9:00 a.m. (EST)
The bears had their best outing since mid-April following an attack that left Wall Street speechless. Warnings signs have been showing up over the past few weeks, and I have talked about a “Whoa Nelly” event happening. Yesterday was that moment.
The Dow tanked 317 points, or 1.9%, to settle at its session low of 16,563 on Thursday. The blue-chips opened at 16,869 but fell below 16,800 within minutes. I have talked about additional support at 16,600, and this level was also tested. I have warned that a close below the second wave of support would be extremely bearish, and the elevator drop opened the door for a test to 16,300-16,250 on further weakness. A recovery back above 16,700-16,800 would be bullish heading into next week.
The S&P 500 stumbled 39 points, or 2%, to end at 1,930. The bears cracked 1,960 and then 1,950 within the first hour of trading. Additional support at 1,940 also failed in the final hour. If the bears had 10 more minutes yesterday, they likely would have triggered 1,925 — a level the bulls desperately need to hold today. If not, there could be a test to 1,900. Any 10-point gains to clear prior resistance levels would help ease some of Thursday’s pain.
The Nasdaq was hammered for 93 points, or 2.1%, to close at 4,369. Tech opened under 4,425 at 4,421, which was a clear signal that 4,400 would be breeched. I have talked about wiggle room down to 4,375-4,350, and Thursday’s low reached 4,367. The bulls will be looking to reclaim 4,375-4,400 ahead of the weekend, while the bears would obviously like to get under 4,350. Any dips below this level could lead to 4,325-4,300 quickly.
The Russell 2000 sank 26 points, or 2.3%, to finish at 1,120. The small-caps started the session below 1,140 after opening at 1,137, and that was a green light that a test to 1,125 would come. I have cautioned further weakness to 1,110-1,100 on a close below this level of support. The bulls will be looking to at least clear 1,125-1,130 by today’s closing bell and, while 1,140 would be nice, it would require a 2% rebound.
The S&P 500 Volatility Index ($VIX, 16.95, up 3.62) zoomed 27% after trading to a high of 17.11. If you flinched yesterday on the close above 15, that is understandable, as I said not to get nervous until the bears cleared this level. Naturally, the VIX got plenty of attention from the talking heads and, for those who said the index was dead, welcome back, Jack. The bulls managed to hold 17.50, but a close above this level could lead to 20-22. The bears will be trying to hold 15 heading into next week.
I have updated all of the current trades with my thoughts and instructions. Although it has been a shaky week for the market, the Daily portfolio has performed extremely well. Even better, by locking in profits on the winners, the portfolio is once again in fantastic position for new trades and the beginning of a possible new trend.
Special Notice: If this is the start of a 5%-10% pullback — please do not worry. The best time to make money is when the market is trending, up or down. Trading ranges are hard to navigate, and volatility can whipsaw you out of a lot of good trades, but I managed to avoid the pitfalls of July by sticking to the chart work and game plan.
The suit-and-ties will continue to tell you to stay out of the market, as many of them don’t know how to play a downslide slide. I love buying put options as much as call options, and the returns can be just as great. For new subscribers, check out some of the trades I recommended from 2008 when the market really folded like a cheap lawn chair. Again, don’t be nervous.
Overnight futures were showing a rebound going into this morning’s open. Nonfarm Payrolls came in worse than expected and futures are reacting accordingly.
From desk to press, futures look like this: Dow (-24); S&P 500 (-3); Nasdaq 100 (-1).
Closed Trades for 2014: 74-38 — 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 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.
World Wrestling Federation (WWE, $12.48, up $0.39)
September 13 calls (WWE140920C00013000, $0.60, up $0.05)
Entry Price: $0.50 (7/30/2014)
Exit Target: $1.50-$2+ (closed a third at $0.90 on 7/31/2014)
Return: 40%
Stop Target: $0.45 (Stop Limit)
Action: Yesterday, I suggested closing a third of the position to ensure a profitable trade.
There was a negative article on the company’s earnings results that came out after my midday update. This may have contributed to the pullback from a high of $13.40 and the close below $13.
The options traded to a low of $0.55 yesterday, so I have placed a Stop Limit at $0.45 on the two remaining 1/3-sized positions of the trade. This would ensure a 20% profit.
Of course, there is still plenty of time for shares to clear $14 and make a run at $18, but the rest of the trade will likely close if shares retreat to $12.
RF Micro Devices (RFMD, $11.16, down $0.61)
September 12 calls (RFMD140920C00012000, $0.55, down $0.15)
Entry Price: $0.45 (7/29/2014)
Exit Target: $0.90 (closed half at $0.55 on 7/31/2014)
Return: 22%
Stop Target: $0.40 (Stop Limit)
November 12 calls (RFMD141122C00012000, $0.85, down $0.20)
Entry Price: $0.70 (7/29/2014)
Exit Target: $1.40 (closed half at $0.90 on 7/31/2014)
Return: 25%
Stop Target: $0.70 (Stop Limit)
Action: I suggested closing half of the September calls and half of the November calls on Thursday to lock in profits.
The pop past $12 during Wednesday’s after-hours session couldn’t hold, as shares traded to a low $10.93 on Thursday. Near-term support at $11 held, but a backtest to $10 could be in the works. I have set Stop Limits to protect our profits.
The low on the September 12 calls was $0.43 on Thursday, so I have placed the stop limit at $0.40. This would ensure a 6% profit.
The low on the November 12 calls was $0.75 yesterday, so I have placed the stop limit at $0.70. This would ensure a 14% profit.
I would like to see shares recover $11.50 today. I have a near-term target of $13 and a longer-term price target of $15 on the stock.
CVS Caremark (CVS, $76.36, down $1.38)
September 82.50 calls (CVS140920C00082500, $0.25, down $0.10)
Entry Price: $0.45 (7/28/2014)
Exit Target: $0.90
Return: -44%
Stop Target: None
Action: There is additional risk to $75. Earnings are due out next week. I would like to see shares recover $77 today.
iShares Russell 2000 (IWM, $111.19, down $2.60)
August 118 calls (IWM140816C00118000, $0.05, down $0.15)
Entry Price: $0.60 (7/22/2014)
Exit Target: $1.20
Return: -92%
Stop Target: None
Action: Support at $112 failed to hold, and the options are at a nickel. I would like to see where the action is at during the midday update before possibly pulling the plug on the position — but it isn’t looking good.
I may also put the trade on hold if there is a bounce today, but prior support at $112-$113 needs to be regained by halftime. If not, there are too many layers of support to overcome over the next two weeks to stay in the trade.
Pool (POOL, $54.76, down $0.52)
October 50 puts (POOL141018P00050000, $1.15, up $0.15)
Entry Price: $1.10 (7/16/2014)
Exit Target: $2.20-$3.30
Return: 5%
Stop Target: None
Action: 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 is holding at $57 along with the 200-day moving average.
The break-even point for the trade is at $48.90, technically, by mid-October. In other words, this trade has plenty of time to play out.
Fortinet (FTNT, $24.55, down $0.98)
September 28 calls (FTNT140920C00028000, $0.25, down $0.10)
Entry Price: $0.55 (6/30/2014)
Exit Target: $1.10 (Limit Order to close half)
Return: -55%
Stop Target: None
Action: Support is at $25-$24 on a backtest. A move above $26 would be bullish.
General Motors (GM, $33.82, down $0.49)
September 32 puts (GM140920P00032000, $0.55, 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: 38%
Stop Target: None
Action: GM is below all of its major moving averages and is on track to test the low $30 level. I would love to see a close below $33.50 ahead of the weekend. Resistance will try to hold at $34.
Special Notice: I try to remind everyone from time-to-time why I don’t like closing trades on cheap options, or why I don’t carry stops on options that are under $1.50. I also don’t like to trade options that are priced over $2.
For me, I would rather take 3-4 trades at $0.50-$0.75 than risk $2 for an option trade, as the premiums are usually inflated. It is also why I shy away from trading options on stocks priced over $100. This trade was down over 50% at one point and is a great example why I trust my chart work and homework more than my emotions.
The chart work showed this breakdown coming as long as resistance held and, after being down nearly 60%, the trade is up roughly 40%.
Of course, the difference between this one and the aforementioned iShares Russell play is that I was more aggressive with the index trade after the Russell 2000 cleared 1,160.
I wanted to share some of this trader talk given the market volatility and to provide you some words of wisdom at the start of what could be a fun August.
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.