Dear Momentum Options Subscriber,
The major indices traded in negative territory for much of Tuesday’s session, although the bulls did make a run into greener pastures intraday. The bears made another attempt at cracking support, but it stuck like Chuck as the trading ranges continue.
The Dow dipped 37 points, or 0.2%, to finish at 18,068. The blue-chips traded to a low of 17,924 shortly after the open but recovered to reach a peak of 18,119 late in the day. The bulls held support at 18,000-17,950 into the close, as well as the 50-day moving average. Resistance remains at 18,200.
The S&P 500 slipped 6 points, or 0.3%, to end at 2,099. The index traded down to 2,085 on the open but held its 50-day moving average and finished just below the 2,100 level. There is additional risk to 2,075-2,070 on continued weakness, and a close below 2,085 would be bearish. Resistance is at 2,115-2,120. I’m waiting for a close above 2,125 to go long June or July call options.
The Nasdaq fell 17 points, or 0.4%, to settle at 4,976. Tech struggled throughout the day after testing 4,931 on the opening bell. The drop below 4,950 and the 50-day moving average was slightly negative, but those levels held into the close. The rebound to 4,995 also looked bearish, as the bulls were unable to clear 5,000. The good news is that last week’s low of 4,914 held, as well as the 4,900 level. Short-term resistance is at 5,000-5,025. I’m neutral on tech right now, but I’m hoping Cisco (CSCO)’s earnings after today’s close provide a spark for the overall market.
The Russell 2000 declined nearly 3 points, or 0.2%, to close at 1,233. The small-caps opened at 1,230 and immediately fell below support at 1,225-1,220 within the first 30 minutes of trading. Backup support at 1,215-1,210 held following the test to 1,218. I have mentioned that the biggest clue to watch for this week would be any drops below 1,211 (last week’s double bottom), as that would present a possible opportunity to go short. Resistance remains at 1,240-1,250.
The S&P 500 Volatility Index ($VIX, 13.86, up 0.01) traded to a high of 15.13 on the opening fireworks, but the bulls held the 15 level while pushing a low of 13.73 late in the day. A close above 15 or below 12.50 should set the next trend for the rest of May and possibly into June.
The slick-talking pros are finally babbling about the four-month trading range and heightened volatility. They are still bearish on the market, but they will be going on vacation in a couple of weeks. The overall trend is still up, but we still need to be patient. I have found some pockets of strength that are working for us, so we have still have some chips in play until the action really heats up.
I have a lengthy, detailed write-up and chart this morning to explain why I like our latest trade in Diamond Foods (DMND). I have also set a Stop Limit on our Sony (SNE) trade.
From desk to press, futures look like this: Dow (+39); S&P 500 (+5); Nasdaq 100 (+15).
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.
I hereby disclose that I will be participating in the following trade(s). 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.
Diamond Foods (DMND, $28.30, up $0.70)
DMND June 31 calls (DMND150619C00031000, $0.55, up $0.15)
Entry Price: $0.45 (5/12/2015)
Exit Target: $0.90-$1.35
Return: 22%
Stop Target: None
Action: Shares recently tested a low of $27.07, which is a level that has served as longer-term support. DMND is still below its 100- and 200-day major moving averages, with near-term resistance sitting at $28.50-$29. A close above these levels should get $30 in play.
The company is scheduled to announce its quarterly earnings during the first week of June, so this headline risk is still a few weeks away. I would like to see shares above $30 going into the announcement, which is where I would like to close the first half of the trade. This is why I have listed two Exit Targets of $0.90 and $1.35.
Analysts are expecting DMND to earn $0.15 a share on revenue north of $195 million. In early March, the company matched Wall Street’s estimates for a profit of $0.25 a share but missed on its revenue number by nearly $7 million ($229.7 million versus $236.5 million).
Shares made a nice run from $30 to $33.72 following the earnings news and into April, but it has been a rocky ride since. Shares closed lower in 18 of 20 subsequent sessions, and the pullback has been a little harsh.
It is important to note that the company raised its 2015 earnings range from $0.90-$1.10 to $0.95-$1.10 a share in March. This gives Wall Street a mid-point range of $1.025 a share, and analyst estimates are at $1.03 for 2015.
Earlier this month, BB&T recently said the weakness in the stock was a buying opportunity, as it reiterated its $33 price target and “Buy” rating. In February, BMO Capital upgraded the stock to “Outperform” from “Market Perform” and slapped a $32 price target on the stock.
I also like Diamond Foods as a speculative takeover target, as the company has a great, healthy snack portfolio. Diamond has been on the acquisition trail as well, following its 51% acquisition stake in Yellow Chips. The Netherlands-based company currently produces Diamond’s Kettle Brand vegetable chips and has its own premium brand in Europe with its Go Pure label veggie chips.
As a pure nut and snack play, Diamond is the best of breed and looks ripe for a takeover offer from Coca-Cola (KO), Pepsico (PEP) or even Dr Pepper Snapple Group (DPS).
The stock was pushing $100 in September of 2011 after reaching an intraday high of $96.13. However, accounting issues and irregularities crushed the stock, as shares tested the mid-$30s just two months later.
Diamond ran into trouble with its nut-growers back then and was supposedly trying to move payments into different time periods. Under accounting rules, you cannot pay in a future fiscal year for a prior year’s crop, which is something they may have been trying to do.
These accounting issues haven’t been a problem in recent years, but it is a skeleton that is hidden in the company’s closet. The company had to restate earnings over the next few years following the incident, which is why I don’t like trading the stock around earnings announcements.
Diamond Foods has a current market cap of $890 million. A takeover offer of $1.25-$1.5 billion to buy the company would have shares pushing $35-$40. Although current management might be capable of getting the company into its next phase of growth, Diamond Foods needs a shakeup, as shares have underperformed the market for years.
I love this trade as long as $27 holds into earnings, and I believe the current momentum could carry shares past $30.
Sony (SNE, $31.51, up $0.67)
SNE June 32 calls (SNE150619C00032000, $1.05, up $0.25)
Entry Price: $0.70 (5/8/2015)
Exit Target: $1.40
Return: 50%
Stop Target: $0.75 (Stop Limit)
Action: Set a Stop Limit at $0.75 to protect profits.
I will likely raise the Stop Limit along the way if shares continue to trade higher, and I would like to lock in profits on the first half of the trade on a move past $32.
Shares traded to a high of $31.76 on Tuesday and closed above $31.50. The recent 52-week high is at $32.60. Support is at $31-$30.50 on a pullback.
Wells Fargo (WFC, $55.47, down $0.04)
WFC June 57.50 calls (WFC150619C00057500, $0.28, down $0.01)
Entry Price: $0.31 (5/4/2015)
Exit Target: $0.65
Return: -10%
Stop Target: None
Action: Near-term support is at $55.50-$55. Yesterday’s low touched $55. There is additional help at $54.50 and the 50-day moving average. Resistance is at $56.
Limelight Networks (LLNW, $4.05, down $0.02)
LLNW September 4 calls (LLNW150918C00004000, $0.60, flat)
Entry Price: $0.35 (4/29/2015)
Exit Target: $0.80 (Limit Order on half)
Return: 71%
Stop Target: $0.40 (Stop Limit)
Action: Resistance is at $4.20-$4.25. Support is at $3.80 on another close below $4.
You can read my full update on LLNW in the May 1 Pre-Market Update.
Opko Health (OPK, $14.81, up $0.51)
OPK June 16 calls (OPK150619C00016000, $0.35, up $0.05)
Entry Price: $0.50 (4/27/2015)
Exit Target: $1.00
Return: -30%
Stop Target: None
Action: Shares reached a peak of $14.89 yesterday and came close to clearing $15. The 52-week high is at $15.23, and a close above this level could set up a run to $16-$17. Support is at $14.50-$14.25.
Dot Hill Systems (HILL, $6.87, down $0.12)
HILL September 7.50 calls (HILL150918C00007500, $0.60, flat)
Entry Price: $0.45 (4/20/2015)
Exit Target: $1.35-$1.80
Return: 33%
Stop Target: None
Action: Shares traded down to $6.78 after testing resistance at $7 for the fourth-straight session. 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