In This Issue:
Dear Momentum Stocks Weekly Subscriber,
The market ended mixed to start last week, as the Dow’s Monday winning streak ended at three with the slight pullback. Biotech stocks were weak after Wall Street said the sector was “overvalued,” and transport stocks pulled back as well, which was a warning that trouble could lie ahead.
Tuesday’s action provided clues that the bears were serious, as the S&P 500 Volatility Index ($VIX, 15.07, down 0.73) closed above 13.50. I warned that 15 could come into play quickly, and Wednesday’s weakness came right on cue, with the VIX closing above this level. The bears got a 2% win and pushed the bottom uptrend lines as Wall Street ran for the exits.
Cinderella was looking like a pumpkin after midnight on Thursday, as the Dow futures were down 300 points. The action was implying a test to the 100-day moving averages and possibly the February (2015) and December (2014) lows.
Thursday’s victory gave the bears a four-session win streak and, in the process, more technical damage was done, as the bottom uptrend lines from October (2014) were starting to crack.
There were bullish signs that showed some pressure might be relieved on Friday’s rebound, and near-term support held. There are still two more days of March before April begins, so don’t be foolish in trying to go short just yet.
The Dow added 34 points, or 0.2%, to settle at 17,712 on Friday. The blue-chips made an early morning dip to 17,630, with support at 17,600 holding. There is risk to 17,350-17,300 and a test to 200-day moving average on a close below this level. The rebound to 17,729 looked promising, but the index failed to clear and hold its 100-day moving average. Additional resistance is at 17,800 and the 50-day moving average, followed by 17,900-18,000.
The S&P 500 gained nearly 5 points, or 0.2%, to close at 2,061. The index tested a low of 2,052 while holding short-term support at 2,050-2,040. There is additional support at 2,025-2,000 and the 200-day moving average on a close below 2,040. Thursday’s bottom touched 2,045, and the higher low on Friday along with the close above the 100-day moving average were slightly bullish signs. Resistance is at 2,070-2,075 and the 50-day moving average, followed by 2,090-2,100.
The Nasdaq climbed 28 points, or 0.6%, to finish at 4,891. Tech was strong throughout the session following a dip to 4,859. Near-term support at 4,850 and the 50-day moving average held strong. Backup support is at 4,800-4,775 and the 100-day moving average. A close above 4,900-4,925 could lead to another run at 4,975-5,000+.
The Russell 2000 advanced 8 points, or 0.7%, to end at 1,240. The small-caps traded down to 1,229 after the open, but support at 1,230-1,225 held. The 50-day moving average is holding by 2%, with 3% risk to 1,200 and the 100-day moving average on pullbacks. The bulls recovered resistance at 1,240, but additional hurdles remain at 1,250-1,260.
The S&P 500 Volatility Index ($VIX, 15.07, down 0.73) “flash crashed” again to a low of 14.19 before testing a high of 15.83. Thursday’s close was 15.80. The VIX made a similar move, or flash crash, ahead of the Fed meeting mid-month following a test to 13.38. The indices went on to challenge all-time highs afterwards.
Friday’s action in the VIX signaled that the same type of rebound could come on closes below 15. Last week’s high reached 17.17, and I talked about risk to 17.50 and possibly 20. I wouldn’t get aggressively short until 20 trips, so let’s not flinch or go short until then. The VIX has held the 17.50 level through all of March.
The aforementioned charts show violation of the bottom longer-term uptrend lines (purple circles) for the Dow and S&P 500, and these are bearish signs. However, I often mention that support can sometimes get “stretched,” so I’m not ready to bail on the bulls despite the nastiness in those two charts. This doesn’t mean there won’t be further weakness, but the Nasdaq held its bottom uptrend line for the most part, and the Russell easily held its bottom uptrend line from mid-October (2014).
The upper uptrend (blue) lines coming into 2015 were violated during January’s pullback, with the Dow, S&P 500 and the Russell 2000 testing their 200-day moving averages. The Nasdaq, however, held its 100-day moving average for the most part.
The Nasdaq’s 100-day moving average is currently at 4,776, with “stretch” to 4,750. I was watching last week to see if these levels would come into play, as I thought it could create a great buying opportunity. Last Thursday’s low on the Nasdaq reached 4,825. In other words, there was another 1% pullback built into my lows, but a close above 4,900 may have signaled that a temporary bottom is in.
The best way to play this action, if there is a rebound this week and into April, is by watching the PowerShares QQQ Trust (QQQ, $105.52, up $0.42).
I wanted to see the QQQs test $104-$103.50 last week, and Thursday’s low touched $104.24. This was pretty close to a cigar for the bears and may have also signaled that some selling pressure could be subsiding. The bulls need to get continued closes above $106 on the QQQ to re-establish a run at $108 and possibly $110.
I have been targeting the QQQ April 108 calls (QQQ150417C00108000, $0.45, up $0.05) or the QQQ May 110 calls (QQQ150515C00110000, $0.55, up $0.05) to play a rebound, “dead cat bounce” or the start of a new trend.
I could also target the QQQ May 100 puts (QQQ150515P00100000, $0.95, down $0.05) if the QQQs trade to or close below $103.50-$103.
The Dow Jones Transportation Average ($TRAN, 8,700, up 22) provided a slightly bullish sign despite the test to the 200-day moving average, as this level held to end last week. As you can see from the chart below, this level was breached in December (2014). A close below 8,600 would be bearish, as it could lead to 8,500-8,400 on stretch. A rebound to 8,900 is possible over the near-term, but the bulls will need to recover the 50- and 100-day moving averages, or 8,975-9,000, to reverse the trend.
The Financial Select SPDR (XLF, $23.93, down $0.03) was punished after testing $24.78 last Monday. The back-to-back closes below $24 and the 50- and 100-day moving averages to end the week were upsetting. This was a slightly bearish development that could lead to $23.50 and the 200-day moving average. This level was tested in late January and at the start of February. A recovery of $24-$24.25 this week would be a bullish signal.
The biotech sector was also a hot topic of discussion, as Wall Street worried over its bubblicious valuations. The damage was brutal, and the headlines were bearish, but guess what? The 50-day moving average is holding on the iShares Biotech Index (IBB, $347.46, up $6.65), along with its lower uptrend line.
The index has been on fire — up roughly 15% so far this year — despite last week’s pullback. The panic selling was much needed, but there is still risk to $320 and the 100-day moving average on a close below $330. A move back above $360 and the uptrend line would be bullish.
The Monday/Friday closes last week on the Dow were mixed, as they were for much of March. The bears won last Monday’s session to snap a three-skid losing streak. The bulls won their second-straight Friday session following two previous Friday losses earlier this month.
For new subscribers, mixed Monday/Friday closes suggest trading ranges. With the indices at their lows for the month, it’s exactly what the market is in, with the bottom of these ranges now in play.
Up Monday/Friday closes signal money is moving into the market and higher prices are possible. Down Monday/Friday closes usually indicate money is moving out of the market with downside bias. The current Dow Monday/Friday closes are giving a “neutral” reading. This week’s closes could offer quick clues on how April might play out.
Another indicator I watch from time to time is the AAII Investor Sentiment Survey. This nifty indicator gives you a feel for the biases of individual investors who are either bullish, bearish or neutral on the stock market over the next six months. The survey is taken weekly, and bullish sentiment is currently under 40% at 38.4%.
History shows that when Wall Street and Main Street have been this bearish in the past, the S&P 500 has risen 98% of the time. Even more mind-blowing is that the average gain is more than 25% on the index. This would equate to the S&P trading past 2,500, but don’t tell this to the suits and ties.
As far as our open positions, we are in good shape heading into April and first-quarter earnings season. While some positions are down, I still like all of the trades. The ones on that are on “hold” still need work and could carry a loss at some point, but we will manage them along the way.
I wanted to make sure the portfolio was light going into April, and it remains to be seen if the next batch of trades will be bullish or bearish.
Trading ranges can be emotional, but, for the most part, no major damage has been done. Everyone has been betting against the bulls, but April is historically a strong month for the Dow.
Each Monday, I have a meeting with my team, and last week’s was percipient, as they asked me about my thoughts on the market and where I see things heading. I knew that if they were asking, my subscribers must be asking, which is the reason I have been doing so much extra homework. You have been great while cashing out winners and staying patient, but keep the questions coming.
I told my team that a powerful move was coming into first-quarter earnings season, and last week I warned that the back-end of March is historically weak. This is why I stayed light on the portfolio.
The other important thing to remember is this: Do not be nervous or scared if and when the market does fall 10%-20% at some point this year. Shorting stocks on the downside, or, more likely, using put options, is the same as playing a market that is rocking higher.
I’ll give you the specific trades to make, but it is imperative that you understand how shorting the market can be profitable and get comfortable with the idea of making money on the downside if and when the kitchen sink falls out. However, the technical signals I follow week in and week out, year after year, haven’t given me the message to go short the market for a very long time.
I have planned for further weakness and choppiness right into the end of March and I have said that a rebound could soon develop afterwards. There’s the possibility that the sweet spot that I have also planned for may have come and gone, but I’m hoping it just got delayed for a week.
What got lost in last week’s noise was the fact that the Russell 2000 triggered an all-time high north of 1,268 just a week ago. That was a short sweet spot but, again, I hope it was a tease.
I often say that the bulls take the stairs higher, while the bears tend to use the elevator down. The action in March has been a perfect example of how that volatility has really played out.
Just know that I’m still calm, and I want you to be, too. Forewarned is forearmed, and earnings season starts next week, so this week could be choppy until the real bullets start to fly. However, it should also provide further clues on how April will shake out. Sector rotation can be a hard thing to see at times, but it could also sum up some of March’s madness.
From desk to press, futures look like this: Dow (+108); S&P 500 (+10); Nasdaq 100 (+26).
Momentum Stocks Weekly Play List
All prices given in this update are current as of March 27, 2015
The Momentum Stocks Weekly Closed Trade Track Record for 2015 is 9-0, for a 100% win rate (126-17, or 88% win rate, overall since the start of 2011).
View the entire list of open and closed trades by clicking here.
Limelight Networks (LLNW, $3.48, up $0.04)
Original Entry Price: $3.91 (3/18/15)
Lowered Price from Selling Options: N/A
Exit Target: $7
Return: -11%
Stop Target: $2
Action: Near-term support is at $3.40. A close below this level could lead to $3.20 and a test of the 50-day moving average. Resistance is at $3.60 followed by $3.70-$3.80. The major moving averages are still trending higher.
This is one of my top-three takeover targets for 2015 – along with Flextronics (FLEX), BlackBerry (BBRY), and a few others I’m constantly updating on a mental list.
The Wall Street grapevine is often made public, and LLNW received a takeover target north of $6 last year. Management turned down the proposal.
If shares don’t reach a six-pack this year, management at LLNW will have some explaining to do to shareholders. As a side note, BBRY has been linked to numerous takeover possibilities from the Wall Street media but not much has been said about FLEX making a sweet partner for Apple, Samsung, or Google.
Rigel Pharmaceuticals (RIGL, $3.34, up $0.06)
Original Entry Price: $3.72 (3/10/15)
Lowered Price from Selling Options: N/A
Exit Target: $6
Return: -10%
Stop Target: $2
Action: Support at $3.20 is holding with risk to a drop of $3.00-$2.80 and the 50-day moving average. The golden cross that formed earlier this month is still intact. The 100-day moving average is also on the verge of crossing over a descending 200-day moving average and would form an additional golden cross. Resistance is at $3.60 and a close above this level could lead to $3.80-$4.00. I will be watching this development for possibly adding covered calls to this trade.
Despite the weakness in the biotech sector, shares have held up well. You can read my full write-up on RIGL in the March 16 Issue.
Discovery Laboratories (DSCO, $1.17, up $0.02)
Original Entry Price: $1.68 (3/5/15)
Lowered Price from Selling Options: N/A
Exit Target: $3
Return: -30%
Stop Target: $1
Action: The company’s decision to offer its drug, Surfaxin, to a partnership was seen as a negative headline. However, a partnership would enhance shareholder value and give Discovery a much needed cash infusion. If no partnership or collaboration can be reached, the commercialization of the drug could be in jeopardy.
The company spent $19 million on Surfaxin last year, and that is a drop in the bucket for the bigger wigs of the industry. Discovery wants to build out its pipeline to cure respiratory distress syndrome in premature babies. The market potential is huge as are the risks for this trade. At $1-plus, I like the risk/reward picture the trade offers as I have used covered calls to lessen some damage while taking profits in other DSCO positions.
Shares traded to a low of $1.14 on Thursday and Friday. While this could mean a short-term double-bottom is in, there is still risk to $1.10-$1.00. Continued closes below $1.20 could lead to a retest to $1.00. Resistance is at $1.20-$1.25.
Dot Hill Systems (HILL, $5.28, down $0.08)
Original Entry Price: $4.25 (3/4/15)
Lowered Price from Selling Options: N/A
Exit Target: $5-$7
Return: 24%
Stop Target: Raise from $5 to $5.10 (Stop Limit)
Action: Raise the Stop Limit from $5 to $5.10.
Shares traded to a high of $5.46 to mid-week before a back test to $5.18 on Friday. Near-term support is at $5.
Flextronics (FLEX, $12.38, up $0.04)
Original Entry Price: $12.24 (3/2/15)
Lowered Price from Selling Options: N/A
Exit Target: $15.00
Return: 1%
Stop Target: $9.00
FLEX July 13 calls (FLEX150717C00013000, $0.45, flat)
Entry Price: $0.50 (3/2/2015)
Exit Target: $1.00
Return: -10%
Stop Target: None
Action: Shares traded to a fresh 52-week of $12.61 and are testing 10-year highs. The semiconductor stocks were taken to the woodshed last week but FLEX made a nice rebound off Thursday’s low of $12.12.
Short-term resistance is at $12.50. A close above this level could lead to a run at $13.00-$14.00. Support is at $12.00, followed by $11.75 and the 50-day moving average.
Longer-term, shares could test $20.00, which is why I like the position at current levels despite the recent volatility.
You can read my thoughts on FLEX in the Trade Alert from March 2.
Bank of America (BAC, $15.31, down $0.11)
Original Entry Price: $17.63 (12/19/14)
Lowered Price from selling options: $17.28
Exit Target: $20+
Return: -11%
Stop Target: $15
Current Dividend Yield: 1.2%
Action: The closes below $15.75 were bearish to start the week and lead to lows of $15.26 and $15.27 to end the week. Closes below $15.25 could lead to $15 and possibly the $14s.
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, $1.17, up $0.02)
Wrote a covered call with 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: Lower from $2 to $1.30-$1.25
Return: -3%
Stop Target: None
Action: Lower the Exit Target to $1.25-$1.30 for the position purchased on Nov. 11, 2014, only. It is not a limit order to close the trade but it could become one.
While I like the longer-term prospects for Discovery, I want to reduce my exposure in the stock in case there is a curveball.
The DSCO April options expire in less than three weeks.
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, $13.85, up $0.05)
Original Entry Price: $8 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $20.00
Return: 73%
Stop Target: $12.75 (Stop Limit)
Action: There has been no analyst coverage of RAVE since the company changed its name from Pizza Inn. While there may have been some coverage of the stock when the ticker symbol was PZZI, Wall Street simply missed the stock’s run from $4 to a mid-March high of $16.20.
There have been two brokerage “downgrades” on the stock this month. Shares traded to a low of $13.67 on Thursday followed by $13.68 on Friday. The downgrades have conveniently pushed shares near their 50-day moving average. Where were these knuckleheads when shares were below $5 two years ago?
While I would like to think a “double-bottom” has formed, there is risk to $13.50-$13 on a close below $13.65. A move back above $15 would suggest the “dip” was bought and where subscribers can feel comfortable adding new positions.
I could also initiate another position for the portfolio on a test to $13.
For new subscribers, you can read my February earnings update on RAVE and why this stock is a multi-year hold.
Huttig Building Products (HBP, $2.86, flat)
Original Entry Price: $4 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $6+
Return: -29%
Stop Target: $2 (Stop Limit)
Action: Shares traded down to $2.86-$2.85 throughout the week. The high reached $2.99 on Friday. A close below $2.85-$2.80 will likely get the 52-week low of $2.70 in play. Resistance is at $3.00-$3.10 and it’s where I would like to see shares end the first week of April. At some point, the homebuilders are going to have to build as housing inventory is low.
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