could lie ahead.

Tuesday’s action provided clues that the bears were serious, as the S&P 500 Volatility Index ($VIX, 15.07, down 0.73) closed above 13.50. I warned that 15 could come into play quickly, and Wednesday’s weakness came right on cue, with the VIX closing above this level. The bears got a 2% win and pushed the bottom uptrend lines as Wall Street ran for the exits.

Cinderella was looking like a pumpkin after midnight on Thursday, as the Dow futures were down 300 points. The action was implying a test to the 100-day moving averages and possibly the February (2015) and December (2014) lows.

Thursday’s victory gave the bears a four-session win streak and, in the process, more technical damage was done, as the bottom uptrend lines from October (2014) were starting to crack.

There were bullish signs that showed some pressure might be relieved on Friday’s rebound, and near-term support held. There are still two more days of March before April begins, so don’t be foolish in trying to go short just yet.

The Dow added 34 points, or 0.2%, to settle at 17,712 on Friday. The blue-chips made an early morning dip to 17,630, with support at 17,600 holding. There is risk to 17,350-17,300 and a test to 200-day moving average on a close below this level. The rebound to 17,729 looked promising, but the index failed to clear and hold its 100-day moving average. Additional resistance is at 17,800 and the 50-day moving average, followed by 17,900-18,000.

The S&P 500 gained nearly 5 points, or 0.2%, to close at 2,061. The index tested a low of 2,052 while holding short-term support at 2,050-2,040. There is additional support at 2,025-2,000 and the 200-day moving average on a close below 2,040. Thursday’s bottom touched 2,045, and the higher low on Friday along with the close above the 100-day moving average were slightly bullish signs. Resistance is at 2,070-2,075 and the 50-day moving average, followed by 2,090-2,100.

The Nasdaq climbed 28 points, or 0.6%, to finish at 4,891. Tech was strong throughout the session following a dip to 4,859. Near-term support at 4,850 and the 50-day moving average held strong. Backup support is at 4,800-4,775 and the 100-day moving average. A close above 4,900-4,925 could lead to another run at 4,975-5,000+.

The Russell 2000 advanced 8 points, or 0.7%, to end at 1,240. The small-caps traded down to 1,229 after the open, but support at 1,230-1,225 held. The 50-day moving average is holding by 2%, with 3% risk to 1,200 and the 100-day moving average on pullbacks. The bulls recovered resistance at 1,240, but additional hurdles remain at 1,250-1,260.

The S&P 500 Volatility Index ($VIX, 15.07, down 0.73) “flash crashed” again to a low of 14.19 before testing a high of 15.83. Thursday’s close was 15.80. The VIX made a similar move, or flash crash, ahead of the Fed meeting mid-month following a test to 13.38. The indices went on to challenge all-time highs afterwards.

Friday’s action in the VIX signaled that the same type of rebound could come on closes below 15. Last week’s high reached 17.17, and I talked about risk to 17.50 and possibly 20. I wouldn’t get aggressively short until 20 trips, so let’s not flinch or go short until then. The VIX has held the 17.50 level through all of March.

The aforementioned charts show violation of the bottom longer-term uptrend lines (purple circles) for the Dow and S&P 500, and these are bearish signs. However, I often mention that support can sometimes get “stretched,” so I’m not ready to bail on the bulls despite the nastiness in those two charts. This doesn’t mean there won’t be further weakness, but the Nasdaq held its bottom uptrend line for the most part, and the Russell easily held its bottom uptrend line from mid-October (2014).

The upper uptrend (blue) lines coming into 2015 were violated during January’s pullback, with the Dow, S&P 500 and the Russell 2000 testing their 200-day moving averages. The Nasdaq, however, held its 100-day moving average for the most part.

The Nasdaq’s 100-day moving average is currently at 4,776, with “stretch” to 4,750. I was watching last week to see if these levels would come into play, as I thought it could create a great buying opportunity. Last Thursday’s low on the Nasdaq reached 4,825. In other words, there was another 1% pullback built into my lows, but a close above 4,900 may have signaled that a temporary bottom is in.

The best way to play this action, if there is a rebound this week and into April, is by watching the PowerShares QQQ Trust (QQQ, $105.52, up $0.42).

I wanted to see the QQQs test $104-$103.50 last week, and Thursday’s low touched $104.24. This was pretty close to a cigar for the bears and may have also signaled that some selling pressure could be subsiding. The bulls need to get continued closes above $106 on the QQQ to re-establish a run at $108 and possibly $110.

I have been targeting the QQQ April 108 calls (QQQ150417C00108000, $0.45, up $0.05) or the QQQ May 110 calls (QQQ150515C00110000, $0.55, up $0.05) to play a rebound, “dead cat bounce” or the start of a new trend.

I could also target the QQQ May 100 puts (QQQ150515P00100000, $0.95, down $0.05) if the QQQs trade to or close below $103.50-$103.

The Dow Jones Transportation Average ($TRAN, 8,700, up 22) provided a slightly bullish sign despite the test to the 200-day moving average, as this level held to end last week. As you can see from the chart below, this level was breached in December (2014). A close below 8,600 would be bearish, as it could lead to 8,500-8,400 on stretch. A rebound to 8,900 is possible over the near-term, but the bulls will need to recover the 50- and 100-day moving averages, or 8,975-9,000, to reverse the trend.

The Financial Select SPDR (XLF, $23.93, down $0.03) was punished after testing $24.78 last Monday. The back-to-back closes below $24 and the 50- and 100-day moving averages to end the week were upsetting. This was a slightly bearish development that could lead to $23.50 and the 200-day moving average. This level was tested in late January and at the start of February. A recovery of $24-$24.25 this week would be a bullish signal.

The biotech sector was also a hot topic of discussion, as Wall Street worried over its bubblicious valuations. The damage was brutal, and the headlines were bearish, but guess what? The 50-day moving average is holding on the iShares Biotech Index (IBB, $347.46, up $6.65), along with its lower uptrend line.

The index has been on fire — up roughly 15% so far this year — despite last week’s pullback. The panic selling was much needed, but there is still risk to $320 and the 100-day moving average on a close below $330. A move back above $360 and the uptrend line would be bullish.

The Monday/Friday closes last week on the Dow were mixed, as they were for much of March. The bears won last Monday’s session to snap a three-skid losing streak. The bulls won their second-straight Friday session following two previous Friday losses earlier this month.

For new subscribers, mixed Monday/Friday closes suggest trading ranges. With the indices at their lows for the month, it’s exactly what the market is in, with the bottom of these ranges now in play.

Up Monday/Friday closes signal money is moving into the market and higher prices are possible. Down Monday/Friday closes usually indicate money is moving out of the market with downside bias. The current Dow Monday/Friday closes are giving a “neutral” reading. This week’s closes could offer quick clues on how April might play out.

Another indicator I watch from time to time is the AAII Investor Sentiment Survey. This nifty indicator gives you a feel for the biases of individual investors who are either bullish, bearish or neutral on the stock market over the next six months. The survey is taken weekly, and bullish sentiment is currently under 40% at 38.4%.

History shows that when Wall Street and Main Street have been this bearish in the past, the S&P 500 has risen 98% of the time. Even more mind-blowing is that the average gain is more than 25% on the index. This would equate to the S&P trading past 2,500, but don’t tell this to the suits and ties.

As far as our open positions, we are in good shape heading into April and first-quarter earnings season. While some positions are down, I still like all of the trades. The ones on that are on “hold” still need work and could carry a loss at some point, but we will manage them along the way.

I wanted to make sure the portfolio was light going into April, and it remains to be seen if the next batch of trades will be bullish or bearish.

Trading ranges can be emotional, but, for the most part, no major damage has been done. Everyone has been betting against the bulls, but April is historically a strong month for the Dow.

Each Monday, I have a meeting with my team, and last week’s was percipient, as they asked me about my thoughts on the market and where I see things heading. I knew that if they were asking, my subscribers must be asking, which is the reason I have been doing so much extra homework. You have been great while cashing out winners and staying patient, but keep the questions coming.

I told my team that a powerful move was coming into first-quarter earnings season, and last week I warned that the back-end of March is historically weak. This is why I stayed light on the portfolio.

The other important thing to remember is this: Do not be nervous or scared if and when the market does fall 10%-20% at some point this year. Shorting stocks on the downside, or, more likely, using put options, is the same as playing a market that is rocking higher.

I’ll give you the specific trades to make, but it is imperative that you understand how shorting the market can be profitable and get comfortable with the idea of making money on the downside if and when the kitchen sink falls out. However, the technical signals I follow week in and week out, year after year, haven’t given me the message to go short the market for a very long time.

I have planned for further weakness and choppiness right into the end of March and I have said that a rebound could soon develop afterwards. There’s the possibility that the sweet spot that I have also planned for may have come and gone, but I’m hoping it just got delayed for a week.

What got lost in last week’s noise was the fact that the Russell 2000 triggered an all-time high north of 1,268 just a week ago. That was a short sweet spot but, again, I hope it was a tease.

I often say that the bulls take the stairs higher, while the bears tend to use the elevator down. The action in March has been a perfect example of how that volatility has really played out.

Just know that I’m still calm, and I want you to be, too. Forewarned is forearmed, and earnings season starts next week, so this week could be choppy until the real bullets start to fly. However, it should also provide further clues on how April will shake out. Sector rotation can be a hard thing to see at times, but it could also sum up some of March’s madness.

From desk to press, futures look like this: Dow (+108); S&P 500 (+10); Nasdaq 100 (+26).

Momentum Options Play List

Closed Momentum Options Trades for 2015: 26-7-1 (76%). 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.

US Steel (X, $24.78, down $0.06)

X May 21 puts (X150515P00021000, $0.62, up $0.06)

Entry Price: $0.60 (3/26/2015)

Exit Target: $1.20

Return: 3%

Stop Target: None

Action: Resistance is at $25-$26. A close above $27 and the 100-day moving average would be bullish. Support is at $24, followed by $23.50 and the 50-day moving average. I’m looking for a test to $20 by mid-May.

You can read my full thoughts on the trade in the March 27 Pre-Market Update.

Cypress Semiconductor (CY, $14.36, up $0.24)

CY April 16 calls (CY150417C00016000, $0.20, up $0.05)

Entry Price: $0.40 (3/18/2015)

Exit Target: $0.80

Return: -50%

Stop Target: None

CY June 16 calls (CY150619C00016000, $0.50, up $0.05)

Entry Price: $0.75 (3/18/2015)

Exit Target: $1.50

Return: -33%

Stop Target: None

Action: Resistance is at $14.50-$15. Support is at $14-$13.50 and the 100-day moving average on closes back below $14.25.

Veeva Systems (VEEV, $25.46, up $0.11)

VEEV April 29 calls (VEEV150417C00029000, $0.15, flat)

Entry Price: $0.60 (3/18/2015)

Exit Target: $1.20

Return: -75%

Stop Target: None

Action: Support is at $25. Resistance is at $26-$27 and the 200-day moving average. If shares close below $24, I will exit the trade.

Yahoo! (YHOO, $45.10, up $0.63)

YHOO April 47 calls (YHOO150417C00047000, $0.45, up $0.10)

Entry Price: $0.80 (2/26/2015)

Exit Target: $1.60

Return: -44%

Stop Target: None

Action: Shares traded to a high of $45.67 on Friday. The close above $44.50-$45 and the 50-day moving average was bullish.

Near-term support is at $44-$43 and the 200-day moving average. Shares look poised to test $47 and the 100-day moving average, with momentum possibly pushing $50, depending on how the rest of the Alibaba (BABA, $84.58, up $0.41) lockup period transpires.

The lockup is a time period that prohibits insiders from selling stock for six months after the initial public offering (IPO). There were over 425 million shares, or 18%, of BABA outstanding that became eligible mid-month, and Wall Street was bracing for a selloff. Instead, a run to $87 ensued, followed by a dip to $82. There could be a trade in BABA if $87.50 and the 50-day moving average are cleared.

Additionally, Yahoo! will be announcing earnings the week these options expire, which is another reason I will likely hold the trade open. A 10% move on earnings could be in the cards, and that would have shares testing $50 (or $41) if current levels hold.

The company announced an additional $2 billion stock buyback program last week. Morgan Stanley came out with an “Overweight” rating and $55 price target on YHOO following the news. This trade from February will likely come down to the wire.

Flextronics (FLEX, $12.38, up $0.04)

FLEX April 12 calls (FLEX150417C00012000, $0.50, up $0.05)

Entry Price: $0.67 (2/24/2015)

Exit Target: $1.35

Return: -25%

Stop Target: None

Action: Shares traded to a fresh 52-week of $12.61 and are testing 10-year highs. The semiconductor stocks were taken to the woodshed last week, but FLEX made a nice rebound off of Thursday’s low of $12.12.

Short-term resistance is at $12.50. A close above this level could lead to a run at $13-$14. Support is at $12, followed by $11.75 and the 50-day moving average. I could add May call options if shares clear $12.65, but I want to make sure we can get back to even on this trade first.

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.

Marvell Technology (MRVL) May 18 calls (from February 2015) — Continue to hold.