In This Issue:
Dear Momentum Stocks Weekly Subscriber,
Although the market was closed on Friday, the nonfarm payrolls report was released, and the results had a negative 1% impact on futures. The report came in much worse than expected, as just 126,000 jobs were added versus expectations for 250,000. The unemployment rate stayed flat at 5.5%, but more Americans are out of work. These results will certainly reheat the Fed’s interest-rate debate, but bigger concerns lay ahead if the bottoms of the trading ranges fail to hold.
The Dow added 65 points, or 0.4%, to settle at 17,763 on Thursday. The blue-chips made a run past resistance at 17,800 to 17,815 shortly after the open before slipping into negative territory by halftime. The dip to 17,673 easily held support at 17,600. There is additional risk to 17,350 and the 200-day moving average, as the bulls failed to hold the 100-day moving average for the second-straight session.
The S&P 500 gained 7 points, or 0.4%, to close just under 2,067. The index tested 2,057 on the open, but the 2-point loss quickly faded as the bulls pushed a high of 2,072. The run at 2,070-2,075 and the 50-day moving average looked promising, although the index failed to hold the lower band of resistance. Support at 2,050 and the 100-day moving average held like a rock. Backup support is at 2,040, which is a level that needs to hold to keep the bottom of the trading range intact.
The Nasdaq advanced almost 7 points, or 0.1%, to finish at 4,887. Tech teased us with the push past resistance at 4,900 to 4,901, and the move looked like a bullish signal. Although the bulls failed to hold this level, they extended the Nasdaq’s winning streak to 15-straight sessions ahead of the Good Friday holiday. Additional overhead beams are at 4,925-4,950, with a close above the latter likely leading to another run at 5,000. Support is at 4,875 and the 50-day moving average. Another drop below 4,850 would be a bearish development. Last Wednesday’s low reached 4,844, and the bottom of the trading range is at 4,800.
The Russell 2000 climbed 4 points, or 0.3%, to end at 1,255. The small-caps also teased us following their run to 1,259.97 shortly after the start of trading. I have been saying that 1,260 could be the “all-clear” sign, as that level held for all of last week. A move above this level and to the top of the trading range could lead to 1,270-1,275. Near-term support is at 1,250, followed by 1,240.
The S&P 500 Volatility Index ($VIX, 14.67, down 0.44) closed back below 15 on Thursday. Hopefully it wasn’t a “rabbit-foot” close, as another trip above 15 would be bearish. The bulls are safe until the VIX fails to hold 17.50. Another dip below 13.50 would confirm higher highs are in store.
Futures gapped down on Friday’s jobs report, with Dow futures dropping 165 points to 17,511. This suggests a gap lower for the market this morning.
I did a ton of detailed chart work last Monday to explain and show you the current market environment. The “trading ranges” for the indices are highlighted in the green boxes on the charts. As a review, the levels that need to hold are:
Downside ranges for a possible breakdown or additional selling pressure:
- Dow: 17,600
- S&P: 2,040
- Nasdaq: 4,800
- Russell: 1,200
Upside ranges for a possible rebound or breakout:
- Dow: 18,200
- S&P: 2,120
- Nasdaq: 5,000
- Russell: 1,260
I have purposely kept the portfolio “light” as I prepared us for the possible upcoming fork in the road. March was an incredibly choppy month that produced a continued trading range that is still unsettled. I took profits when they were available and have not tried to rush trading the trading range that has developed since the start of February.
Trading ranges are difficult to trade, which is why the portfolio is light. There will come a time where I will suggest short positions, or put options, at some point this year, but I’m still uncomfortable shorting the market until all my technical indicators turn bearish. This could happen this week or next, or in May, but I’m still hanging with the bulls until there is further confirmation that a top is in.
Although the trading ranges are holding, they could crack or get stretched, so I will be watching for additional warning signs. Remember, the longer the trading range, the bigger the breakout or breakdown in a stock (or index) will be.
One troubling development was the Transports, as they closed below their 200-day moving average on Thursday.
The Dow Jones Transportation Average ($TRAN, 8,606, down 67) closed just above 8,600 but, it could test 8,350-8,300 on continued weakness. The 8,600 level has held since mid-December, but the index did spend a few days below the 200-day moving average in October of 2014.
I wouldn’t be surprised to see continued weakness in the Transports this week, and we will have to see where a bottom might lie. A recovery of the 8,800-9,000 level would be bullish.
The financial stocks will also need to show continued strength. I will be watching the Financial Select SPDR (XLF, $24.21, up $0.12) for bullish or bearish clues, as the index is currently holding its 50-day moving average.
A “death cross” formed in mid-March, with the 50-day moving average breaking below the 100-day moving average. However, the process is reversing itself with the transition into a “golden cross.” Resistance is at $24.50-$24.75, with a close above the latter confirming a possible breakout. Support is at $24, but closes below $23.75 would upset the progression of this bullish development.
I’m also keeping a close eye on the PowerShares QQQ Trust (QQQ, $105.12, up $0.07). Last week’s chart showed that a move above $106 would be bullish, while a close below $103.50-$103 would be bearish.
I could use the QQQ options, along with the IWM calls/puts, to play a breakout (or breakdown) on the Nasdaq or Russell 2000, so stay tuned to your email inboxes all week. I could open bullish positions if all of the support levels I follow hold. I could start fresh short positions if the bears are for real this time and my indicators turn bearish.
My best guess is that this week could see a test to the bottom of the trading ranges, with some downside stretch if Monday’s win goes to the bears. If the bulls can hold the aforementioned downside targets and the VIX can hold 17.50, the current choppiness could continue.
Next week is the start of first-quarter earnings season, which is when the rubber will really meet the road. Expectations are super low for corporate America, so hopefully there will be some upside surprises and rosy outlooks for 2015.
It feels like the time to go short is approaching, but I’ve learned in life that when too many riders are leaning to one side, the boat usually capsizes. There has been a lot of money lost by the slick-talking pros trying to go short.
Betting against the bulls hasn’t been the best idea in three years. I know that trading ranges can be frustrating. However, by following the charts and watching the sentiment, we are in great shape to build out our next batch of trades.
The goal is to stay calm this week and to let the dust settle from the two-month trading range that has been keeping both the bulls and bears at bay. Once the all-clear signs are flashed, we will take action. The first quarter was incredibly busy and profitable, so the last thing we want to do is to give away profits.
From desk to press, futures look like this: Dow (-132); S&P 500 (-16); Nasdaq 100 (-33.5).
Momentum Stocks Weekly Play List
All prices given in this update are current as of April 2, 2015
The Momentum Stocks Weekly Closed Trade Track Record for 2015 is 9-0, for a 100% win rate (126-17, or 88% win rate, overall since the start of 2011).
View the entire list of open and closed trades by clicking here.
Limelight Networks (LLNW, $3.61, up $0.09)
Original Entry Price: $3.91 (3/18/15)
Lowered Price from Selling Options: N/A
Exit Target: $7
Return: 8%
Stop Target: $2
Action: The company hired a new chief administrative and legal officer, Michael DiSanto, who has more than 16 years of experience representing publicly traded and emerging growth companies. His claim to fame thus far was his time served as chief legal officer for Maker Studios, a digital media company that was later acquired by Walt Disney last year.
Last week, I talked about how the company received a takeover target north of $6 last summer. Perhaps the pieces are in place to leverage a better deal for Limelight Networks with the recent hire of DiSanto but, even without a takeover, shares are still bound for a run past $5.
The major moving averages are still trending higher with last week’s high reaching $3.66 midweek. Resistance is at $3.70-$3.80. Near-term support is holding strong at $3.40. A close below this level could lead to $3.25 and a test of the 50-day moving average.
Rigel Pharmaceuticals (RIGL, $3.64, down $0.11)
Original Entry Price: $3.72 (3/10/15)
Lowered Price from Selling Options: N/A
Exit Target: $6
Return: -2%
Stop Target: $2
Action: Shares reached $3.80 on Thursday. Resistance is at $3.80, followed by $4.00. The 52-week high is at $4.20. Support is at $3.40.
You can read my full write-up on RIGL in the March 16 Issue. My near-term price target is $5.00-$6.00 with a shot at double-digits by year-end. I talked about the raised price target last week from one brokerage firm that believes shares can trade to $10.00 and who has followed our lead.
Discovery Laboratories (DSCO, $1.22, up $0.02)
Original Entry Price: $1.68 (3/5/15)
Lowered Price from Selling Options: N/A
Exit Target: $3.00
Return: -27%
Stop Target: $1.00
Action: Support is at $1.20. Continued closes below $1.20 could lead to a retest to $1.10-$1.00. Resistance is at $1.25-$1.30.
Read my full update from March 30 on DSCO by clicking here.
Dot Hill Systems (HILL, $5.28, up $0.04)
Original Entry Price: $4.25 (3/4/15)
Lowered Price from Selling Options: N/A
Exit Target: $5.00-$7.00
Return: 24%
Stop Target: Raise from $5.10 to $5.15 (Stop Limit)
Action: Raise the Stop Limit from $5.10 to $5.15.
The $5.15 level was tested twice last week, and we can squeeze another 1% out of the trade by raising the Stop Limit by a nickel.
Resistance is at $5.35-$5.40. Near-term support is at $5.15 followed by $5.00. A close below $5.00 could lead to $4.80 and a back test to the major moving averages.
Bank of America (BAC, $15.54, up $0.13)
Original Entry Price: $17.63 (12/19/14)
Lowered Price from selling options: $17.28
Exit Target: $20+
Return: -12%
Stop Target: $15.00
Current Dividend Yield: 1.3%
Action: Shares may have bottomed at $15.25 last week but face further resistance at $15.75. The next wave of resistance is at $16.00 and the 50-day moving average.
For new subscribers, wait for BAC to clear $16.00 before opening new positions.
We previously sold to open the BAC January 18 calls for 30 cents on Jan. 2, 2015, to reduce the cost basis to $17.33, and the calls expired for the full premium on Jan. 16, 2015.
Bank of America paid a 5-cent dividend on March 4. This lowered the cost basis of the trade to $17.28.
Discovery Laboratories (DSCO, $1.22, up $0.02)
Wrote the DSCO April 2 calls (DSCO150417C00002000, $0.05, flat)
Original Entry Price: $1.60 (11/11/14)
Lowered Price from selling options: $1.20
Exit Target: $1.25-$1.30
Return: 2%
Stop Target: None
Action: The April options expire in less than two weeks. Although I like shares longer-term, we are trying to limit our exposure in DSCO by exiting in the $1.25-$1.30 range.
On Nov. 11, 2014, I suggested buying DSCO at $1.60 while selling to open the DSCO April 2 calls for 40 cents. This lowered the cost basis of the trade to $1.20. If shares are called away at the $2 strike price by April, the trade will make 67%.
Rave Restaurant Group (RAVE, $13.22, down $0.09)
Original Entry Price: $8 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $20.00
Return: 65%
Stop Target: Lower from $12.75 to $12.60 (Stop Limit)
Action: Lower the Stop Limit from $12.75 to $12.60.
I mentioned the March brokerage downgrades could lead to shares testing their 50-day moving average. Last Thursday’s drop to $13.12 was a perfect back test for the knuckleheads who downgraded the stock get in. A close below $13.00 could trigger our Stop Limit, but let’s keep our fingers crossed. If $12.75 is breeched, a back test to $10.00 and the 100-day moving average could come into play. I lowered the Stop Limit to $12.60 to give this trade a little wiggle room (which is another reason I raised the Stop Limit on HILL 1%).
Obviously, I believe RAVE shares have been oversold in recent weeks but I also know a 100% return in three months was a little frothy. Shares came into the year at $7.10 and reached a 52-week high of $16.20 in mid-March.
I still believe this is easily a $20.00 stock this year but I also protect profits to take the emotion out of trading. While I would love to see our Stop Limit hold, I have no problem buying RAVE again at $12.00-$10.00.
The company recently opened its 40th Pie Five location, which is in Oklahoma, so its story hasn’t changed.
For new subscribers, you can read my February earnings update on RAVE and why this stock is a multi-year hold. Options are still unavailable to trade on the stock.
Huttig Building Products (HBP, $2.94, up $0.07)
Original Entry Price: $4 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $6+
Return: -27%
Stop Target: $2.00 (Stop Limit)
Action: Shares made a run at $3.00 last Thursday with additional resistance at the 50-day moving average. Support is at $2.85-$2.80 with the 52-week low at $2.70.
New subscribers can start nibbling on continued closes above $3.00.
Trades on Hold (7): These are trades that are still open in the portfolio but are down from the original recommended price. These trades are on “hold” and are not a buy until I bring back coverage of the stock. This means I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly when a trade closes.
AKS Steel Holding (AKS, May 2011), DryShips (DRYS, January 2011), Rambus (RMBS, November 2011), Bebe Stores (BEBE, February 2012), Vivus (VVUS, July 2012), Zynga (ZNGA, March 2014), Galena Biopharma (GALE, February 2014)
Trade on!
Rick Rouse
Editor
Momentum Stocks Weekly