In This Issue:
Dear Momentum Options Subscriber,
I often say that the bulls like to take the stairs higher, while the bears prefer to take the elevator down. Last week’s action stayed bullish throughout the week, with the bulls building solid gains through mid-April.
The higher highs and lower lows propelled the major indices toward and past the top of their trading ranges from February. However, Friday’s 1.5% overall pullback kept the market in the ongoing three-month trading range.
The start of this week’s action and the heart of first-quarter earnings season could add fuel to the volatility fire as we wind down the last full week of April.
The Dow tanked 279 points, or 1.5%, to finish at 17,826 on Friday. The blue-chips held the 17,800 level throughout much of the session before a late-day dip to 17,748. The close above the 100-day moving average was slightly bullish, while the close below the 50-day moving average was slightly bearish. There is additional help at the 17,600, but a drop below this level could lead to 17,400-17,350 and a test of the 200-day moving average. Near-term resistance is at 17,900-18,000, which are the levels the bulls need to clear to start the week.
The S&P 500 sank nearly 24 points, or 1.1%, to end at 2,081. The index opened at 2,102 but avalanched to a low of 2,072. I warned of backup support at 2,075-2,070 being tested on another dip below 2,090, but these levels held into the close. The 50-day moving average failed to hold on Friday, but the 100-day moving average held. A close below 2,065-2,060 would be bearish for a test to 2,040, followed by 2,025-2,020 and the 200-day moving average. Resistance is at 2,090-2,100.
The Nasdaq tumbled 76 points, or 1.5%, to settle at 4,931. Tech opened at 4,966, and the gap below 5,000 led to an immediate test of the 50-day moving average. The bears pushed a low of 4,912, with backup support at 4,900 holding. There is additional risk to 4,850-4,800 and the 100-day moving average on continued weakness, and a close below the latter would be bearish. Short-term resistance is at 4,975-5,000.
The Russell 2000 stumbled 21 points, or 1.7%, to close at 1,251. The small-caps opened 8 points lower at 1,264 and failed to hold the 1,260 level. This was a good clue that 1,250 and the 50-day moving average might come into play. The bulls have wiggle room to 1,240-1,239, and Friday’s low kissed 1,248. A close below the aforementioned levels would be a bearish development that could lead to 1,225-1,210 and the 100-day moving average. Resistance is at 1,260-1,265.
The S&P 500 Volatility Index ($VIX, 13.89, up 1.29) zoomed 10% and closed back above the 13.50 level. The bears pushed a high of 15.02 but failed to hold this level into the close. The close below 14 was slightly bullish, and I have been mentioning all month long that the VIX needs to close below 12.50 to confirm higher highs.
The suits and ties continued to ignore the VIX and have said for years that it is a broken index. They have been so wrong, and Thursday’s clue was spot on that Friday might be troublesome, as the VIX traded to 12.50 on a dime before closing at 12.60. This represented the lowest the VIX had traded all year. While the odds are high that volatility could clear 15 again this month, I have repeatedly said not to flinch until the VIX clears and closes above the 17.50 level. If the bears reclaim this level, it would likely lead to a test to 20-22.
I was hoping that the indices would finally break out and hold the top of their trading ranges, but Friday’s reversal can be blamed on Greece worries, as well as some trading-rule changes in China.
Greece has little meaning in the overall eurozone, and we know the country is having a hard time repaying its debt. These worries have popped up every three to six months for the past three years, and Friday was another hiccup in the bulls’ run at record highs.
The Greece story will likely gain traction this week, but the bigger worry will be with this Friday’s outcome. Eurozone officials are meeting to reach yet another deal for Greek debt repayments ahead of this coming weekend. While the risk of default is there, I expect another deal to be reached.
It might hurt the market over the near term, but having Greece out of the euro would be a good longer-term move and could strengthen the currency. However, that time is not now, as most know-it-alls believe it could lead to a global selloff, but one that would be healthy in the longer term.
Chinese ETFs (exchange-traded funds) took a hit on Friday after the country tightened its trading rules on margin selling. The news came after China’s stock market closed but ahead of Wall Street’s open. The new requirements made it easier to short sell, and that spooked fears of a pullback, as China’s market has been on a roll over the past year.
Despite Friday’s drubbing, earnings have come in above Wall Street’s expectations. Nearly 60 S&P 500 companies have reported their numbers, with roughly 75% of them topping forecasts. However, I like to look at revenues instead of earnings beats, as growing revenues are a better sign than some of the trickery companies use to meet earnings expectations. On this front, only 45% of the companies have topped estimates, and this is down from nearly a 60% over the prior four quarters.
The financial stocks reported mixed results last week, but the numbers were solid overall. To start, JPMorgan Chase (JPM, $62.84, down $0.97) reported a profit of $1.45 a share and beat the suit-and-ties’ forecast of $1.40. Revenue of $24.8 billion also topped expectations for $24.5 billion. Shares reached a fresh 52-week peak of $64.48 mid-week.
Goldman Sachs (GS, $197.35, down $2.86) cleared $200 to reach a fresh 52-week high of $202.40 following its blowout earnings announcement. “Golden Slacks” reported its best quarter in five years after profits came in at $5.94 a share, or $1.68 ahead of analysts’ expectations for $4.26 a share. Revenue of $10.62 billion easily topped estimates for $9.35 billion. The company also increased its quarterly dividend to $0.65 a share, up from $0.60. An analyst tried to be a hero by downgrading shares late in the week, but they obviously missed the rocket ride off of the 52-week low of $153 and change.
Wells Fargo (WFC, $54.05, down $0.76) reported a profit of $1.04 a share versus estimates for $1.10 a share. Revenue for the quarter came in at $21.3 billion versus estimates for $21.2 billion. Analysts fretted over the company’s margins, but shares are still within striking distance of the 52-week high of $56.29 set in late March.
And, finally, Bank of America (BAC, $15.56, down $0.23) reported a profit of $0.27 a share on revenue of $21.2 billion. Wall Street was expecting $0.29 a share on revenue of $21.5 billion.
The Financial Select SPDR (XLF, $24.13, down $0.33) was cruising before Friday’s 1% pullback. The close below the 50-day moving average was slightly bearish, but it has crossed back above the 100-day moving average, forming a golden cross. This is a bullish sign as long as near-term support at $24.00-$23.80 holds.
Tech and blue-chip heavy hitters step up to the earnings plate this week. The mix of sectors should provide a clearer view of what the numbers will really look like for the first-quarter across the board.
The Monday/Friday closes quickly turned bearish, as the Dow closed lower on both days last week. Another lower Monday close today would be a bearish development, while a positive close would be slightly bullish sign and offer hope of a rebound.
I covered the nearly three-month trading ranges last week with more detailed charts, and new subscribers should review them to get a great snapshot of the overall chaos. While I was hoping for smooth sailing once the small-caps and tech cleared the top of their ranges last week, Friday’s pullback keeps them all in play, with the possibility of lower lows and the bottoms being tested.
The downside targets I gave at the beginning of the month were:
- Dow: 17,600
- S&P: 2,040
- Nasdaq: 4,800
- Russell: 1,200
The prior week and April lows reached:
- Dow: 17,646-17,585
- S&P: 2,056-2,048
- Nasdaq: 4,852-4,844
- Russell: 1,249-1,239
The March lows are as follows:
- Dow: 17,579
- S&P: 2,039
- Nasdaq: 4,842
- Russell: 1,206
If the March low levels are triggered or breached, it would probably be a safe bet to use index put options to play a test to lower levels and the 200-day moving averages.
This would suggest another 2%-3% in downside risk from current levels, which would have the bottom of the trading ranges back in play. This will either represent another buying opportunity or the chance to use short-term put options.
I have done well buying at the bottom of the trading ranges since early February. I’m hoping that we get another opportunity to do so again heading into May and June. The summer doldrums might take shape afterwards, which is when I expect a more serious pullback might come. The key word in that last sentence is “might.”
Here are the major cues I will be watching this week for market direction:
- The Monday/Friday closes on the Dow.
- The action in the VIX. Stay cool until there is a close above 15. No flinching until 17.50 trips.
- The action in the indices to see if the April lows hold. The second lines of defense are the March lows. If triggered, I could use near-term index options for quick trades on panic-selling.
- The action in the financial and tech stocks.
I have not traded too many put options this year, and I haven’t recommended short positions, but I will have no problem doing so when all of my technical indicators turn bearish. However, I’m hoping that if there is further weakness the March lows will hold and it will represent another buying opportunity.
This means that we will likely have to wait for the dust to settle this week and maybe into next week while protecting profits. Either way, our next batch of trades into May, June, July and August should make us some nice returns once a clear trend is established.
I have said for more than a year now that the Nasdaq hasn’t come this far not to record all-time highs. It is also important to remember that the Russell 2000 just hit another all-time high last Wednesday. The lack of follow-through on Friday was disappointing, but one day doesn’t make or break a trend.
From desk to press, futures look like this: Dow (+85); S&P 500 (+9); Nasdaq 100 (+14).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 40-11-1 (77%). 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.
PowerShares QQQ Trust (QQQ, $106.01, down $0.68)
QQQ May 110 calls (QQQ150515C00110000, $0.25, down $0.35)
Entry Price: $0.60 (4/10/2015)
Exit Target: $1.20
Return: -58%
Stop Target: None
Action: Support at $106 held by a penny into Friday’s close. The close below the 50-day moving average was slightly bearish, but there is backup support at $105-$104.75 and the 100-day moving average. I like the trade as long as $104 holds, but a close below this level could force me out. A move back above $106.75-$107 this week would be bullish.
Jabil Circuit (JBL, $23.07, down $0.52)
JBL May 24 calls (JBL150515C00024000, $0.25, down $0.25)
Entry Price: $0.60 (4/10/2015)
Exit Target: $1.20
Return: -58%
Stop Target: None
Action: Near-term support at $23.50 was cracked on Friday’s pullback to $23.01. Backup support at $23 held by a penny, but there is further risk to $22.75 and the 50-day moving average on continued weakness. Resistance is at $23.50-$24.
Rigel Pharmaceuticals (RIGL, $4.09, down $0.08)
RIGL June 5 calls (RIGL150619C00005000, $0.40, flat)
Entry Price: $0.25 (3/31/2015)
Exit Target: $0.75-$1.00
Return: 60%
Stop Target: None
Action: Shares traded to a fresh 52-week high of $4.25 Friday morning before a pullback to $4.04.
Resistance is at $4.20-$4.25. Continued closes above these levels would be bullish for a possible run to $4.50-$5. Support is at $3.80-$3.60 on a close below $4.
Trades on Hold — other 2015 Portfolio Open positions (3): 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.
Marvell Technology (MRVL) May 18 calls (from February 2015) — Shares made a nice rebound above their 100-day moving average late in the week before Friday’s pullback to $15. There is additional risk to the 200-day moving average again on continued weakness. This is a remaining trade from February that continues to tease. The sector could see heated M&A activity in the coming months, and MRVL tends to move on takeover chatter. I like the trade as long as $14.25-$14 holds, but a close below the latter could force me to exit the position — Continue to hold.
BlackBerry (BBRY) June 13 calls (from March 2015) — Shares made a run past $10 last week to $10.14 before closing just below this level. The 100- and 200-day moving averages are a penny apart and are trying to stabilize above $10. A move above $10.25 could lead to a run at $11 on short-covering. This is a speculation trade from early March on BBRY receiving a takeover offer of $14 or better by mid-June — Continue to hold.
Cypress Semiconductor (CY) June 16 calls (from March 2015) — The close below $14 and test to $13 last week was disappointing, but the 100-day moving average is still in a rising trend. Earnings are due out next Thursday, April 30. I would like to hold the position open into the event. This will be the catalyst that will make or break the trade going into the month of May, which starts next Friday — Continue to hold.
Trade on!
Rick Rouse
Editor and Chief Options Strategist
Momentum Options