In This Issue:
Dear Momentum Stocks Weekly Subscriber,
The bulls gave good clues that higher highs might be in store after starting last week off with their third-straight Monday win. The push to prior resistance and the top of the trading ranges was a tease, however, as Tuesday’s pullback continued to worry Wall Street.
The action got progressively worse into the Fed’s announcement regarding interest rates on Wednesday. As the saying goes, it’s always darkest before the dawn, and panic was in the air. The good news is that there is light after the darkness, and the bulls remembered this.
Thursday’s mixed action kept Wall Street off-guard and had analysts believing that Wednesday’s action was a “dead cat bounce.” Friday’s win capped off a great week, and there is likely more upside ahead as the suits and ties try to catch up to the market’s gains for the year.
The Dow jumped 168 points, or 0.9%, to end at 18,127 on Friday. The blue-chips traded in positive territory throughout the session, while reaching a high of 18,197. The close above 18,100 gets the all-time high of 18,288 and resistance at 18,300 in play. If triggered, there is fluff up to 18,500-18,600. Support is at 18,000-17,900, followed by 17,800 and the 50-day moving average.
The S&P 500 soared nearly 19 points, or 0.9%, to settle at 2,108. The index easily cleared resistance at 2,100 shortly after the open, while trading to a top of 2,113. The bulls were a six-pack shy of triggering a fresh all-time high. A close above 2,120 could lead to a test to 2,150-2,175. Support is at 2,100-2,090 on a pullback, with backup at 2,075 and the 50-day moving average.
The Nasdaq zoomed 34 points, or 0.7%, to close at 5,026. Tech opened at 5,033 and traded to a fresh 15-year high of 5,042. The bulls needed another six-pack here as well, after missing the all-time closing high of 5,048. The index reached an intraday high of 5,132.52 in March of 2000, which now represents further resistance. A move above these levels could lead to 5,200. Support is at 5,000-4,975.
The Russell 2000 gained 11 points, or 0.9%, to finish at 1,266. The small-caps opened a point below 1,260 and traded to an all-time high of 1,267. It was the 14th record close of 2015 for the index, which is a story Wall Street has ignored. I talked about a possible surge to 1,275 once 1,260 cleared and mentioned that the small-caps would lead the way higher. This level is less than 1% away, and the 1,300 level is roughly 3% away. Support is at 1,260-1,250 on a backtest, which are levels that need to be watched carefully.
The S&P 500 Volatility Index ($VIX, 13.02, down 1.05) dropped 7% on Friday and closed below 13.50. By far, the VIX gave the single-best clue mid-week ahead of the Fed meeting following a “flash crash” to 13.38. Coming into last week, I said it would be imperative that the bulls hold 17.50 into the Fed announcement and 15 afterwards. It was a “discount double-check,” as I also said that a move to 13.50-12.50 was needed to sustain the rally. Friday’s low touched 12.54.
The battleground this week will be at VIX 12.50, as continued closes below this level could lead to 11.50-10. While it is too early to say if these levels will be tested, they could be on continued spikes higher. Closes above 13.50 are “safe” as long as 15 holds, but any pops above this level could signal a short-term top.
“The setup here is an easy one and probably the most telling market sign we will get this week. If the VIX closes above 17.50, it could lead to panic selling. If the VIX closes below 15 on consecutive sessions, it would be a very bullish sign for a retest to 13.50-12.50.”
This was my most important message from last Monday ahead of the Federal Reserve’s statement on interest rates.
Given the chaos and elevated volatility going into the announcement, it was important to stay “patient” while Wall Street and the talking heads were clearly getting “impatient.”
Janet Yellen followed the game plan, as the Fed dropped “patient” from its policy meeting minutes while lowering guidance for any future rate hikes. The chairwoman told Wall Street and the world that although the Fed was dropping the word “patient,” it wouldn’t be “impatient” to raise rates.
It was exactly what the suits and ties didn’t want to hear because most of them have been calling for a slight pullback or a 5%-10% correction.
While it is easy to say that the market rallied following the Fed’s more dovish stance, the real reason was based on the technicals, which is why it is so important to track them each and every week.
A slower economy, a stronger dollar and low commodity inflation contributed to the zombies leaving rates unchanged and only delayed the debate on when the Fed will raise them. It can be a maddening process, and it’s one I have largely chosen to ignore.
Gold ($GOLD, $1,181.70, up $11.20) rebounded on the Fed news, as the dollar weakened and the threat of higher rates was removed over the short term. The yellow metal traded past the $1,300 level (per ounce) in mid-January before falling off a cliff and below all of its major moving averages within a month. Gold may have formed a temporary “double-bottom” after holding $1,140 and the early November 2014 lows. A run to $1,200 looks certain, and a close above the 100-day moving average would be bullish for the gold bugs.
The best way to trade gold is by following the SPDR Gold Shares ETF (GLD, $113.57, up $1.28). Options are available to trade, and the GLD April 116 calls (GLD150417C00116000) closed at $0.90 on Friday. They could be used to play further strength in GLD, with a stop at $0.45 for super-aggressive traders. This is not an official trade recommendation, but one that is on my Watch List.
Silver ($SILVER, $16.73, up $0.61) was testing $15.50 ahead of the Fed decision and made a strong run at $17 afterwards. Friday’s high reached $16.89, with silver reclaiming its 50-day and 100-day moving averages. A run to $18 and the 200-day moving average could come on additional strength.
The Financial Select SPDR (XLF, $24.71, up $0.33) held up well despite the drop in yields following the Fed announcement. Last week, I talked about the mini “death cross” that has formed on the chart, with the 50-day moving average falling below the 100-day moving average. This setup still bears watching, but the major moving averages are “curling” higher. A run to $25 looks certain, and a move above this level would be bullish. The 52-week high is at $25.14. Near-term support is at $24.50-$24.25. A close below $24 would be bearish.
The Dow Jones Transportation Average ($TRAN, 9,148, up 29) is trying to work itself out of its recent “death cross” pattern and could be on the verge of setting fresh highs. Resistance is at 9,200-9,300, and a close above the latter would be super bullish. Short-term support is at 9,100, followed by 9,000-8,975 and the 50- and 100-day moving averages.
Oil prices still look like they are headed lower despite the rebound to $47.50 a barrel last week. The chart for Light Crude Oil ($WTIC, $46.45, up $0.84) shows the 50-day moving average holding, but it is still in a downtrend along with the other major moving averages. A move above $48 needs to be watched, but my feeling is that there will be a flush to $40 if $45 fails to hold again.
The Monday/Friday closes have turned bullish, as the bulls have won three-straight March Monday’s following a sloppy February. Fridays have been choppy, as the bears won two-straight before this past Friday’s rebound. If the bulls can get another win today, it would be a bullish sign for a continued rally into the week. However, the bulls need to get a Friday win as well this week to confirm that money from the sidelines is flowing into the market. If not, there could be some choppiness as traders book profits.
March is historically weak later in the month, and the week after “triple-witching” and option expiration week tends to be bearish. However, I have been talking about the market hitting a “sweet spot,” and this week should give us that clue.
The Dow has made significant moves following triple-witching week and has advanced in seven of the past 11 years. In 2000, the blue-chips jumped nearly 5% during the week after triple-witching and, in 2007, the index gained over 3%. During the same time period in 2009, the Dow zoomed roughly 7% and, in 2011, the bulls recorded another 3% gain.
It’s no secret that 80% of mutual fund managers underperformed the market last year, but it’s not because they are dumb. They just don’t do the homework. Given the market’s performance this year, my guess is that there are a number of money managers underperforming the market once again.
With the first quarter winding down, fund managers are going to have to put some money to work this week. If money starts moving from the sidelines and into the market this week and next, there is a good chance that another 3% move higher is possible by month end.
From desk to press, futures look like this: Dow (-8); S&P 500 (-2); Nasdaq 100 (-2).
Momentum Stocks Weekly Play List
All prices given in this update are current as of March 20, 2015
The Momentum Stocks Weekly Closed Trade Track Record for 2015 is 8-0, for a 100% win rate (125-17, or 88% win rate, overall since the start of 2011).
View the entire list of open and closed trades by clicking here.
Limelight Networks (LLNW, $3.65, down $0.22)
Original Entry Price: $3.91 (3/18/15)
Lowered Price from Selling Options: N/A
Exit Target: $7
Return: -7%
Stop Target: $2
Action: Shares traded to a 52-week high of $3.98 last week before Friday’s 6% pullback. I was hoping to catch a close above $4 but near-term support at $3.60 is back in play. There is additional risk to $3.40-$3.20 and the 50-day moving average.
I wanted to get back into LLNW following our 1.74% and 6% gains on the last trades. Longer-term subscribers know I like this stock as a takeover candidate for a few years now. The company turned down a takeover offer north of $6 last summer. Its market cap is $350 million and Limelight’s content delivery network is a cheap way for a major player to make inroads into the space.
Rigel Pharmaceuticals (RIGL, $3.45, down $0.06)
Original Entry Price: $3.72 (3/10/15)
Lowered Price from Selling Options: N/A
Exit Target: $6
Return: -7%
Stop Target: $2
Action: Near-term support is at $3.40. A close below this level could lead to $3.20-$3. Resistance is at $3.75-$3.80.
The chart shows a “golden cross” has formed as the 50-day moving average has crossed above the 200-day moving average. This is a bullish sign with a trading range that could lead to a breakout.
You can read my full write-up on RIGL in the March 16 Issue.
Discovery Laboratories (DSCO, $1.24, down $0.01)
Original Entry Price: $1.68 (3/5/15)
Lowered Price from Selling Options: N/A
Exit Target: $3
Return: -26%
Stop Target: $1
Action: Shares traded to a low of $1.18 following earnings. The good news is support at $1.25-$1.20 held. Continued closes below $1.20 could lead to a retest to $1. Resistance is at $1.40.
Dot Hill Systems (HILL, $5.08, up $0.09)
Original Entry Price: $4.25 (3/4/15)
Lowered Price from Selling Options: N/A
Exit Target: $5-$7
Return: 20%
Stop Target: Raise from $4.75 to $4.85 (Stop Limit)
Action: Raise the Stop Limit from $4.75 to $4.85.
Shares traded above $5 throughout the week while holding near-term support at $4.90-$4.85. Continued closes above $5 should lead to a run at the 52-week high of $5.33.
Flextronics (FLEX, $12.28, up $0.16)
Original Entry Price: $12.24 (3/2/15)
Lowered Price from Selling Options: N/A
Exit Target: $15
Return: 0%
Stop Target: $9
FLEX July 13 calls (FLEX150717C00013000, $0.45, up $0.05)
Entry Price: $0.50 (3/2/2015)
Exit Target: $1.00
Return: -10%
Stop Target: None
Action: Short-term resistance is at $12.25-$12.50. The 52-week high is at $12.48. A close above this level could lead to a run at $13. Support is at $11.75 and the 50-day moving average if $12 fails to hold.
You can read my thoughts on FLEX in the Trade Alert from March 2.
Bank of America (BAC, $15.84, up $0.83)
Original Entry Price: $17.63 (12/19/14)
Lowered Price from selling options: $17.28
Exit Target: $20+
Return: -8%
Stop Target: $15
Current Dividend Yield: 1.3%
Action: The midweek close below $16 and the 50-day moving average was bearish and lead to Thursday’s trip to $15.61. Backup support at $15.50 held but there is risk to $15.25-$15 on a close below this level.
We previously sold to open 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.
JDS Uniphase (JDSU, $13.90, up $0.07)
Original Entry Price: $14.07 (12/19/14)
Lowered Price from selling options: $13.54
Exit Target: $18+
Return: 3%
Stop Target: Raise from $10 to $13.75 (Stop Limit)
Action: Raise the Stop Target from $10 to $13.75 and make it a Stop Limit.
The JDSU March 14 calls expired Friday. The stock position is still open but I have raised the Stop Target and made it a Stop Limit to protect a profit and to avoid a loss. We can write another covered call if and when shares clear and hold $14. In the meantime, continue to hold.
Resistance is at $14-$14.25. A close above these levels would be bullish for a run at the 52-week high of $14.99. Support is at $13.75 and where the Stop Limit is at followed by $13.50 and the 50/100-day moving averages.
We previously sold to open the JDSU March 14 calls for 23 cents on Feb. 26, 2015 to reduce the cost basis to $13.54.
We previously sold to open the JDSU February 15 calls for 30 cents on Jan. 2, 2015, to reduce the cost basis to $13.77.
Discovery Laboratories (DSCO, $1.24, down $0.01)
Wrote the DSCO April 2 calls (DSCO150417C00002000, $0.05, flat)
Original Entry Price: $1.60 (11/11/14)
Lowered Price from selling options: $1.20
Exit Target: $2
Return: 3%
Stop Target: None
Action: Continue to hold.
On Nov. 11, 2014, I suggested buying DSCO at $1.60 while selling to open the DSCO April 2 calls for 40 cents. This lowered the cost basis of the trade to $1.20. If shares are called away at the $2 strike price by April, the trade will make 67%.
Rave Restaurant Group (RAVE, $15.35, up $0.11) Stock Trade
Original Entry Price: $8 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $20
Return: 92%
Stop Target: $11.75 (Stop Limit)
Action: RAVE was active above $15 all last week and reached a peak of $15.36 on Friday.
Shares are trying to build a new floor of support at $14.25-$14. Resistance is at $15.50-$16. The recent 52-week is at $16.20.
I read over the company’s SEC filings over the weekend – boring and dry stuff. However, the juiciest bit of information I found is there are less than 2,000 stockholders of this company. Make sure you are one of them if you haven’t established a position in RAVE.
The company is on track to open a new Pie Five location every week this year and I continue to love the long-term prospects for Rave Restaurant Group. I mentioned my year-end target is $20 for the stock but I have a feeling I may be raising it again.
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, $2.84, down $0.02) Stock Trade
Original Entry Price: $4 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $6+
Return: -29%
Stop Target: $2 (Stop Limit)
Action: Shares traded down to $2.81 on Thursday and Friday. A close below this level will likely get the 52-week low of $2.70 in play. Resistance is at $3-$3.10.
Trades on Hold (7): 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.
AKS Steel Holding (AKS, May 2011), DryShips (DRYS, January 2011), Rambus (RMBS, November 2011), Bebe Stores (BEBE, February 2012), Vivus (VVUS, July 2012), Zynga (ZNGA, March 2014), Galena Biopharma (GALE, February 2014)
Trade on!
Rick Rouse
Editor
Momentum Stocks Weekly