Dear Momentum Stocks Weekly Subscriber,
Wall Street was hoping for a pullback last week during, as the final trading week in February has traditionally been a soft for the market. The suit and ties were trembling from January’s selloff and were hesitant to put fresh cash to work despite the rebound off of the lows to start last month.
The slow drift upward to all-time and 15-year highs has been frustrating for investors who are out of the market. Although there was an opportunity to get long, support was tested on the market’s opens last week, and this kept traders on the sidelines.
The Dow dropped 81 points, or 0.5%, to settle at 18,132 on Friday. The blue-chips traded in negative territory from start to finish while ending at session lows. Support at 18,100 held for the sixth-straight time, and the index closed above the 18,000 level in nine of the past 10 sessions. Additional support is at 17,800-17,750 and the 50-day moving average. Continued closes above 18,200 keep my near-term targets of 18,300-18,500 in play.
The S&P 500 fell 6 points, or 0.3%, to close at 2,104. The index was choppy throughout the first half of trading but managed to reach an intraday high of 2,112. The fade to 2,103 into the close held near-term support at 2,100 for the sixth-straight session. Backup support is at 2,075-2,050 and the 50-day moving average. Resistance is at 2,115-2,125, with fluff up to 2,150 if the latter is cleared.
The Nasdaq declined 24 points, or 0.5%, to finish at 4,963. Tech made another run at 5,000 to end the week after reaching 4,989, but the two-point gain quickly evaporated. The bears pushed a low of 4,960 but were unable to crack support at 4,950 that has also held for six-straight closes. There is risk to 4,900-4,850 on a continued pullback, followed by 4,750 and the 50-day moving average. Fifteen-year resistance remains at 5,000-5,100.
The Russell 2000 slipped nearly 6 points, or 0.5%, to end at 1,233. The small-caps pushed a fresh all-time intraday high of 1,239.67 and fell just shy of clearing 1,240. I have mentioned that a close above this level will likely lead to run at 1,250-1,260. Support at 1,230-1,225 has been holding for nine-straight sessions. If the bears crack the lower end of this range, a test to 1,210-1,200 and the 50-day moving average could come quickly. A close below the 1,200 level would be bearish for a test to 1,175 and the 100-day moving average.
The S&P 500 Volatility Index ($VIX, 13.34, down 0.57) fell 4% and closed below 13.50 despite Friday’s overall market pullback. This was a very bullish development and the first close below this level since mid-December. I have been mentioning 13.50 as a key level for continued higher highs following the mid-February close below 15.
The close below 15 last month was the first of the year, and I’ve talked about the VIX testing 12.50 in March. It is too early to say if and when single-digits will come into play, but I do believe it will happen at some point this year. I predicted a single-digit VIX last year and came close after the index tested a low of 10.28 last July.
The one clue I focused on last week was the Transports. The Dow Jones Transportation Average ($TRAN, 9,024, down 57) came into the week on a roll above its 50-day moving average and tripped 9,214, mid-week. However, my enthusiasm dampened on the three-day pullback to 9,000. There is additional support at 8,950 and the 50-day moving average, but a close below these levels would be bearish.
I wanted to see the Transports challenge their recent 52-week peak north of 9,300, but that rally stalled. It is imperative that the index holds near-term support this week.
I mentioned that the Transports could lead the Dow into continued blue-sky territory, and that remains the case if there is a test to new highs this month.
The other bearish development was the financial stocks. The Financial Select SPDR (XLF, $24.35, down $0.09) was looking good on the push past $24.50 to a high of $24.60. The index will need to hold $24 and its 50-day moving average or else it will weigh on the market.
The Dodd-Frank bank “stress tests” will be released on Thursday, and the results are designed to show whether a bank can survive another recession. Additional bank stress tests will be released on March 11, after the market closes, and these results will be from the Federal Reserve.
The Fed will be assessing the banks’ plans for returning capital to their shareholders. Of course, the banks will also have to pass the recession test as well as other risk disclosures. These events will likely help or hinder the current rally.
The Dow came into February at 17,164 and added nearly 6%, or 968 points, for the month. The blue-chips reached an all-time peak of 18,244 last week following a February low of 17,037.
Here were my thoughts from Feb. 2:
“The Dow made three bottoms near 17,100 to end last week (end of January), which is why Monday’s action and close should provide a good first clue how this week’s action shakes out. There is a good chance that the Dow will move 1,000 points this month from current levels…”
This was a bold prediction, but it was my “game plan,” or plan A. Fortunately, I got it right. Although, I didn’t list a “backup plan,” or plan B, it was easy to read in that one paragraph that any closes below Dow 17,100-17,000 would have me quickly closing bullish positions.
In the aforementioned “notes” from Feb. 2, I also wrote this in the Pre-Market update:
“A close below Dow 17,000 and the 200-day moving average would spook Wall Street and favor the bears.”
The explosive move in February to the upside totally caught Wall Street off guard, as it represented the largest percentage gain for the blue-chips in two years.
While my game plan, or plan A, has called for additional Dow fluff to 18,500 over the near term, I still have to hold onto the football and not fumble while trying to score winning trades. If and when the Dow reaches this level, a new game plan will be forming, and we can take the huge gains from February and go on defense.
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.
On the flip-side, a 368-point move to the upside also represents a 2% swing from current levels and would have the Dow pushing…drumroll please…18,500.
I could cover this scenario with the other indices, but the blue-chips’ triple-digit moves will capture more headlines. The good news is that I have covered the breakdown points for the other major indices, and there are other bearish signals I will be watching for as well.
For the record, the S&P also added nearly 6%, or almost 110 points, in February, while the Nasdaq zoomed 7%, or 328 points. The Russell 2000 roared 6%, or 68 points.
One worrisome sign from last week was the lower Monday/Friday closes on the Dow. Although the losses were minimal on Monday (down 24 points), and Friday’s loss was less than 1%, a lower Monday today would make three-straight lower Monday/Friday closes, which would represent a red flag on the risk board.
There were three-straight Monday/Friday closes to start January, and it was a clear warning sign then and it could be this week. As a reminder, the indices fell 3%, on average, in January. Monday will be subject to overseas news and geopolitical events, while this Friday will deliver the jobs report.
Another important tell will be the VIX. A continued push towards 12.50 this week would be bullish, but a backtest to 15 can’t be ruled out. A close above this level would be a yellow flag. If this were the case, a pop to 17.50 could flush out the weaker hands again. The possibility of a new bearish trend could also develop on multiple closes above 15.
For the Wall Street pros who went short last month, they have to be worried, as hype of Nasdaq 5,000 gains (and loses) steam. February was an incredible month for the market, and the current momentum is being questioned heading into March.
Chances are that a 2% move could come this week, as the bulls and bears will fight over what is setting up to be a volatile month.
While I will be riding shotgun with the bulls for another 2% giddy-up, the road could be rough if the bears get off to a good start today. A 2% drop, followed by a 4%-5% run to my higher price targets is also possible, and that is my “plan C.”
Hopefully, these ABCs produce continued gains for us, and I think I have covered everything but the kitchen sink. “Plan D” would be closes below the 50-day moving averages, but hopefully that conversation comes at a later date. The bottom line is that I’m still hoping for even better things to come, but I’m also watching the exit signs.
From desk to press, futures look like this: Dow (+1); S&P 500 (-0.25); Nasdaq 100 (+6).
Momentum Stocks Weekly Play List
All prices given in this update are current as of Feb. 28, 2015
The Momentum Stocks Weekly Closed Trade Track Record for 2015 is 3-0, for a 100% win rate (120-17, or 87% win rate, overall since the start of 2011).
View the entire list of open and closed trades by clicking here.
All of the current trades in the portfolio are bullish, and there are Stop Limits in place to protect profits in some of the current trades. I also took the opportunity to write additional covered calls last week and the portfolio is in great shape as the first quarter comes to a close.
It has been a while since I have recommended short positions. There are opportunities to go short and any pullback might provide an opportunity for some quick trades. It might also provide another opportunity to start another round of long positions.
I could have New Trades this week. I am bullish on a few stocks, but I could also take a short position in a stock or two that look weak. I usually refrain from shorting stocks in bull markets but every now and then there are opportunities. If I take any action, I will send out an alert.
Western Union (WU, $19.52, down $0.07) Option Trade
WU May 20 calls (WU150515C00020000, $0.60, flat)
Entry Price: $0.41 (2/13/2015)
Exit Target: $0.80-$1.00
Return: 46%
Stop Target: 45 cents (Stop Limit)
Action: The late day reversal on Friday was disappointing after shares reached a peak of $19.73. Support is at $19.50-$19.25. Shares are on the verge of tripping $20 once $19.75 clears. There is additional fluff from the six-year chart up to $22 on closes above $20. I have a Stop Limit at 45 cents to protect profits.
New subscribers should wait for WU shares to clear $19.75-$20 to start a possible position in the calls.
Array BioPharma (ARRY, $7.96, down $0.15)
Original Entry Price: $8.17 (2/12/15)
Lowered Price from Selling Options: N/A
Exit Target: $9.10 (Limit Order)
Return: -3%
Stop Target: $6
Action: The close below $8 was worrisome as it opened the door for a possible test to $7.75-$7.50. A close below $7 would be bearish. Resistance is at $8-$8.25 and a close above $8.50 would be bullish. I have a near-term target of $9+. New subscribers should wait for ARRY shares to reach $8.25 before initiating positions.
BlackBerry (BBRY, $10.81, up $0.05)
Wrote the BBRY March 11 (Weekly March 6th expiration) calls (BBRY150306C00011000, $0.20, up $0.01)
Original Entry Price: $10.03 (1/29/15)
Lowered Price from Selling Options: $9.79
Exit Target: $12+
Return: 10%
Stop Target: Raise from $8 to $10 .
Action: Raise the Stop Target from $8 to $10 but we cannot make it a Stop Limit until after the covered call expires.
The close above 50- and 100-day moving averages last week was bullish with shares trading to a high of $10.95. A move above $11 could lead to a run to $11.25-$11.50 over the near-term.
These options expire this Friday and, if shares are above $11, the position will be “called-away” at the $11 strike price.
If this is the case, we can start a new position in BBRY, as I have said shares could be headed to the mid to high teens this year.
We previously sold to open the BBRY March 11 (weekly) calls for 24 cents on Feb. 26, 2015 to reduce the cost basis to $9.79. If the trade is called away at $11 by this Friday, the return will be 12%.
The company’s announcement that it would be working with Google last week was a clear indication who might be the eventual buyer of BlackBerry. Over the weekend, it was announced Samsung and BlackBerry will be teaming up for their launch of the Samsung Galaxy 6.
These recent collaborations make Google or Samsung the clear front-runner, and I have mentioned BBRY shares could fetch $20 in a takeover offer this year. Google or Samsung could probably get a deal done for $15-$17 and a marriage during the spring season would be a nice way to get M&A activity heated up.
I am looking at adding possible LEAP options on BBRY, and I could add a New Trade this week if shares clear $11. I’m still doing the math and watching the chart, but if I take action, I will send out an alert.
Bank of America (BAC, $15.81, down $0.23)
Original Entry Price: $17.63 (12/19/14)
Lowered Price from selling options: $17.33
Exit Target: $20+
Return: -9%
Stop Target: $15
Current Dividend Yield: 1.3%
Action: The close below $16 and the 200-day moving average on Friday was bearish. There is additional risk to $15.50-$15.25. Resistance is at $16-$16.25. A recovery of the 200-day moving average would be a slightly bullish sign.
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.
JDS Uniphase (JDSU, $13.77, up $0.45)
Wrote the JDSU March 14 calls (JDSU150320C00014000, $0.35, up $0.12)
Original Entry Price: $14.07 (12/19/14)
Lowered Price from selling options: $13.54
Exit Target: $18+
Return: 2%
Stop Target: $10
Action: Shares danced with their 50-day moving average throughout the week before Friday’s 3% surge. The close above $13.75 was bullish and should lead to a run to $14. If this level is reached and holds into late March, the position will be closed. Support is at $13.40 and the 50-day moving average on a pullback.
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.
We sold the March 24 calls for 24 cents on Feb. 26, 2015 to reduce the cost basis to $13.54. If shares are called away in late-March at $14, the trade will make 3%.
AT&T (T, $34.56, up $0.06)
Original Entry Price: $33.88 (12/5/14)
Lowered Price from dividends and selling options: $33.60
Exit Target: $40
Return: 3%
Stop Target: Raise from $30 to $34.15 (Stop Limit)
Current Dividend Yield: 5.5%
Action: Raise the Stop Target from $30 to $34.15 and make it a Stop Limit.
Support is at $34 and the 200-day moving average. I have set a Stop Limit slightly above this level to protect profits.
I will wait to write another covered call option when shares are testing new 52-week highs north of $37. I could also raise the Stop Limit during this week, depending on market conditions. Resistance is at $34.75-$35.
New subscribers should wait for $35 to trip before opening bullish positions to confirm continued strength and a run at fresh 52-week peaks.
We previously sold to open the T February 35 calls for 28 cents on Jan. 2, 2015, to reduce the cost basis to $33.60.
Discovery Laboratories (DSCO, $1.61, down $0.02)
Wrote the DSCO April 2 calls (DSCO150417C00002000, $0.25, flat)
Original Entry Price: $1.60 (11/11/14)
Lowered Price from selling options: $1.20
Exit Target: $2
Return: 34%
Stop Target: None
Action: The close above $1.60 and the 200-day moving average was super bullish. This sets up a possible run at $1.75-$2 over the next month or two. Support is at $1.50 and the 100-day moving average on a pullback.
I love the position at current levels, and new subscribers can still establish a covered call against the shares by selling to open the DSCO April 2 calls at current levels to lower the cost basis.
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 $2 by April, the trade will make 67%.
Rave Restaurant Group (RAVE, $13.02 up $0.27) Stock Trade
Original Entry Price: $8 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $20
Return: 63%
Stop Target: $11 (Stop Limit)
Action: Shares may have finished a “backfilling” period as the bounce off $11.50 has been bullish. A nice base of support has formed at $12-$11 and the move above $13 shows momentum is coming back into the stock.
Last Friday’s high reached $13.21 and resistance is at $13.25-$13.50. A close above this level will likely get the mid-teens in play.
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 of Rave Restaurant Group. My year-end price target is $20 and would still represent another 50+% return if reached. I have been recommending shares of RAVE, then ticker symbol PZZI, since 2012.
Huttig Building Products (HBP, $3.06, down $0.09) Stock Trade
Original Entry Price: $4 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $6+
Return: -24%
Stop Target: $2 (Stop Limit)
Action: This has been a frustrating trade as there has been no rebound or rally in the housing stocks. Perhaps that changes this spring.
The good news is support at $3 is holding bit there is risk to $2.75 on a close below this level. Resistance is at $3.10 followed by $3.25-$3.30 and the 50- and 100-day moving averages.
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