Dear Momentum Options Subscriber,
The market got off to a good start for the week, as the major indices made a run to the top of their trading ranges. Although the bulls failed to hold near-term resistance zones, the action kept the possibility for continued all-time highs into May alive.
The Dow added 46 points, or 0.3%, to settle at 18,070. The blue-chips traded in positive territory for the second-straight session and reached a peak of 18,133. The bulls failed at holding resistance at 18,100-18,200, which are levels that have stuck since early April. A close above the latter would be bullish for a run at 18,300-18,500 and all-time highs. Support is at 18,000-17,975 and the 50-day moving average.
The S&P 500 gained 6 points, or 0.3%, to close at 2,114. The index tested resistance at 2,115-2,125 on the open after trading to a high of 2,120, but it failed to clear the top of its trading range. A close above 2,125 keeps 2,150-2,175 in play. Support is at 2,100-2,090 and the 50-day moving average.
The Nasdaq climbed 11 points, or 0.2%, to finish at 5,016. Tech opened just below 5,025 at 5,018 and made a run to resistance at 5,050-5,100. The index fell short of pushing this zone after stalling at 5,043, but the effort looked good. Support is at 5,000-4,950 and the 50-day moving average.
The Russell 2000 advanced 5 points, or 0.4%, to end at 1,233. The small-caps opened at 1,230 and tested resistance at 1,240-1,250 and the 50-day moving average but failed at holding this level into the close. Support is at 1,225-1,220 and the 100-day moving average, with backup at 1,215-1,210.
The S&P 500 Volatility Index ($VIX, 12.85, up 0.15) spiked to a low of 12.10, which may have provided a clue that higher highs are in store. Although the index failed to hold the 12.50 level, the test to 12 was the lowest the VIX has traded all year. I still want to see closes below 12.50-11.50 to confirm higher highs, and the VIX needs to hold 14-15 this month to make that happen.
I mentioned in Monday’s Pre-Market Update that the suits-and-ties tend to ignore the VIX when it’s flat lining. They usually make comments when the index is pushing 20 or when it’s in the low teens. Last year, I predicted that the VIX would test single-digits, and last July’s low checked in at 10.28.
If the S&P 500 does make a run at 2,200-2,300 over the next six to 12 months, it is very likely that the VIX will be below 10. This will certainly have the talking heads clamoring and questioning what is wrong with the VIX. As you can see from the 25-year chart below, the VIX has fallen below 10 on a few occasions.
If and when the VIX does test 9-10, I would then become cautious myself on a market pullback, correction or selloff. It is possible that the VIX could hold 10 for a few weeks, but it will have become a hot topic, if not the hottest story, by then, at which point it will be time to go. With the major indexes setting all-times highs throughout 2014 and 2015, it’s hard to imagine the VIX not challenging all-time lows at some point this year.
Although I haven’t recommended options on the VIX, options do trade on the index. At some point, I will likely get us in a few bullish or bearish VIX trades. For now, I’m watching the VIX May 15 calls (VIX150520C00015000, $0.75, down $0.10) and the VIX May 13.50 puts (VIX150520P00013500, $0.35, flat) for possible trades. I’m looking at the June options with the same strikes as well, as they would provide an extra month for a trade to play out.
I have a few more trades I like that nearly became official recommendations yesterday, as my Watch List is exploding with call and put ideas. However, I wanted to see continued follow-through in the market and certain stocks I’m watching before adding additional upside risk.
I have been trying to open new positions after locking in triple-digit returns in other trades, while letting our winners run. I often say that calling a market top is never easy, which is why so many knuckleheads have been wrong over the past few years as they try to do so.
The market has traded higher in May over the past two years, and there is still wiggle room or “fluff” to higher highs. I have said not to get nervous, or bearish, until the bears saw a leg off of the bar stool. There are plenty of clues that will let us know when a possible market top is in or when the action will get wobbly. In the meantime, we will continue to play the three-month trading range.
I have made a few adjustments to our current positions, so please take notice. If things look good this morning, I could have additional Trade Alerts an hour or so after the opening bell.
From desk to press, futures look like this: Dow (-5); S&P 500 (-2); Nasdaq 100 (-7).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 46-14-1 (75%). 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.
Wells Fargo (WFC, $55.73, up $0.54)
WFC June 57.50 calls (WFC150619C00057500, $0.35, up $0.10)
Entry Price: $0.31 (5/4/2015)
Exit Target: $0.65
Return: 13%
Stop Target: None
Action: The 52-week high is at $56.26, and shares are holding their 50-day moving average. A close above $55.75 should be the trigger that gets shares pushing fresh highs. Support is at $55-$54.75.
The financial stocks are holding up well, and there are other names I like in the sector. Bank of America (BAC) cleared its 200-day moving average yesterday, but I chose WFC because it tends to make larger price moves.
Limelight Networks (LLNW, $4.18, up $0.11)
LLNW September 4 calls (LLNW150918C00004000, $0.65, up $0. 05)
Entry Price: $0.35 (4/29/2015)
Exit Target: $0.70, raise to $0.80 (Limit Order on half)
Return: 86%
Stop Target: $0.40 (Stop Limit)
Action: Raise the Limit Order from $0.70 to $0.80 on the first half of the trade. Also, set a Stop Limit at $0.40 to protect profits.
Shares traded to $4.22 and another fresh 52-week high on Monday. Resistance is at $4.20-$4.25. A close above the latter could lead to a run at $4.50-$5. Support has moved up to $4, with $3.80-$3.75 serving as backup.
You can read my full update on LLNW in the May 1 Pre-Market Update.
Krispy Kreme Doughnuts (KKD, $18.14, up $0.08)
KKD June 17 puts (KKD150619P00017000, $0.60, down $0.05)
Entry Price: $0.35 (4/28/2015)
Exit Target: $1.05 (closed first half at $0.70 on 4/29/2015)
Return: 86%
Stop Target: $0.50 (Stop Limit)
Action: Resistance is at $18.25. Yesterday’s high touched $18.32. Support is at $17.75-$17.50 on another drop below $18.
Earnings are due out the first week of June, and I have a target of $15 for KKD going into or after the announcement.
You can read my full update on KKD in the April 29 Pre-Market Update.
Opko Health (OPK, $14.27, up $0.24)
OPK June 16 calls (OPK150619C00016000, $0.40, up $0.05)
Entry Price: $0.50 (4/27/2015)
Exit Target: $1.00
Return: -20%
Stop Target: None
Action: Monday’s high reached $14.46. Resistance is at $14.25-$14.50 and the 50-day moving average. Support is at $14.
Earnings are estimated to be released this Friday, May 8. Analysts are looking for a loss of $0.08 a share on revenue of $23 million. I believe OPK will top these numbers.
Dot Hill Systems (HILL, $6.44, down $0.17)
HILL September 7.50 calls (HILL150918C00007500, $0.50, down $0.05)
Entry Price: $0.45 (4/20/2015)
Exit Target: $1.35-$1.80
Return: 11%
Stop Target: None
Action: Resistance is at $6.50-$6.75 and the 52-week high. Near-term support is at $6.25.
Earnings are estimated to be released on Thursday, May 7. Wall Street is expecting a profit of $0.06 a share on revenue north of $59 million. The company has beaten or matched estimates the past four quarters, and another upside surprise could have shares pushing $7. There is risk back to $6 on an earnings miss or lowered guidance.
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.
SunPower (SPWR) June 38 calls (from April 2015) — I will likely close this trade if support at $30 fails. Resistance is at $32.50 — Continue to hold.
iShares Russell 2000 (IWM) May 127 calls (from April 2015) — I would like to be out of this trade by this Friday, win, lose or draw — Continue to hold.
BlackBerry (BBRY) June 13 calls (from March 2015) — This is a speculation trade from early March on BBRY receiving a takeover offer of $14 or better by mid-June — Continue to hold.
Trade on!
Rick Rouse
Editor and Chief Options Strategist
Momentum Options