9:00 a.m. (EST)
It was a wild week that had bullish tones throughout, as the bulls managed to push fresh all-time and new 52-week highs ahead of Friday’s Fed comments.
Janet Yellen is the newest bartender of the punch bowl, and she kept the party going after her “hawkish” comments left Wall Street somewhat happy.
The few analysts and talking heads that are left between now and the start of September scrambled for clues on why the market rallied. They had excuses, but no answers, as the suit-and-ties are not “students” of the market and don’t do homework. If they were, they would have seen by the clues dropped all week long by the bulls that higher highs were on deck.
The Dow slipped 38 points, or 0.2%, to close at 17,001 on Friday. The blue-chips traded to a high of 17,064 on the open but languished in negative territory the remainder of the session. The bears pushed 16,984 within 30 minutes after the pop, but the bulls held 17,000 following the assault. My fluff targets of 17,250-17,300 remain on deck once 17,151 and prior all-time highs trigger, with the possibility of 17,500 on an overshoot. Support has been moving up to 16,900-16,800 and the 50-day moving average, with 16,600 serving backup.
The S&P 500 dipped 4 points, or 0.2%, to finish at 1,988. The index reached a record peak of 1,994.76 on Thursday, but Friday’s high fell a point and a quarter short before a back test to 1,985. I have been calling for a run to 2,000 since early July, and 2,020-2,025 could come on additional fluff. Support is at 1,975-1,970 on continued dips below 1,985, with 1,960 and the 50-day moving average serving as the second layer.
The Nasdaq gained a 6 points, or 0.1%, to end at 4,538. Tech traded to 4,547 ahead of the weekend, and I talked about a run to 4,550 coming once 4,500 cleared. There is further room for the bulls to run to 4,600-4,700 on a continued summer rally as long as 4,500 holds. There would be risk down to 4,450-4,400 if it does not. A close below the latter, or the 50-day moving average at 4,416 would spell trouble ahead.
The Russell 2000 added a third-point, or 0.03%, to settle at 1,160. The small-caps kissed 1,154 on Friday’s open before trading to a high of 1,163 late in the session. A run to 1,175 is still in the mix, with the possibility of 1,200 triggering on an overshoot. A close below 1,160 and, more importantly, the 1,150 level, needs to be watched on any weakness this week.
The S&P 500 Volatility Index ($VIX, 11.47, down 0.39) traded up to 12.48 ahead of Wall Street’s lunch break, but the bulls held 12.50. This was a bullish sign, but even better was the fact that the bears failed to hold 11.50. The 52-week low on the VIX is 10.28.
It was a ghost town last week on Wall Street, with the talking heads complaining about “low volume.” I often say that some of the market’s best action happens while the suit-and-ties are away, and I mentioned that a summer rally could have them scrambling by the time they get back.
The bulls came into August looking to gain some momentum, which was lost following a run to new highs at the beginning of July. A trading range followed for much of last month before volatility returned in a wicked way that lasted through mid-August. Now, a market breakout.
Monday’s S&P 500 close above the 50-day moving average was followed by the blue-chips on Tuesday, and these were bullish signs. The Nasdaq cleared its 50-day moving average the prior week, and the Russell 2000 closed above its 50-day moving average on Thursday while holding on Friday.
Looking back and so far, I have played this action like a fiddle, but I know the music could stop at any time. Fortunately, I have adopted a great habit of watching the band members when playing stock market musical chairs and know when to take a seat.
The extremes were in force last week, as one analyst jumped on the bull bandwagon and raised their price target for the S&P to 2,300. Another stock commentator claimed the market would tank 5%-10% in September.
To make matters worse, the Fed Heads piped-up by saying that technical analysis was overrated and didn’t work. This might have topped Janet Yellen’s recent claim the small-caps have reached a top, as they are still down for the year. Two pennies on the subject in a second.
The Monday/Friday closes, the VIX and the small-caps once again provided the best clues last week, and there are some new clues popping up that appear bullish. The bears have left their traps at lower levels, and I have marked them to warn me of risk to the downside.
Let’s cover the Monday/Friday closes first. The Dow has finished higher on four straight Monday’s and will be looking to make it five to start the week. Regardless of the outcome, the market will be closed next Monday for Labor Day. If the bulls can keep this streak alive, I would expect the opening on Tuesday of next week to be bullish — providing support holds on any pullbacks.
Friday continues to favor the bears, as they have now won four of the past five. I mentioned last week that this is due to geopolitical concerns, but that could ease this week, as there could be some positive Russia-Ukraine news on Tuesday.
Next, the VIX came into the week at 13.15. I mentioned that the bulls had breathing-room up to 13.50 and wiggle-room up to 15. The bulls needed no backup, as they held the 13.50 level throughout the week. There was a spike to 13.51 on Thursday’s open, but volatility settled down soon afterwards, as the bulls pushed a low of 11.52 ahead of the close. Friday’s high reached 12.48.
Coming into last week, I mentioned that the bulls needed to get below 12.50 on Monday (check), and that a close below 11.50 would confirm new highs. I nearly got a “triple-check” discount, as the VIX traded to a low of 11.52 on Thursday and closed below 11.50 on Friday. I have talked all year long about the VIX slipping to single-digits despite most famous slick-talking pros still saying it is a useless and broken index.
The bulls also won the action in the small-caps, as the Russell 2000 reclaimed the 1,150 level on Monday and nearly cleared 1,160. This was the major battle that I had mentioned the bulls needed to win and, on Tuesday, they did. The back test to 1,150 on Wednesday was 1,152 and, on Thursday, the bears pushed 1,147. While there was further help at 1,140, the bulls didn’t need it with the end of week closes above 1,160.
The negative Nancy in me still points to the fact the small-caps are in the red for the year, but only by 3 points. The other three major indexes are solidly swimming in the green.
If any of the Fed Heads were to read this report on the market, they would see that technical analysis works. Meanwhile, it’s up to the market to determine if the small-caps are overvalued or undervalued, not Janet. If she were to see that the other indexes are on track for double-digit gains this year, while the small-caps are still down, maybe she would have said the Russell has some catching up to do. Just my two cents on the zombies’ remarks in recent weeks. The main one is busy playing golf and was on a streak of playing seven of the past 10 days before being interrupted to make a speech.
Yes, I am tip-toeing the geopolitical events that are still in play while Wall Street and the President are away. It appears their agendas are full until the beginning of September.
Since the beginning of August, the Dow is up 438 points, or 3% and the S&P 500 is higher by 58 points, or 3%, as well. The Nasdaq has gained 169 points, or 4%, while the Russell 2000 has advanced 40 points, or 4%.
As you can see, the bears would have to mount a serious attack to reclaim August, and the bulls would have to throw the baby out with the bathwater to give back their gains. Neither event will likely happen this week, but you can never discount the unknown.
Earnings season will be light and has moved to the back-burner until October. This is when third-quarter earnings numbers will start to hit the Street, and September will be used for raising (or lowering) guidance.
This leaves geopolitical events and mother nature in charge of the financial markets this week.
The dangling carrot to watch will be the financial stocks. I have talked about their “lack of leadership” all year, however, they have been in a steady uptrend, as you can see from the chart below, and are finally “breaking out.” The recent tight trading range in June and July broke loose in August, first to the downside. Following a test to $22 at the beginning of the month, the Financial Select Spiders (XLF, $23.12, down $0.08) have gained 5% and are showing strength. They have reached a 52-week high with Friday’s peak to $23.26 over the past two weeks after bottoming at $22.10 for three straight sessions.
If the financials can take the bull ball and run with it, continued highs could come this week.
Technical and fundamental analysis still does work when applied to the market and when you do your homework. I like to keep things simple and that’s why I ignore the noise.
Heading from desk to press, futures look like this: Dow (+56); S&P 500 (+7.5); Nasdaq 100 (+18).
MOMENTUM OPTIONS PLAY LIST
Closed Trades for 2014: 83-40 — the Weekly Wrap is 22-4 (85%) for 2014 (107-11, or 91% win rate, since 2011) and is designed for traders that want to use options with less risk. 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.
Sony (SNE, $18.86, up $0.03)
September 19 calls (SNE140920C00019000, $0.45, up $0.05)
Entry Price: $0.45 (8/20/2014)
Exit Target: $0.90
Return: 0%
Stop Target: None
October 20 calls (SNE141018C00020000, $0.35, up $0.05)
Entry Price: $0.25 (8/20/2014)
Exit Target: $0.50-$0.75
Return: 40%
Stop Target: None
October 19 calls (SNE141018C00019000, $0.65, up $0.10)
Entry Price: $0.45 (8/18/2014)
Exit Target: $0.90
Return: 44%
Stop Target: $0.45 (Stop Limit)
Action: Sony performed well on a technical basis last week after trading to a high of $19 midweek. A close above this level should get $20 in play. Support is at $18.75.
I normally don’t put too many eggs in one basket, as they can be messy if they break. I have already closed one Sony trade for an 87% win, and here are more detailed reasons on why I like these trades.
This near-term chart shows the volatility along with the up and down “gaps.” The pop past $19 in late-July was on better-than-expected numbers than the year-ago period. I mentioned there is no Wall Street coverage of the stock, but much of the momentum in the stock has been the continued strength of the PlayStation 4, as it continues to outperform Microsoft’s Xbox One on a 2-to-1 basis.
The Sony October 20 calls were heavily traded on Friday, as nearly 5,000 contracts traded hands. The open interest was 1,100 contracts heading into the weekend, as the options traded over 5 times their open interest. This indicates that other savvy traders like me see an opportunity for a massive payday if $20 triggers.
The two-year chart below clearly shows $19 as resistance, followed by $20. The 200-weekly moving average is at $19.88.
I didn’t do weekend research on Dan Loeb’s position in Sony or even if his hedge fund firm Third Point still has a position in the stock, but, at one point last year, their stake was 6%-7%. He had been pushing for a partial spinoff of Sony’s entertainment division.
This is a solid division of Sony, so it’s unlikely that they will want to let go of Sony Pictures Entertainment.
Keryx Biopharmaceuticals (KERX, $15.89, up $0.26)
September 18 calls (KERX140920C00018000, $0.80, up $0.20)
Entry Price: $0.75 (8/20/2014)
Exit Target: $1.50
Return: 7%
Stop Target: None
Action: I have been mentioning that Keryx has a Phase 3 drug, Zerenex, that could gain FDA approval at some point this year or next. News could be coming in the next few weeks, and here’s the deal. On May 22, the company announced that the FDA was extending the PDUFA date for three months. This is the Prescription Drug User Fee Act and is a hurdle most drug companies face when bringing drugs to market.
Shares were north of $13 ahead of the news and finished the following session just south of this level. Since late May, shares have been in a steady uptrend with some nasty pullbacks, but the uptrend line has held.
Fast-forward to today, and Wall Street has likely forgotten that the new PDUFA date is coming up in early September. No homework and long summer vacations can cause memory loss I suppose, but I marked it on my calendar and that’s why I recommended the trade last week. The stock has been on my Watch List, so I see it every day I come to work.
I would like to see this position double ahead of the news so that I can take some risk off of the table by closing half or a quarter of the position. Then again, Keryx is pretty confident Zerenex will launch in Q3, which is the current quarter the market is in, so I may roll the dice for a bigger payday by leaving the full position on.
This is one of the reasons I went with the September call options, as the news and price movement will come over the next two weeks. The October call option premiums were a little more expensive, although the likelihood shares surge past $20 are good if the FDA gives Zerenex the thumbs up.
I will be babysitting this trade a little more tightly as September rolls around, but there should be no worries as long as near-term support holds at $15.50-$15.25.
Shares made a run at their 52-week and March high of $17.46 after trading above the $17 level the prior week. It would be nice to see this area challenged again this week on a rebound, as it would be a bullish signal ahead of the holiday.
Either way, mark Sept. 7 down on a Post-it note, as it is the expected date that this news will be out, according to both parties.
Yahoo (YHOO, $38.01, up $0.37)
September 38 calls (YHOO140920C00038000, $1.75, up $0.10)
Entry Price: $1.25 (8/11/2014)
Exit Target: $1.90-$2.50 (closed half at $1.90 on 8/22/14, Limit Order to close other half at $2.50)
Return: 46%
Stop Target: Raise from $1.40 to $1.50 (Stop Limit on other half)
October 43 calls (YHOO1018C00043000, $1.00, up $0.10)
Entry Price: $0.80 (8/11/2014)
Exit Target: $1.20-$1.60
Return: 25%
Stop Target: Raise from $0.80 to $0.85 (Stop Limit)
Action: The Limit Order to close half the September 38 calls at $1.90 triggered on Friday after shares traded to a high of $38.20. This is the beauty of having limit orders in place in case you weren’t around to watch the stock. I have a Limit Order of $2.50 to exit the other half and have moved the Stop Limit from $1.40 to $1.50.
The September 38s reached $1.90 on high volume, as over 2,000 contracts traded — open interest is north of 26,000. The October 43’s reached $1.03, with over 2,000 contracts changing hands. I was cheerleading for close above $38 all last week, as it was going to possibly put $40 in play this week and a longer-term run at $42. Support is at $37-$36.50 on a pullback. These trades will close automatically if the Stop Limits in place to protect profits are triggered.
World Wrestling Federation (WWE, $14.64, up $0.20)
September 15 calls (WWE140920C00015000, $0.45, up $0.10)
Entry Price: $0.50 (8/6/2014)
Exit Target: $1.00+
Return: -10%
Stop Target: None
Action: I wanted to see a close above $14.75 ahead of the weekend, but the uptrend is still intact. As you can see from the chart, there is a gap to fill up to $17, and the 200-day moving average is at $17.44. A run to these levels will make this trade a big winner, brothers and sisters, but $15 needs to clear this week.
The two prior WWE trades made 203% (in early March) and 133% (in early August). This is a piggy-back trade that I’d like to see perform just as well and only cost $0.50.
Pool (POOL, $56.50, up $0.34)
October 50 puts (POOL141018P00050000, $0.45, flat)
Entry Price: $1.10 (7/16/2014)
Exit Target: $2.20-$3.30
Return: -59%
Stop Target: None
Action: A break below the July low of $54.16 would be bearish and could lead to $50 and fresh 52-week lows. Longer-term resistance is at $57 along with the 200-day moving average that is still holding.
The break-even point for the trade is at $48.90, technically, by mid-October. These options have over two months before they expire.
Trades on Hold — other 2014 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 2014 Portfolio link in the Members Area to view all open/closed trades.
Fortinet September 28 calls (from June 2013) — The 52-week high is at $26.23, and shares are acting like they want to clear $26 and make a run at fresh highs — continue to hold.
CVS Caremark September 82.50 calls (from July 2014) — Shares are still trying to crack $80. I will bring back coverage once cleared — continue to hold.
S&P 500 Spiders September 180 puts (from August 2014) — Like blackjack, I’m considering this trade as “insurance,” as the puts still have a month before they expire. Perhaps they pay off, maybe not, but the tremendous gains in the other trades make me feel comfortable holding the trade open. Remember, the bulls like taking the stairs higher. The bears love taking the elevator — continue to hold.