In This Issue:
Dear Momentum Stocks Weekly 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 ($VIX, 12.86, down 2.27) tanked 15% and closed back below 15 following a two-day stint above this level. The bulls also held 13.50 throughout Friday’s session following a high of 13.42. This was a bullish sign, and I have mentioned that continued closes below 12.50 would confirm new highs are in store.
Although there were a lot of headlines to follow last week, I tried to keep the focal points on the small-caps and the VIX, along with the action in the transport and financials sectors.
While last Monday’s win was a bullish sign, I had planned for a choppy week leading into the nonfarm payrolls report. While the action got stretched, I have said that the technical indicators I follow would need to continue to deteriorate before I need to consider going short.
The Russell 2000 will be the main clue to watch this week, as it has lagged the other indices on the rally back to the top of the trading ranges. I included more detailed charts in the April 27 Issue, which new subscribers can review, as the action is still being defined within these ranges. I spent the final hour of Friday’s session cheerleading the market to clear and hold Dow 18,200, S&P 2,120, Nasdaq 5,000 and Russell 1,260.
These levels represent the “tops” of the ranges I have been highlighting, which have been intact for nearly four months. The Nasdaq got a “check” last week with its solid finish, while the Dow and S&P got “check minuses.” The Russell is still struggling, but, overall, the indices feel like they are on the verge of another run into blue-sky territory.
The Dow Jones Transportation Average ($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 Stocks Weekly Play List
All prices given in this update are current as of May 8, 2015
The Momentum Stocks Weekly Closed Trade Track Record for 2015 is 15-0, for a 100% win rate (128-17, or 88% win rate, overall since the start of 2011).
View the entire list of open and closed trades by clicking here.
Dot Hill Systems (HILL, $6.90, up $0.06)
Original Entry Price: $6.80 (5/5/15)
Lowered Price from Selling Options: N/A
Exit Target: $8.00-$10.00
Return: 1%
Stop Target: $5.00
Action: The company reported a profit of $0.06 a share on revenue of $60.3 million. This topped Wall Street’s expectations for a profit of $0.06 a share on revenue north of $59 million.
Shares traded to a high of $7.00 to end the week. This represented fresh 52-week highs and there is additional fluff to $7.25. Support is at $6.75-$6.50. I have a Price Target of $8.00-$10.00 for HILL over the next three to six months.
Psychemedics (PMD, $15.55, flat)
Original Entry Price: $15.67 (5/5/15)
Lowered Price from Selling Options: No options available
Exit Target: $18.00-$20.00
Return: -1%
Stop Target: $12.00
Action: Psychemedics provides drug testing services for companies and organizations through the analysis of hair samples. It is a more accurate way of detecting abuse for illegal drugs and helps companies manage these types of issues. The stock currently yields 3.6% and pays a 60-cent annual dividend.
Support is at $15.50 and the 50-day moving average. Resistance is at $15.75-$16.00.
Wells Fargo (WFC, $56.05, up $1.24) Option Trade
WFC October 60 calls (WFC151016C00060000, $0.70, up $0.10)
Entry Price: $0.67 (5/5/2015)
Exit Target: $1.35
Return: 4%
Stop Target: None
Action: Shares cleared resistance at $55.50 following Friday’s surge past $56.00. The 52-week high is at $56.26 that was reached in late March. My near-term target is calling for WFC to break out to $58.00-$60.00. Support is at $55.00 followed by $54.50 and the 50-day moving average.
Limelight Networks (LLNW, $3.97, down $0.16)
Original Entry Price: $3.91 (3/19/15)
Lowered Price from Selling Options: N/A
Exit Target: $7.00
Return: 2%
Stop Target: $2.00
Action: Resistance is at $4.20-$4.25. Support is at $3.80 followed by $3.65 and the 50-day moving average.
Discovery Laboratories (DSCO, $1.01, down $0.06)
Original Entry Price: $1.68 (3/5/15)
Lowered Price from Selling Options: N/A
Exit Target: $3.00
Return: -40%
Stop Target: $0.50
Action: Support is at $1.10-$1.00, and a close below the latter would be bearish. Resistance is at $1.20-$1.25.
You can read my full update on DSCO and its earnings by clicking here.
Bank of America (BAC, $16.45, up $0.21)
Original Entry Price: $17.63 (12/19/14)
Lowered Price from selling options: $17.28
Exit Target: $20+
Return: -5%
Stop Target: $15.00
Current Dividend Yield: 1.3%
Action: Shares cleared resistance at $16.25 and the 100-/200-day moving averages and are showing momentum. Additional resistance is at $16.75-$17.00. Support is at $16.25-$16.00.
I could write a covered call against BAC shares this week to lower the cost basis of the trade if shares clear $17.00. If I take action, I will send out a Trade Alert.
We previously sold to open (wrote) 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.
Rave Restaurant Group (RAVE, $14.27, up $0.87)
Original Entry Price: $8 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $20.00
Return: 78%
Stop Target: $12.60 (Stop Limit)
Action: Shares continue to flirt with their 50-day moving average and backup support at $13.50. The 6% rebound back above $14.00 looked bullish on Friday but additional resistance is at $14.50-$15.00.
The company’s next earnings report is due out this month. For new subscribers, you can read my February earnings update on RAVE and why this stock is a multi-year hold.
Huttig Building Products (HBP, $3.53, down $0.16)
Original Entry Price: $4 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $6+
Return: -12%
Stop Target: $2.00 (Stop Limit)
Action: Support is at $3.50 and the 200-day moving average might come. The 50-/100-day moving averages are curling higher and are in the midst of forming golden crosses. Resistance is at $3.75-$4.00.
Rambus (RMBS, $13.92, up $0.01)
Original Entry Price: $17.83 (11/14/2011)
Lowered Price from Selling Options: $16.38
Exit Target: $15+
Return: -15%
Stop Target: $9.00
Action: Resistance is at $14.00-$14.25. Near-term support is at $13.75-$13.50. A close below the latter would be bearish.
We previously sold to open (wrote) the RMBS December 20 calls for $1.45 on Nov. 14, 2011 to reduce the cost basis to $16.38.
Trades on Hold (6): 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.
I do not recommend adding to these positions or opening new positions, but if you are already holding the stocks, we recently opened covered calls on these positions. If you missed the alert, you can find it here.
AKS Steel Holding (AKS, May 2011) – We sold to open (wrote) the AKS September 6 calls (AKS150918C00006000) on 4/30/2015 for 40 cents. Continue to hold.
DryShips (DRYS, January 2011) – We sold to open (wrote) the DRYS September 1 calls (DRYS150918C00001000) on 4/30/2015 for 5 cents. Continue to hold.
Bebe Stores (BEBE, February 2012) – We sold to open (wrote) the BEBE September 4 calls (BEBE150918C00004000) on 4/30/2015 for 35 cents. Continue to hold.
Vivus (VVUS, July 2012) – We sold to open (wrote) the VVUS September 4 calls (VVUS150918C00004000) on 4/30/2015 for 10 cents. Continue to hold.
Zynga (ZNGA, March 2014) – We sold to open (wrote) the ZNGA September 3 calls (ZNGA150918C00003000) on 4/30/2015 for 16 cents. Continue to hold.
Galena Biopharma (GALE, February 2014) – We sold to open (wrote) the GALE October 2 calls (GALE151016C00002000) on 4/30/2015 for 15 cents. Continue to hold.
Trade on!
Rick Rouse
Editor
Momentum Stocks Weekly