Dear Momentum Options Subscriber,
The bulls continued to push fresh all-time highs last week as geopolitical concerns and Greece’s debt struggles eased.
My thought going into last week was that we needed to see a higher Tuesday following Monday’s holiday, a continued fall in the VIX and another up Friday. I said that if the bulls could check all three of these boxes, a run to the upper near-term targets I have talked about for the indexes would be in play.
The bears will be looking for revenge this week, as the last part of February is historically bearish. The bad news for the bears is that the bulls broke out of a four-month long trading range, and they have momentum.
The Dow jumped 154 points, or 0.9%, to end at 18,140 on Friday. The blue-chips tested support at 17,900-17,800 on the open after falling triple digits to a low of 17,878. The bulls recovered positive territory shortly afterwards and made a steady climb to an all-time intraday high of 18,144. The close above December resistance at 18,100 sets up a possible push to 18,300-18,500 over the near term.
The S&P 500 added 13 points, or 0.6%, to settle at 2,110. The bears pushed near-term support at 2,090-2,075 on their opening attack and reached 2,085 before throwing in the towel. The bulls recovered the 2,100 level during the second half of trading, with the index closing at another all-time high. I have said that continued closes above 2,100 would be bullish for a run to 2,125-2,150 over the near term.
The Nasdaq soared 31 points, or 0.6%, to close at 4,955. Tech kissed 4,905 at the start of trading, with support at 4,900 holding for the second-straight session. The index reached another 15-year peak of 4,957 and is just 1% away from clearing 5,000. Additional resistance lies at 5,100 and the all-time intraday high of 5,132.
The Russell 2000 gained nearly 4 points, or 0.3%, to finish at 1,231. The small-caps opened in positive territory by a point before fading to a low of 1,218. Support at 1,220 was slightly stretched before the late-day run to another all-time peak just under 1,232. There is additional fluff to 1,250 if 1,235-1,240 is cleared.
The S&P 500 Volatility Index ($VIX, 14.30, down 0.99) fell 6% after trading up to 16.29 on the open. The bulls held the 17.50 throughout the week but had to wait until Friday to get their second close of the year below 15 on the VIX. The bears will be trying to hold 13.50 to stop the market from setting additional highs. However, the bulls’ momentum could push the VIX below 12.50 over the short term.
Worries over Greece subsided as the country struck a deal for a four-month extension with the European Union just ahead of the market’s close. The deal eased Wall Street’s fears over a possible exit from Europe’s currency union, and the market took it as a good sign. However, further talks over Greece’s financial future still lurk in the shadows, but, for now, that news is on the back burner.
The Ukraine/Russia ceasefire looks good on paper, but those concerns still remain as well. I rarely talk about ISIS, but after its call for an attack on the Mall of America, it remains a bigger concern.
Growing up, I never concerned myself with overseas events and how they affected Wall Street. However, in the late 1990s and into the turn of the century, I found that it was imperative to keep track of global news, as events from around the world do impact our economy and stock market.
The Monday/Friday closes have turned bullish in recent weeks, and it appears that the money on the sidelines is moving in. The bulls have won two of the past three Monday sessions but need a win today to avoid falling back into the previous ranges.
The Friday closes have been higher over the past two weeks, but, for the year, it’s a tie. The Friday weakness in January was a clear sign that lower lows would be in play, and the turnaround in February will be impressive if the bulls can make it three in a row.
I mentioned that the suit and ties might have to play catch-up on a break out of the trading ranges. The previous trading ranges from my earlier chart work were highlighted in January to show the importance of not getting sucked into the January pullback.
The charts also show the noise over the past four months, which is why I said I would wait for a break below the 10-year uptrend lines before going aggressively short.
I warned that February is always a tricky month to trade, but support held coming into the month, which was a bullish sign. With the trading range still intact, I said that the Dow was on the verge of a 1,000-point move. We’ve got that and then some off of the February low of 17,037.
I started doing some early homework in December on the longer-term 10-year charts, which really helped me navigate the previous four-month trading range. I normally wait until January or February to review them, as the holidays are always a busy time. However, I knew that if I wanted to get another head start on Wall Street this year, I would have to do some extra homework.
It wasn’t my ideal “Christmas break,” but those of you who have followed me for years know my vacations come on three-day weekends and when the market is closed. When you have money in the market, it is hard not to look at stocks on a daily basis and, therefore, the homework is necessary. Don’t worry, I still have plenty of downtime to enjoy life and, by doing the homework, I have been able to stay two steps ahead of Wall Street.
The price targets I have previously discussed and the ones in the upcoming charts should be in play by the end of 2015 or during the first quarter of 2016. It is imperative that the bottom 10-year uptrend lines hold for these targets to be achieved. If not, the market could see a nasty freefall that will absolutely scare Wall Street and Main Street. We can worry about this when the time comes, but, for now, let’s cover the upside potential.
In December, I mentioned that most analysts predict 5%-6% up years for the market, as they are too lazy to do the chart work. Some analysts may go as high as the 7%-8% range, as that has historically been the market’s average yearly return.
Following 2013’s gain of nearly 30% for the S&P 500, none of the analysts believed a double-digit return was in store for 2014 and certainly not again this year.
However, if all goes well, the S&P could be trading at 2,350-2,400 this year. The index started 2015 at 2,058 after adding 11% in 2014, and a push to 2,350 would represent a 14% return. If the bulls reach 2,400, the return would be 17%. A close below 2,000 would be bearish and is currently 5% away.
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. If the bulls reach 19,500, it would represent a 9% return for the blue-chips. A close below 17,000 would be bearish and is currently 6% away.
The Nasdaq is the more interesting story, and I said throughout 2014 that the bulls haven’t come this far not to test 5,000 and all-time highs. As expected, I said that talk about this level would heat up last week, and it did. While talk of a bubble continues, I wouldn’t be surprised to see the Nasdaq make a run at 6,000 this year or into 2016. The index added 13% in 2014 and came into this year at 4,736. A run to 5,750 would represent a gain of 21%. If 6,000 triggers, the return would be 27%. A close below 4,500 would be bearish and is currently 9% away.
The Russell 2000 was the laggard in 2014 but still posted a 4% gain. The index started 2015 at 1,204, and a run to 1,350 would represent a gain of 12%. If 1,400 is reached, the return would be 16% for the small-caps. A close below 1,150 would be bearish and is currently 7% away.
Although I’m tremendously bullish for the rest of the year, I do believe that there will be a nasty pullback at some point.
The indexes are flying high above their 50-day moving averages and, eventually, a pullback will be in the cards. As I mentioned, the bottom of the uptrend lines are 5%-10% away and could easily be tested on a pullback or correction.
I don’t see that worry on the horizon, but the bears always deserve respect, as they can strike hard and fast on a moment’s notice.
Earnings season is winding down, and I will talk more about what I expect for March next week. Janet Yellen is speaking this week, and there are a number of economic reports that could help or hinder the current rally.
Our current trades are in great shape, and I have stops in place to protect profits. I have also given clues about what to look for on a possible pullback, so it’s important to keep an open mind, as trading ranges do get stretched.
From desk to press, futures look like this: Dow (-33); S&P 500 (-3.5); Nasdaq 100 (+1.5).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 12-1 (92%). 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.
GrubHub (GRUB, $41.36, up $1.67)
GRUB March 45 calls (GRUB150320C00045000, $0.75, up $0.41)
Entry Price: $0.55 (2/20/2015)
Exit Target: $1.10
Return: 36%
Stop Target: None
Action: Shares formed a “double-top” last August near $46, and overhead resistance is at $42. A close above this level should lead to a retest of $45-$46. The 52-week high is at $45.80. Short-term support is at $40. All three major moving averages are “curling” higher, with the 50-day crossing over the 100- and 200-day moving averages. The “golden crossover” looks bullish for a possible run to $50.
GrubHub recently announced earnings of $0.13 a share on sales of $73.3 million. Wall Street had been expecting $0.11 a share on revenue of $70.3 million. Revenue was up 50% versus last year’s fourth-quarter numbers. The recent acquisitions of DiningIn and Restaurants on the Run should provide even better revenue numbers in 2015.
Gogo (GOGO, $16.22, up $0.26)
GOGO March 18 calls (GOGO150320C00018000, $0.50, up $0.10)
Entry Price: $0.45 (2/20/2015)
Exit Target: $0.90
Return: 11%
Stop Target: None
Action: Shares traded to a high of $16.46 on Friday and came within a penny of clearing their 200-day moving average. A move above this level could lead to a run towards $18.
Earnings are due out on Thursday, and Wall Street is expecting a loss of $0.31 a share on revenue of $106.5 million. The worst estimate is for a loss of $0.36 a share, while the best estimate is for a loss of $0.25 a share.
Gogo has lost money in the past four quarters, so I’m more interested in revenues, as they will need to come in higher than expected. Analysts have a range of $103-$110 million for the recently ended quarter, and I would like to see sales north of $111 million.
Gogo currently has a backlog of over 1,000 airplanes waiting for their in-flight wireless internet connectivity. United Airlines recently signed a deal for 200 regional jets with Gogo Wi-Fi back in January. In December, American Airlines said it would be adding Gogo to 250 of its planes by 2016.
The company is also upgrading its air-to-ground (ATG) network and satellite-based technologies with its next generation business ATG-4 technology. This will allow for faster connectivity speed and capacity, with the first shipments expected in April.
There is competition in the space, but AT&T’s decision not to get into the market was good news for Gogo. AT&T could have been a very competitive rival, but it deemed the space too risky last November. While true, it may have been their way of saying that they were late to the party.
Marvell Technology (MRVL, $16.29, down $0.11)
MRVL May 18 calls (MRVL150515C00018000, $0.45, down $0.10)
Entry Price: $0.50 (2/18/2015)
Exit Target: $1.00
Return: -10%
Stop Target: None
Action: Marvell Technology caught a Wall Street upgrade on Friday despite the earnings miss. Although I was disappointed with the lowered guidance as well, I mentioned that the company’s new mobile chip rivals Qualcomm’s, and there is interest.
Wall Street’s believes Marvell’s chip business could fetch more than $1 billion. The company’s CEO said in the conference call that he was “open” to enhancing shareholder value.
Shares tested $15.99 on Friday’s low and held near-term support at $16. There is additional help at $15.50 and the 50-day moving average. Resistance is at $16.50-$16.75. Shares reached a 52-week high of $16.78 on Friday’s open.
These options have three months before they expire, and I’m expecting a run to $18-19 over the near term.
Western Union (WU, $19.45, up $0.18)
WU March 19 calls (WU150320C00019000, $0.70, up $0.10)
Entry Price: $0.40 (2/13/2015)
Exit Target: $0.80 (closed half at $0.60 on 2/19/2015)
Return: 63%
Stop Target: $0.40 (Stop Limit)
Action: Friday’s run to $19.53 and a fresh 52-week peak was a bullish sign. Longer-term resistance is at $20, with fluff up to $22. Support is at $19.25-$19.
Brocade Communications Systems (BRCD, $12.06, down $0.52)
BRCD March 13 calls (BRCD150320C00013000, $0.10, down $0.20)
Entry Price: $0.24 (2/13/2015)
Exit Target: $0.50-$0.75
Return: -58%
Stop Target: None
Action: Shares fell 4% on Friday after trading to a low of $11.87 while holding their 50-day moving average. The finish above $12 was slightly bullish, but additional resistance is at $12.25-$12.50 and prior support. A close below $11.75 could force an early exit.
Boston Scientific (BSX, $16.47, up $0.02)
BSX March 15 calls (BSX150320C00015000, $1.55, flat)
Entry Price: $0.45 (2/10/2015)
Exit Target: $2.50 (closed half at $1.34 on 2/18/15)
Return: 221%
Stop Target: $1.25, raise to $1.35 (Stop Limit)
Action: Raise the Stop Limit order from $1.25 to $1.35.
An analyst said that shares were “priced for perfection” on Friday, which caused some weakness before a late-day recovery. The options traded to a low of $1.41 on the dip to $16.24.
Support is at $16.25-$16. Resistance is at $17-$18 over the near term.
CBOE Holdings (CBOE, $62.61, up $0.65)
CBOE March 67.50 calls (CBOE150320C00067500, $0.10, flat)
Entry Price: $0.80 (2/4/2015)
Exit Target: $0.60 on the second half (Limit Order), (closed half at $1.10 on 2/5/15)
Return: -25%
Stop Target: None
Action: A close above $64 and the 50-day moving average would be bullish. Support is at $61 and the 100-day moving average. A close below these levels could force me to exit the trade for a slight loss.
JDS Uniphase (JDSU, $13.53, up $0.25)
JDSU March 14 calls (JDSU150320C00014000, $0.35, up $0.05)
Entry Price: $0.78 (1/8/2015)
Exit Target: $0.50-$0.75
Return: -55%
Stop Target: None
Action: This trade was put on hold last week but is making a comeback.
Shares cleared their 50-day moving average on Friday’s pop past $13.40. The next waves of resistance are at $13.75-$14. The breakeven point for the trade is at $14.25.
Trades on Hold — other 2015 Portfolio Open positions (2): 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) — Resistance is at $83.50 and the 200-day moving average. A close below $81.50 would help get the trade going in the right direction — Continue to hold.
AT&T (T) March 36 calls (From February 2015) — Support is at $34 and the 200-day moving average, followed by $33.75-$33.50 and the 100- and 50-day moving averages. Resistance is at $34.25-$34.50 — Continue to hold.
Trade on!
Rick Rouse
Editor and Chief Options Strategist
Momentum Options