In This Issue:
Dear Momentum Options Subscriber,
The bulls continued their May momentum, as they rebounded from a choppy week with a strong Friday to get the weekly win. The bandwagon-jumping could continue despite the indices closing in on the top of their trading ranges, as traders (and the Fed heads) continue to try to call a market top.
The Dow zoomed 267 points, or 1.5%, to settle at 18,191 on Friday. The blue chips made a strong run past near-term resistance at 18,000-18,100 shortly after the open. The high of 18,205 cleared the top of the trading range, but the bulls fell just shy of holding 18,200 into the close. The all-time high from early March is at 18,288, and there is additional fluff to 18,350-18,500 on a move above this level. Support is at 18,000-17,950 and the 50-day moving average on dips below 18,100.
The S&P 500 soared 28 points, or 1.4%, to close at 2,116. The index opened above its 50-day moving average by three points and reached a peak of 2,117 intraday. The close above 2,115 was bullish, but additional hurdles remain at 2,120-2,125. I have talked about the possibility of 2,150-2,200 coming into play on a close above the latter. The bears will be looking to get the action back below 2,100-2,090 to start the week.
The Nasdaq surged 58 points, or 1.2%, to finish at 5,003. Tech also opened above its 50-day moving average and spent the majority of the session above the 5,000 level. The bulls pushed a peak of 5,014 and face additional resistance at 5,050-5,100. A close above the latter should lead to a retest of the recent multi-year high of 5,119 and the all-time intraday high of 5,132. There could be additional fluff to 5,200-5,300 if these levels are cleared over the near term. Support is at 4,975-4,950, with backup at 4,900.
The Russell 2000 rallied 9 points, or 0.8%, to end at 1,234. The small-caps opened where they finished after trading up to 1,239 on Friday. The index failed at clearing its 50-day moving average and getting back into the 1,240-1,250 zone. This was a slightly bearish signal, and these are levels that need to clear this week. Support is at 1,225-1,220, followed by 1,210. The bears pushed a low of 1,211 on back-to-back sessions last week.
The S&P 500 Volatility Index ($VIX, 12.86, down 2.27) tanked 15% and closed back below 15 following a two-day stint above this level. The bulls also held 13.50 throughout Friday’s session following a high of 13.42. This was a bullish sign, and I have mentioned that continued closes below 12.50 would confirm new highs are in store.
Although there were a lot of headlines to follow last week, I tried to keep the focal points on the small-caps and the VIX, along with the action in the transport and financials sectors.
While last Monday’s win was a bullish sign, I had planned for a choppy week leading into the nonfarm payrolls report. While the action got stretched, I have said that the technical indicators I follow would need to continue to deteriorate before I need to consider going short.
The Russell 2000 will be the main clue to watch this week, as it has lagged the other indices on the rally back to the top of the trading ranges. I included more detailed charts in the April 27 Pre-Market Update, which new subscribers can review, as the action is still being defined within these ranges. I spent the final hour of Friday’s session cheerleading the market to clear and hold Dow 18,200, S&P 2,120, Nasdaq 5,000 and Russell 1,260.
These levels represent the “tops” of the ranges I have been highlighting, which have been intact for nearly four months. The Nasdaq got a “check” last week with its solid finish, while the Dow and S&P got “check minuses.” The Russell is still struggling, but, overall, the indices feel like they are on the verge of another run into blue-sky territory.
The Dow Jones Transportation Average ($TRAN, 8,766, up 50) made another backtest to its April lows and near-term support at 8,550 before rebounding once again to hold its 200-day moving average. The index traded to a high of 8,844 and came close to holding the 8,800 level and its 50-day moving average on Friday. I said last week that this would be “a small victory,” but that the bulls ultimately needed to clear 8,875-8,900 to regain momentum. It’s the same deal for this week. A close below 8,550-8,500 would be a very bearish development but one I’m hoping doesn’t happen until later in the year (or next).
Although I don’t trade oil too often, prices appear to be stabilizing, with a mini “golden cross” forming. It’s no surprise that oil would start to rise ahead of the summer driving months, with Light Crude Oil ($WTIC, $59.47, up $0.50) cracking the $62.50 level last week. While a temporary top may have been in, light crude has a solid base as $57.50-$55. Continued closes above $60 would be bearish for gas prices but bullish for a run to $67.50-$70 and the 200-day moving average.
Lower gas prices have fueled consumer spending purchases this year, but this could slow if prices at the pump start to clear $3 nationwide. Lower energy prices have also helped corporate profits. It’s a little early to predict how the hot summer months will play out right now, but this will be a developing story that could derail future rallies down the road.
The action in the financial sector also gave me confidence to continue to stay long and strong the market. I said that a major move was forthcoming in the sector following the month-long trading range, but the volatility was a little more than I expected.
I wanted to see the Financial Select SPDR (XLF, $24.76, up $0.35) make a run past $24.60 and hold this level last week. Monday’s high reached $24.59, and Tuesday’s peak reached $24.65, but the bulls failed to hold $24.60. This led to a backtest to support at $24, with Wednesday’s low reaching $24.07. Thursday’s positive close also gave me some relief that Friday’s nonfarm payrolls would be rosy enough for Wall Street, as the XLF showed strength.
I have repeatedly said that the financial stocks will need to lead the next leg higher for the market and, for some reason, Wall Street has penciled in a market selloff once the Fed raises rates. I have said the exact opposite, which is why I would love to see the Fed hike rates in June.
I reviewed the recent and year-to-date Monday/Friday Dow closes last week, and continued strength on these days would signal that money is moving off of the sidelines and into the market. While Mondays continue to be shaky, the bulls are sitting on the high end of this see-saw battle over the past two months. Fridays have been much more bullish, as the bulls have now won three-straight and six of the past seven.
The Dow is up 351 points, or nearly 2%, for May, while the S&P is higher by 31 points, or 1.5%. The Nasdaq has added 62 points, or a little over 1%, and the Russell has matched this performance with its nearly 15-point gain for the month.
For traders who have shorted the market coming into May, the market gains are bearable, as their losses have been limited thus far. However, a move above the top of the trading ranges could fuel a short-covering rally, as positions get covered and money-fund managers have to show results. Their clients will certainly be wondering why they are short or “out” of the market with fresh all-rime highs in play.
The upside “fluff” targets I have given over the near term for the major indices have another 2%-3% built into a continued rally.
While Wall Street has been planning to “sell in May and go away,” another 2%-3% upside move could take until mid-June to play out with continued volatility. Most of the suits-and-ties are already starting to plan their first summer vacations this month. When the “smart” money is away, it has usually been a bullish time frame to stay long before and after their vacations.
Of course, a lower start today, along with a rising VIX, and a breakdown in the transports and financial stocks would be signals that a continued trading range is in store.
From desk to press, futures look like this: Dow (+11); S&P 500 (+1); Nasdaq 100 (+3).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 47-15-1 (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.
Sony (SNE, $30.64, up $0.34)
SNE June 32 calls (SNE150619C00032000, $0.80, up $0.25)
Entry Price: $0.70 (5/8/2015)
Exit Target: $1.40
Return: 14%
Stop Target: None
Action: Resistance is at $31-$31.50. The recent 52-week high is at $32.60. Support is at $30, followed by $29 and the 50-day moving average.
Wells Fargo (WFC, $56.05, up $1.24)
WFC June 57.50 calls (WFC150619C00057500, $0.38, up $0.11)
Entry Price: $0.31 (5/4/2015)
Exit Target: $0.65
Return: 23%
Stop Target: None
Action: Shares cleared resistance at $55.50 following Friday’s surge past $56. The 52-week high is at $56.26, which was reached in late March. My near-term target is calling for a breakout to $58-$60. Support is at $55, followed by $54.50 and the 50-day moving average.
Limelight Networks (LLNW, $3.97, down $0.16)
LLNW September 4 calls (LLNW150918C00004000, $0.55, down $0.05)
Entry Price: $0.35 (4/29/2015)
Exit Target: $0.80 (Limit Order on half)
Return: 57%
Stop Target: $0.40 (Stop Limit)
Action: Resistance is at $4.20-$4.25. Support is at $3.80, followed by $3.65 and the 50-day moving average.
You can read my full update on LLNW in the May 1 Pre-Market Update.
Opko Health (OPK, $14.13, down $0.01)
OPK June 16 calls (OPK150619C00016000, $0.30, flat)
Entry Price: $0.50 (4/27/2015)
Exit Target: $1.00
Return: -40%
Stop Target: None
Action: Resistance is at $14.25 and the 50-day moving average. Support is at $13.75-$13.50 on another drop below $14.
Earnings are scheduled to be released today, after the close. Analysts are looking for a loss of $0.08 a share on revenue of $23 million.
Dot Hill Systems (HILL, $6.90, up $0.06)
HILL September 7.50 calls (HILL150918C00007500, $0.60, down $0.05)
Entry Price: $0.45 (4/20/2015)
Exit Target: $1.35-$1.80
Return: 33%
Stop Target: None
Action: Shares traded to a high of $7 to end the week. This represented a fresh 52-week high, and there is additional fluff to $7.25. Support is at $6.75-$6.50.
Trades on Hold — other 2015 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 Open Trades and Closed Trades pages to see all open and closed positions.
SunPower (SPWR) June 38 calls (from April 2015) — Resistance is at $32.75 and the 50-day moving average. Support is at $30 — 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