9:00 a.m. (EST)
The bulls went into July looking strong but left the month looking weak. Of course, everything in between was a range-bound market that produced stair-stepping highs before the elevator drop on Thursday and follow through on Friday. The bulls had a decent lead entering the month, but the bears managed to break through several layers of support, which has caused some serious technical damage.
The bulls went into July looking strong but left the month looking weak. Of course, everything in between was a range-bound market that produced stair-stepping highs before the elevator drop on Thursday and follow through on Friday. The bulls had a decent lead entering the month, but the bears managed to break through several layers of support, which has caused some serious technical damage.
The Dow declined 70 points, or 0.4%, to close at 16,493 on Friday. The bulls tried to recover the 16,600 level after making a run to 16,584, but it quickly faded as the bears pushed a low of 16,437 at midday. I mentioned that there could be further risk to 16,300-16,250 on a continued pullback, and any drops below this area will likely lead to 16,000. A close back above 16,600 and the 100-day moving average (MA) would be bullish. For the week, the Dow gave back 467 points, or 2.8%. For 2014, the blue-chips are down 83 points, or 0.5%. The Dow ended 2013 at 16,576.
The S&P 500 slipped 5 points, or 0.3%, to settle at 1,925. The index tried to recover the 1,940 level on Friday but fell short after a push to 1,937. I talked about further risk to 1,900 and the 100-day MA on a close below 1,925, and Friday’s low touched 1,916. There is additional help at 1,875 if 1,900 is penetrated. Near-term resistance is at 1,940-1,950 and the 50-day MA. The S&P declined 53 points, or 2.7%, for the week. Year-to-date, the index is higher by 77 points, or 4.2%. The S&P 500 finished 2013 at 1,848.
The Nasdaq dropped 17 points, or 0.4%, to end at 4,352. Tech traded up to 4,385 on Friday’s open but struggled with the 4,400 level before fading to a low of 4,324. I had talked about a test to 4,375-4,350 and the 50-day MA if the bears cracked 4,400, but there is now risk to 4,300-4,200 on continued weakness. For the week, the Nasdaq gave back 97 points, or 2.2%. For 2014, Tech is up 176 points, or 4.2%. The Nasdaq closed 2013 at 4,176.
The Russell 2000 fell 5 points, or 0.5%, to finish at 1,114. I mentioned Thursday’s close below 1,125 could lead to 1,110-1,100, and Friday’s low reached 1,107. There is additional support at 1,080-1,075 if 1,100 fails to hold. Resistance is at 1,125-1,140 and the 200-day MA. For the week, the small-caps fell 29 points, or 2.6%, and are down 49 points, or 4.2%, year to date. The Russell 2000 ended 2013 at 1,163.
The S&P 500 Volatility Index ($VIX, 17.03, up 0.08) breeched 17.50 on Friday after trading to a high of 17.57. I have been warning that any close above 15 would lead to 17.50 with further risk to 20-22. Wednesday’s spike above 13.50 and run past 14 was a good clue that the VIX would trip these levels. A close back below 15 this week would be mildly bullish.
The Dow fell 263 points, or 1.5% in July, while the S&P 500 dipped nearly 30 points, or 1.6%. It was the first losing month for both indexes since January. The Nasdaq dropped 38 points, or 0.8%, and the Russell 2000 tanked 73 points, or 6.2%.
It has been 33 months since the S&P 500 has experienced a 10% selloff and, while it is too early to say this is the start of one, it bears watching.
Some of the early signs came during the prior week, with the Dow struggling on Friday and Monday and again last week. Although the Dow managed to post a gain last Monday, the blue-chips have fallen on four of the past six Mondays. The chart below shows the Monday closes on the Dow for the year.
Following a 10-straight win streak, the Dow has now fallen for two straight Friday’s. Here are the Friday closes for the Dow in 2014:
As you can see, the Dow hasn’t experienced a Monday/Friday decline in the same week since early April. For new subscribers, I often say mixed Monday/Friday closes tend to suggest a trading range has formed, while higher and lower M/F’s suggest that an up or down trend is in place. This Monday’s close will be important, as well as Friday’s, to see whether money is flowing back into or out of the market.
I recommended 15 trades for the Daily from late May through the end of June and closed 12-straight winners over that time frame and into late July. I also warned that a mini-trading range could develop, and that played out like a fiddle before the last day of July and the 2% pullback. There were 10 recommendations last month, and those trades will likely wind up with a record of 7-3.
I also warned of May’s tight trading range and, for the Weekly Wrap, I only recommended two trades. I got aggressive in June with a half-dozen recommendations. Five of the eight trades were closed for average double-digit winners and the other three are still in play. In July, I only recommended two trades for the Weekly Wrap.
My point is, I have done well navigating the trading ranges, and my fluff targets for the major indexes from December finally triggered during the late June/early July run to fresh all-time highs. My year-end targets from February for the indexes are much higher than current levels. I also said the 200-day MAs needed to hold across the board throughout 2014 and that the threat of war needed to simmer. If they didn’t hold, I showed in the charts that there could be a nasty correction at some point this year.
Predicting market tops, bottoms, up/down trends and trading ranges is extremely difficult, and that is why I spend literally 100 hours a week researching and studying the market.
My catalyst for the move to higher highs in June was in anticipation of a good second-quarter earnings season. That’s what we got, as 70% of the companies that have reported have topped Wall Street’s expectation. However, the number of earnings warnings for the current quarter is on the rise, with companies pricing in lower growth.
There were a lot of reasons the talking heads were giving for the end-of-the-week pullback, including Argentina’s debt default, the Fed’s statements and geopolitical events. My take is that the market was setting up to “buy the rumor, sell the news” once the flood of second-quarter earnings was released.
It remains to be seen if the selling pressure continues, and the indicators I follow have been great tools for predicting market direction. August could see continued weakness, as it is historically one of the worst months for the market. I wouldn’t be surprised to see the selling pressure continue into this week and perhaps next week before a rally back to resistance, but gauging the volatility will be the hard part.
Ahead of Monday’s open, futures look like this: Dow (+46), S&P 500 (+7); Nasdaq 100 (+13).
Closed Trades for 2014: 74-39 — 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 takeall 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.
World Wrestling Federation (WWE, $13.03, up $0.55)
September 13 calls (WWE140920C00013000, $0.80, up $0.20)
Entry Price: $0.50 (7/30/2014)
Exit Target: $1.50-$2+ (closed a third at $0.90 on 7/31/2014)
Return: 67%
Stop Target: $0.45 (Stop Limit on remaining two thirds of the position)
Action: Shares traded down to $12.13 on Friday before bouncing back to clear $13. Resistance for WWE is at $13.50. Near-term support is at $12 with risk to $11.75 and the 50-day MA. I am keeping the Stop Limit at $0.45 but may raise it today if shares continue higher in order to lock in better gains.
RF Micro Devices (RFMD, $11.39, up $0.23)
September 12 calls (RFMD140920C00012000, $0.60, up $0.05)
Entry Price: $0.45 (7/29/2014)
Exit Target: $0.90 (closed half at $0.55 on 7/31/2014)
Return: 28%
Stop Target: $0.40 (Stop Limit)
November 12 calls (RFMD141122C00012000, $0.95, up $0.10)
Entry Price: $0.70 (7/29/2014)
Exit Target: $1.40 (closed half at $0.90 on 7/31/2014)
Return: 32%
Stop Target: $0.70 (Stop Limit)
Action: Shares traded to a low of $11.07 on Friday but the stop limits held. Short-term resistance for RFMD is at $11.50, and a move above this level should lead to another run at $12. Support is at $11 with risk to $10.75-$10.50.
CVS Caremark (CVS, $76.52, up $0.16)
September 82.50 calls (CVS140920C00082500, $0.25, flat)
Entry Price: $0.45 (7/28/2014)
Exit Target: $0.90
Return: -44%
Stop Target: None
Action: Shares cleared $77 on Friday but were unable to hold this level into the close. Support for CVS is at $75. Earnings are due out Tuesday, Aug. 5.
Pool (POOL, $54.63, down $0.13)
October 50 puts (POOL141018P00050000, $1.15, flat)
Entry Price: $1.10 (7/16/2014)
Exit Target: $2.20-$3.30
Return: 5%
Stop Target: None
Action: The battle at double-nickels ($55) ended with a bear win on Friday. Shares are on the verge of testing the July low of $54.16. A break below this level should lead to $50 and fresh 52-week lows. Resistance for POOL is holding at $57 along with the 200-day MA.
The breakeven point for the trade is at $48.90, technically, by mid-October.
Fortinet (FTNT, $24.18, down $0.37)
September 28 calls (FTNT140920C00028000, $0.20, down $0.10)
Entry Price: $0.55 (6/30/2014)
Exit Target: $1.10
Return: -64%
Stop Target: None
Action: Shares traded to a low of $23.97 on Friday and held the 50-day MA. There is continued risk to $23.50, and I will likely exit the trade on a drop below this level. A close for FTNT back above $25 would keep me excited.
General Motors (GM, $33.44, down $0.38)
September 32 puts (GM140920P00032000, $0.65, up $0.10)
Entry Price: $0.40 (6/23/2014)
Exit Target: $0.80-$1.20 (Limit Order to close half at $0.80)
Return: 63%
Stop Target: $0.45 (Stop Limit)
Action: GM closed below $33.50 on Friday. I have talked about a test to $32-$30 coming and would like to see continued weakness to start the week. There is a limit order in place to close half the calls at $0.80. Friday’s high reached $0.71 when shares tested a session low of $33.30. A close below $33 should lock in a triple-digit return on half of the trade.
Resistance for GM will try to hold at $34, and I have placed a Stop Limit of $0.45 to protect our profits. I will also likely move this up once half of the trade is closed or if the shares start to rebound.
Other 2014 Portfolio Open positions (0): 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.