Dear Momentum Options Subscriber,
Last week got off to a strong start as the market continued its record rally from February. The Nasdaq recovered and closed above 5,000 on Monday for the first time in 15 years. However, the celebration was short-lived, as the index spent a total of just 45 minutes above this level.
Tuesday’s pullback based on geopolitical gibberish held fresh support, and Wednesday’s pullback was a wait-and-see moment ahead of the bank stress tests.
Thursday’s action was bullish before the bank stress test results, as the market snapped a two-session slide. After the close, it was announced that all 31 major banks passed the required tests to withstand an economic downturn. While a second judgment will come this week from the Federal Reserve, the news was bullish.
Friday’s nonfarm payrolls report was the wild card, as Wall Street was expecting weaker-than-expected numbers. Its collective jaw dropped when it saw that the economy added nearly 300,000 jobs last month. The unemployment rate dropped to 5.5%, and the headlines immediately started asking when the Fed would hike rates.
Although a quarter-point rate hike is now nearly a given by June, traders took profits, and the market had one of its worst days of the year. The damage gave the bears their first weekly win in five weeks and created the buying opportunity that the suits and ties have been waiting for.
The Dow dropped 279 points, or 1.5%, to close at 17,856 on Friday. The blue-chips traded in negative territory throughout the session and touched a low of 17,825. The close below 18,100-18,000 was the first in 10 sessions, but the 50-day moving average held. I warned of risk to 17,800 on a drop below 18,000 again, with further weakness to 17,600 and the 100-day moving average. The 200-day moving average was tested on the first trading day of February and would be in play on a close below 17,600. A return above 18,000-18,100 to start the week would be a bullish sign.
The S&P 500 sank nearly 30 points, or 1.4%, to finish at 2,071. The index fell to a low of 2,067 and closed below 2,100-2,095 for the first in 14 sessions. I mentioned that near-term support at 2,090-2,075 would be tested on a close back below 2,100 last week. The 50-day moving average held by 5 points, but there is additional risk to 2,060-2,050 and the 100-day moving average.
The 200-day moving average was also tested in February and has moved up 20 points to sit just under 2,000. This would represent another 3%-4% drop from current levels, which is where much of Wall Street would love to get into the market. I would like to see a close above 2,075, at least, on Monday, followed by 2,090 by Friday, before we can say that higher highs are back in play.
The Nasdaq tanked 55 points, or 1.1%, to end at 4,927. Tech tried to hold positive territory on Friday, but the minor intraday pop turned progressively worse into the closing bell. I warned that there is risk to support at 4,950-4,925 on continued dips below 4,975, and Friday’s low touched 4,918. The 50-day moving average is just below 4,800 and represents a 3% decline from current levels. A close below 4,900 will likely get this level in the mix. The bulls need to recover 4,950-4,975 before talk of 5,000 returns.
The Russell 2000 tumbled over 16 points, or 1.4%, to settle at 1,217. The small-caps traded down to 1,216 on Friday and closed below 1,230-1,225 for the first time in 13 sessions. The bulls need to hold 1,210-1,200 and the 50-day moving average to start Monday’s session or the index faces risk to 1,175 and the 100-day moving average quickly. The 200-day moving average isn’t far behind, and a test to 1,160-1,150 would likely come if 1,175-1,170 fails over the near term. A 1% move to start the week and a recovery of 1,225-1,230 would signal that Wall Street missed the dip.
The S&P 500 Volatility Index ($VIX, 15.20, up 1.16) gave warnings signs throughout last week following the failed attempt to get below 12.50. I talked about how February’s rally would carry the VIX back below 15 but that the bulls needed to get below 13.50-12.50 to confirm higher highs into March. Last Monday’s low reached 12.87, but Tuesday’s close back above 13.50 stalled the rally. I am expecting the VIX to test 17.50 on further weakness, and a close above 20-21 would have me looking at bearish positions. For now, try to relax, as another close below 15-14.75 and the 200-day moving average would be bullish.
March is historically a bullish month, but Wall Street and the talking heads were throwing the baby out with the bathwater on Friday. Traders were selling stocks without asking questions, as the action marked the second worst day of the year for the Dow. On Jan. 5, the blue-chips fell 331 points.
The important message from the charts above and a point I want to make is that all of the major indexes held their respective 50-day moving averages. The VIX close above 15 was troublesome, but no major damage was done.
Although Friday was a bummer, I was thrilled to see that Apple (AAPL) will join the Dow and replace AT&T (T) in the index. The change will take place on March 19.
I have been cheerleading for this move and have mentioned this story off and on over the past year. From Feb. 23, 2015:
“The Dow came into 2015 at 17,823 and added 8% last year. The blue-chips could have some new members this year, although there has been no official word. I have talked how Apple (AAPL) would be the best candidate, but other companies should be considered to reflect more of a global index. I know it’s wishful thinking for the NYSE, but Apple’s addition could easily translate into Dow 20,000. This would represent a gain of 12% for the index.”
From Sept. 15, 2014:
“There is a good chance that the Dow finishes the year above 18,000 as long as the major moving averages hold. I have talked about the blue-chips reaching 19,000 if Apple (AAPL, $101.66, up $0.23) shares were added to the Dow 30, but that may or may not happen this year. The NYSE needs a splashy “new” addition, and Apple fits that headline.”
A dollar move in a Dow stock currently represents a 6-7 point move on the index. While the pundits will say that the Dow added Apple at its peak, I disagree. In fact, if Apple makes a run to $200 this year or next, the Dow will be at 20,000 easily, as long as the rest of the blue-chips pull their weight.
The Dow Jones Transportation Average ($TRAN, 8,907, down 96) tried to recover and hold the 9,100 level going into last week, but the four-day slide afterwards and Friday’s 1% drop was troublesome. The bears cracked the 50-day moving average and came within a stone’s throw of clearing the 100-day moving average. There is additional support at 8,800 on a close below 8,900, but there would be additional risk to 8,600 and the 200-day moving average if 8,900-8,800 fails to hold this week.
The Financial Select SPDR (XLF, $24.35, down $0.09) made higher highs and higher lows throughout the week following the Dodd-Frank law bank stress tests results. The XLF reached $24.66 on Friday and has been holding the 50-day moving average since early February.
I mentioned that the bigger hurdle would be this Wednesday’s results from the Federal Reserve. While there could be a few bad apples, overall, the banks should get another passing grade.
A mini-trading range has been in play for a month, and a close above $24.75-$25 this week would be bullish for the XLF. A close below $24 and the 50-day moving average would be a bearish development.
The month of March is usually positive for the market, as the S&P has advanced 67% of the time during the past two decades. The average gain of 1.5% is impressive, but volatile swings have taken place in recent years. The index fell over 2% the second week of last March but recovered to push higher highs into April.
The S&P has not had a 10% correction in three and a half years and, while there will be one at some point this year or next, it’s way too early to say the market has reached its peak.
While I will agree there are “expensive” stocks in the market, the companies that aren’t meeting Wall Street’s expectations are getting punished. Momentum stocks have been hit both ways, as the stronger ones have pushed higher highs, with the weaker ones setting or testing fresh 52-week lows.
This is the case for the market, as it has been getting stronger following the 15-year rebound to Nasdaq 5,000. To put 2015 versus the year 2000 in perspective, Cisco (CSCO) shares have a current price-to-earnings (PE) ratio of 17. In 2000, the PE for shares reached a high of 125. Yahoo! (YHOO) shares have a current PE ratio south of 6 versus a PE valuation north of 400 in 2000. And, finally, there’s Intel (INTC), which is trading at a current PE ratio of 14. In 2000, the PE peaked north of 40.
Hopefully this simplifies a few things, but it doesn’t mean the market can’t go lower from current levels.
Also from last week:
“The important number to remember on any pullback will be 17,754. This is the Dow’s 50-day moving average. This would represent a 378-point, or 2%, loss from current levels. The talking heads will panic on a 300-point move if the first week of March starts with a pullback… A 2% drop, followed by a 4%-5% run to my higher price targets is also possible, and that is my “plan C.” ”
Last week’s dip represented nearly a 2% dip for the market, so I wasn’t nervous about the end-of-the-week pullback. I used February’s run to record all-time highs to lock in a number of profitable positions and set Stop Limits to protect the gains.
If there is additional weakness and a break below the 50-day moving averages, I will likely wait to see if the 100- and 200-day moving averages hold before starting additional bullish trades. I don’t mind riding with the bears when forced, but the traders that have tried to short this market recently have been punished.
While Wall Street is hesitant to go long, I’m on the opposite end and still cautious about going short in this market. A possible trading range could also be developing, and there will be plenty of money to be made if and when there is a 10%-20% pullback.
In the meantime, I have adopted the Fed’s now-famous catch phrase, as “patience” will be needed over the next few weeks. I will be building out my Watch List for both bullish and bearish trades while waiting for the dust to settle, so stay locked and loaded for both New Trades and/or Profit Alerts.
From desk to press, futures look like this: Dow (+4); S&P 500 (+1); Nasdaq 100 (+4).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 20-4-1 (80%). 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.
Note: The April options have 39 days before they expire, while the May options have 67 days before expiration. The June options have 102 days before they run out of time.
The portfolio will be in great shape as we wait for the shakeout and the next sure trend to develop. While it could be short in nature, a pullback or trading range could transpire over the next week or so, but I’m still bullish on the market.
There will likely be just five open trades by the end of this week, although if there is a strong rebound, I could add New Trades. I could also add a few very short-term bearish trades. I don’t like to trade just to trade, and the portfolio is doing peachy, so there is no need to rush the action.
Atmel (ATML, $8.79, down $0.01)
ATML May 9 calls (ATML150515C00009000, $0.60, flat)
Entry Price: $0.40 (3/4/2015)
Exit Target: $1.00 (closed 1/3 at $0.65 on 3/5/2015)
Return: 56%
Stop Target: $0.50 (Stop Limit)
Action: Shares traded to a low of $8.70 on Friday before rebounding to reach a high of $8.87. Support is at $8.40-$8.30 and the 50- and 100-day moving averages on a close below $8.75. Resistance is at $9. If cleared, a run to $10 could come quickly.
BlackBerry (BBRY, $10.67, down $0.22)
BBRY June 13 calls (BBRY150619C00013000, $0.50, down $0.05)
Entry Price: $0.60 (3/2/2015)
Exit Target: $1.20
Return: -17%
Stop Target: None
Action: Shares traded to a high of $11.45 on Tuesday before closing below $11. This may have represented a short-term top. Support is at $10.50 and the 50-day moving average following Friday’s close below $10.75. Additional help is at $10.25 and the 100-day moving average. Resistance is at $10.75-$11.
Yahoo! (YHOO, $43.44, down $0.72)
YHOO April 47 calls (YHOO150417C00047000, $0.50, down $0.15)
Entry Price: $0.80 (2/26/2015)
Exit Target: $1.60
Return: -38%
Stop Target: None
Action: Support is at $43-$42 and the 200-day moving average. A close below the latter could get $40 in play. Shares reached $44.24 on Friday before the steady fade into the close. Resistance at $45 is a major hurdle, but, if cleared, could lead to a run to $47-$50 by mid-April.
Western Union (WU, $19.45, down $0.04)
WU April 20 calls (WU150417C00020000, $0.30, flat)
Entry Price: $0.36 (2/25/2015)
Exit Target: $0.75
Return: -17%
Stop Target: None
Action: Support is at $19.25-$19 following the continued closes below $19.50 to end last week. Resistance is at $19.50-$19.75 over the near term. I plan to keep the trade open as long as $19 holds. A break below this level would be a bearish development.
American Express (AXP, $80.31, down $0.84)
AXP April 87.50 calls (AXP150417C00087500, $0.20, down $0.10)
Entry Price: $0.56 (2/25/2015)
Exit Target: $1.15
Return: -64%
Stop Target: None
Action: Support is at $80, and a close below this level could lead to $78. Resistance is at $81.50-$82.
Flextronics (FLEX, $11.76, down $0.20)
FLEX April 12 calls (FLEX150417C00012000, $0.30, down $0.10)
Entry Price: $0.67 (2/24/2015)
Exit Target: $1.35
Return: -55%
Stop Target: None
Action: Shares held short-term support at $11.75 following Friday’s dip to $11.70. There is additional support at $11.50 and the 50-day moving average. A move below this level would be bearish. Resistance is at $12-$12.25.
You can read my thoughts on FLEX in last Tuesday’s Pre-Market Update. I’m hoping that the company gets a piece of the Apple Watch pie as a component maker. Apple will be releasing the details of its upcoming watch today.
Marvell Technology (MRVL, $16.56, up $0.05)
MRVL May 18 calls (MRVL150515C00018000, $0.45, flat)
Entry Price: $0.50 (2/18/2015)
Exit Target: $1.00
Return: -10%
Stop Target: None
Action: Resistance is at $16.75-$17. Near-term support is at $16.25-$16 on a backtest. A close below the latter could lead to $15.75 and the 50-day moving average. I believe a run to $20 is coming by mid-May once $17 is cleared.
JDS Uniphase (JDSU, $13.89, up $0.57)
JDSU March 14 calls (JDSU150320C00014000, $0.30, up $0.15)
Entry Price: $0.78 (1/8/2015)
Exit Target: $1.00
Return: -62%
Stop Target: None
Action: Shares reached a high of $14.01 on Friday and cleared their 50-day moving average. Resistance is at $14-$14.25, and a close above the latter could lead to a run at the 52-week high at $14.99. Support is at $13.50-$13.25 and the 100-day moving average on a drop back below $13.75
The trade made an incredible comeback last week, but it’s still not out of the woods. This is a trade that was opened in January, and it is running out of time. I would like to be out of this trade this week for a slight profit or at break-even levels. I could add April or May calls on a move above $14.25, but I want to be out of this trade first before possibly adding a new position.
Trades on Hold — other 2015 Portfolio Open positions (1): 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.
Philip Morris (PM) March 75 puts (From January 2015) — Shares traded to a low of $79.79 on Friday, while closing a nickel above $80. There is additional risk to $77.50-$75 on a close below this level. This position also made a nice comeback last week. It is the last recommendation from my January batch of trades, but it is also running out of time.
The puts are currently trading for $0.14, and the position is still down. However, I’m looking to save some of the premium that is still left in the trade, so I’m watching the action carefully. I will send out a Trade Alert or update the position if I decide to take action this week. The entry price was $0.93, and I’d love to get $0.75-$0.95 cents for the puts. For now, set a Limit Order to sell to close the position at $0.95, based on volatility, but I may have to lower it throughout the week.
Trade on!
Rick Rouse
Editor and Chief Options Strategist
Momentum Options