In This Issue:
Dear Momentum Stocks Weekly Subscriber,
The bulls showed strength last week, as the Dow started with a win on Monday. The VIX closed below 15 but was stretched for the second-straight session as the bottom of the trading ranges were tested. Wall Street sold on the nonfarm payrolls report from the previous Friday, but, when support held, it was a good sign.
Tuesday’s final-hour pullback was enough to keep the suits and ties bearish before Wednesday’s run at resistance. Thursday’s follow-through rally gave the bulls their fourth win in five sessions, with the VIX closing below 13.50. Friday’s run to the top of the trading ranges came right on cue and ahead of the start of first-quarter earnings season.
The Dow jumped 99 points, or 0.6%, to close at 18,057 on Friday. The blue-chips were strong throughout the session following an opening dip to 17,945. The 13-point fade turned into an intraday high of 18,066, with a close above 18,000. The bulls just missed clearing 18,100 and a close above 18,200 and the top of the trading range would be bullish. Support is at 17,900 and the 50-day moving average, followed by 17,800 and the 100-day moving average.
The S&P 500 surged 11 points, or 0.5%, to finish at 2,102. The index held positive territory throughout the session and closed half of a point off of its intraday peak while clearing 2,100. Thursday’s close above 2,090 was a great clue that 2,100 would trigger following the backtest to 2,075 and the 50-day moving average. Additional hurdles remain at 2,110-2,120 and the top of the trading range.
The Nasdaq added 21 points, or 0.4%, to end at 4,996. Tech fell 4 points on the open to 4,970, with support at 4,950 easily holding. The bulls fell short at ringing 5,000 and clearing the top of the trading range but look poised to do so on additional strength. Resistance is at 5,050-5,100 once cleared. Backup support is at 4,900 and the 50-day moving average on closes below 4,975-4,950.
The Russell 2000 climbed 5 points, or 0.5%, to settle at 1,264. The small-caps were also strong throughout Friday’s session after reaching a peak of 1,266. The closes above the top of the trading range occurred last Monday and throughout the week. The bulls came within two points of setting another all-time high on Friday. A near-term run to 1,275 is nearly a given, and 1,290-1,300 is possible on a continued short-covering rally. Support is at 1,250 and the uptrend line, followed by 1,240-1,230 and the 50-day moving average.
The S&P 500 Volatility Index ($VIX, 12.58, down 0.51) traded to a low of 12.51 on Friday after testing 13.26 on the open. I mentioned that once the bulls held down 15, the next waves of resistance would be at 13.50-12.50. The current chart shows a possible test to 11-10 could come on a continued breakout. The 52-week low is at 10.28. It is too early to say if single-digits will come into play, but, if they do, Wall Street will freak. There is no need to turn bearish until 17.50 trips. Otherwise, continue to stay bullish, although the action could get elevated with first-quarter earnings season starting this week.
The downside targets that I gave last week for the major indices were:
- Dow: 17,600
- S&P: 2,040
- Nasdaq: 4,800
- Russell: 1,200
These levels denoted the bottoms of the trading ranges from the start of February, which are represented by the green boxes in the index charts above. I covered these trading ranges and the exact same trading ranges two weeks ago and said to stay patient.
Monday’s low reached 17,646 on the Dow and 2,056 on the S&P. The Nasdaq kissed 4,852, while the Russell tapped danced with 1,249. All of these lows were higher than the previous week’s lows, which showed that a possible bottom was in.
The Monday/Friday closes were also important clues, and that is something I want to talk about, as they have turned very bullish over the past month. Last Monday’s win was the Dow’s second-straight positive session, which was a good first clue for us to stay long. The index has closed higher over five of the past six Monday sessions.
Last Friday’s win was the Dow’s third-straight up-Friday, following an up-Thursday ahead of the Good Friday market holiday. For new subscribers, up-Monday/Friday closes usually signal that money is moving into the market, while down-M/F closes signal that cash is moving to the sidelines. Mixed Monday/Friday closes can indicate trading ranges.
The Fed minutes from last week revealed that the zombies are still hesitant on raising interest rates. The Fed still seems divided on when they might raise rates, and a June hike is now a big question mark. There were several Fed officials who believed June would be the right time to raise rates, while others thought it would be too soon and that it would be best to wait longer. There were some members still suggesting the Fed should wait until 2016. Hard to believe, but it’s true.
I have been in the “who cares?” camp, as I couldn’t care less about the debate on when rates will rise. Wall Street believes an interest-rate hike will crush stocks, but I have said that it might help the financial stocks get into second gear.
The Fed remains worried about low inflation, falling energy prices and a stronger dollar, which lowers the cost of imported goods. While all of this might affect the multi-national companies, it’s a great environment for smaller, or small-cap, companies.
The Dow Jones Transportation Average ($TRAN, 8,767, up 59) caught the suit-and-ties’ attention on the drop below the 200-day moving average on the prior Friday. Last Monday’s low reached 8,527, with a rebound to the 200-day moving average on Tuesday and Wednesday. I mentioned that the transports might spend a few days below this level like they did in October 2014 before rebounding.
Thursday and Friday were also bullish sessions, with the Transportation index closing just below the 8,800 level while reclaiming the 200-day moving average. I mentioned last week that a recovery of 8,800-9,000 and the 100- and 50-day moving averages would be bullish, and last week’s rebound was a step in the right direction. Hopefully these levels trigger this week to confirm higher highs.
The financial stocks stayed in a tight range throughout last week, but a very bullish development occurred. A mini “golden cross” has formed in the Financial Select SPDR (XLF, $24.24, down $0.01), as the 50-day moving average has crossed back over above the 100-day moving average.
I have talked about the underperformance of the financial stocks all year and, at current levels, the XLF is still down nearly $0.50, or 2%, year to date. A move above $24.50 would be bullish, while a pop above $24.75 could signal a breakout. The XLF closed at $24.73 to end 2014 and on the first trading session to start 2015. The intraday highs on those days were $25.12 and $24.90, respectively.
First-quarter earnings season kicks off this week, and sentiment couldn’t be worse for corporate profits. Wall Street had high expectations coming into 2015, as they expected year-over-year first-quarter earnings growth of over 4%, with second-quarter growth of over 5%.
Coming into this week, analysts had tempered their expectations to declines of nearly 5% for the first-quarter and nearly 2% for the second quarter.
These are dramatic earnings estimate swings over the past three months, which is why everyone is so bearish coming into first-quarter earnings season. My best guess is that the suit-and-ties were a little high on expectations to end 2014 and have now become too low coming into earnings season.
This kind of flip-flopping can be a circus to watch, and analysts will likely change their minds again over the next three months — for better or for worse — for third- and fourth-quarter numbers. If the Fed does hike interest rates, it will only add to Wall Street’s confusion on how to play the remainder of the year.
Although March was an incredibly choppy month, the S&P 500 offered one clue that April could be brighter. The index had gone 26 sessions, or since mid-February, before it closed higher on back-to-back sessions in late March.
In early April, the S&P closed higher on Friday and (last) Monday and is currently working on a three-session win streak. This is a very bullish sign and one that could last for a few more weeks given Friday’s close above 2,100. The all-time high for the index is at 2,119, which was reached in late February. This level is just 1% away and could start a short-covering rally if cleared.
I have said since last year and all this year that the Nasdaq hasn’t come this far not to test or take out its all-time high. The index reached an all-time intraday peak of 5,132 on March 10, 2000, and this level is just under 3% away.
I would like to think that there is another 2%-3% of upside ahead this month before we have to worry about the bears again. If all goes well this week (and next), we can then worry about a possible top ahead of the “sell in May and go away” adage that Wall Street has become accustomed to.
From desk to press, futures look like this: Dow (-25); S&P 500 (-3); Nasdaq 100 (-1).
Momentum Stocks Weekly Play List
All prices given in this update are current as of April 10, 2015
The Momentum Stocks Weekly Closed Trade Track Record for 2015 is 11-0, for a 100% win rate (128-17, or 88% win rate, overall since the start of 2011).
View the entire list of open and closed trades by clicking here.
TiVo (TIVO, $11.04, down $0.08)
Original Entry Price: $11 (4/7/15)
Lowered Price from Selling Options: N/A
Exit Target: $12.00-$13.00
Return: 0%
Stop Target: $10.00
Action: Resistance is at $11.25. Support is at $11 followed by $10.75 and the 50-day moving average.
Limelight Networks (LLNW, $3.47, up $0.01)
Original Entry Price: $3.91 (3/18/15)
Lowered Price from Selling Options: N/A
Exit Target: $7.00
Return: -11%
Stop Target: $2.00
Action: Support at $3.40 was tested throughout the week with Friday’s low reaching $3.36. I mentioned there was additional risk to $3.25-$3 and the 100-day moving average if the 50-day moving average failed to hold. Shares held $3.40 into the closes and a move back above $3.60 would be bullish.
Rigel Pharmaceuticals (RIGL, $3.93, up $0.12)
Original Entry Price: $3.72 (3/10/15)
Lowered Price from Selling Options: N/A
Exit Target: $6.00
Return: 6%
Stop Target: None
Action: Friday’s top touched $3.98. Resistance is at $4 followed by the 52-week high at $4.20. Support is at $3.60 followed by $3.40 on a drop back below $3.80-$3.75.
You can read my full write-up on RIGL in the March 16 Issue. My near-term Price Target is $5-$6 with a shot at double-digits by year-end.
Discovery Laboratories (DSCO, $1.38, up $0.03)
Original Entry Price: $1.68 (3/5/15)
Lowered Price from Selling Options: N/A
Exit Target: $3.00
Return: -18%
Stop Target: $1.00
Action: Shares tested a low of $1.18 to start the week before closing at $1.31 on Monday. The move above resistance at $1.25-$1.30 was bullish as Tuesday’s and Friday’s high touched $1.38. The next hurdles are at $1.40-$1.45 and the 50/100-day moving averages. Support is at $1.20.
Read my full update from March 30 on DSCO by clicking here.
Dot Hill Systems (HILL, $6.13, up $0.28)
Original Entry Price: $4.25 (3/4/15)
Lowered Price from Selling Options: N/A
Exit Target: $5.00-$7.00
Return: 44%
Stop Target: Raise from $5.15 to $5.50 (Stop Limit)
Action: Raise the Stop Limit from $5.15 to $5.50.
Monday’s pullback to $5.18 nearly triggered the previous Stop Limit of $5.15 before shares closed at $5.31. Tuesday’s run to $5.49 set a fresh 52-week high while clearing previous resistance at $5.35-$5.40. Shares set intraday highs of $5.55 and $5.88 on Wednesday and Thursday before Friday’s surge past $6.00 to $6.18.
Near-term support is at $6 followed by $5.75. The options are trading in 2.50 increments and hopefully soon, that will change. I still want to wait before possibly opened a covered call on this stock, and I have set a Stop Limit in the meantime to protect profits.
Bank of America (BAC, $15.72, up $0.01)
Original Entry Price: $17.63 (12/19/14)
Lowered Price from selling options: $17.28
Exit Target: $20+
Return: -9%
Stop Target: $15.00
Current Dividend Yield: 1.3%
Action: Shares tested $15.34 on Monday’s open with support at $15.25 holding. The close above $15.50 was bullish, but resistance at $15.75 stuck the rest of the week. However, there were intraday highs above this level to end the week. Resistance is at $16.00 and the 50-day moving average and a close above this level would be bullish.
Earnings are due out on Wednesday. Wall Street is looking for $0.29 a share on revenue of $21.5 billion. The company has missed estimates three of the past four quarters by 6 cents, 5 cents (beat), and 10 cents, twice. Over the prior year, it has posted two profitable quarters and two quarterly losses. The see-saw action needs to stay bullish this time around to show consecutive quarterly growth.
A beat-and-raise quarter could give shares the momentum needed to clear near-term resistance at $16 but additional hurdles remain at $16.25-$16.40 and the 100/200-day moving averages.
I believe BAC is going to announce a surprise quarter but I would wait for shares to clear $16.50 before opening new stock positions. This would solidify a move above all the major averages.
With that said, I do like the BAC May 16 calls (BAC150515C00016000, $0.30, down $0.01) as a possible speculative trade. The BAC June 16 calls (BAC150619C00016000, $0.43, down $0.01) also look good and would provide a month more of time premium.
A move back below $15.50 into earnings would be a bearish development. I will be watching the action in the May 15 puts (BAC150515P00015000, $0.17, flat) for additional clues to see if bearish bets are being made.
The BAC May 16 calls and the BAC May 15 puts could also be used as a strangle option trade.
I could add BAC options to the portfolio if shares show momentum into earnings. If I do, I will send out a New Trade alert. If you do not hear from me, it means I didn’t want to take on added risk since we are already long the stock.
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.
Discovery Laboratories (DSCO, $1.38, up $0.03)
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: Raise from $1.25-$1.30 to $1.50
Return: 15%
Stop Target: None
Action: I’m raising the exit target from $1.25-$1.30 to $1.50. Additionally, the DSCO April 2 options expire this Friday.
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, $13.55, down $0.40)
Original Entry Price: $8 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $20.00
Return: 69%
Stop Target: $12.60 (Stop Limit)
Action: The Stop Limit of $12.60 held on the dip to $13.00 on Monday. Shares finished the session at $13.52 after reaching a peak of $13.69. Tuesday and Wednesday’s surge to $14.45 and hold above $14.00 looked promising. Thursday’s close back below this level was a sure sign another test to the 50-day moving average would come. Friday’s low touched $13.35. There is additional risk to $13.25-$13.00 again on a close below this level.
For new subscribers, you can read my February earnings update on RAVE and why this stock is a multi-year hold. Options are still unavailable to trade on the stock.
Huttig Building Products (HBP, $2.87, up $0.02)
Original Entry Price: $4 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $6+
Return: -28%
Stop Target: $2.00 (Stop Limit)
Action: Shares tested $3.00 on Monday’s run to $2.99 before finishing at $2.85. Friday ‘s peak reached. $2.98. Resistance is at $3-3.05 and the 50-day moving average. Support is at $2.85-$2.80 with the 52-week low at $2.70 serving as backup.
New subscribers can start nibbling on continued closes above $3.00.
Rambus (RMBS, $13.73, up $0.37)
Original Entry Price: $17.83 (11/14/2011)
Lowered Price from Selling Options: $16.38
Exit Target: $15+
Return: -16%
Stop Target: $9.00
Action: This is not a new trade but one that has been on hold.
Shares traded to a high of $13.80 on Friday. The intraday move above $13.75 was a bullish sign for a possible run past $14.00 Support is at $13.00-$12.75 if $13.50 fails.
A “mini” golden cross formed in February with the 50-day moving average crossing above the 100-day moving average. Another golden cross recently developed with the 50-day moving average crossing above the 200-day moving average. The 52-week high is $14.82.
We previously sold to open (wrote) the RMBS December 20 calls for $1.45 on Nov. 14, 2011 to reduce the cost basis to $16.38.
Trades on Hold (6): 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), 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