In This Issue:
Dear Momentum Stocks Weekly 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 it 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 Stocks Weekly Play List
All prices given in this update are current as of April 17, 2015
The Momentum Stocks Weekly Closed Trade Track Record for 2015 is 11-0, for a 100% win rate (128-17, or 88% win rate, overall since the start of 2011).
View the entire list of open and closed trades by clicking here.
TiVo (TIVO, $10.92, down $0.22)
Original Entry Price: $11 (4/7/15)
Lowered Price from Selling Options: None
Exit Target: $12.00-$13.00
Return: -1%
Stop Target: $10.00
Action: Shares have been in a tight range following the move above the 50-day moving average earlier this month. Friday’s backtest to $10.80 stretched this level but held into the close. There is additional risk to $10.50 on a close below $10.75. Resistance is at $11.25 and the 100-day moving average.
Limelight Networks (LLNW, $3.37, down $0.08)
Original Entry Price: $3.91 (3/18/15)
Lowered Price from Selling Options: N/A
Exit Target: $7.00
Return: -14%
Stop Target: $2.00
Action: Support at $3.40 was cracked into Friday’s close. This opened the door for additional weakness to $3.20-$3.10 and the 100-day moving average. Resistance is at $3.40-$3.45 and the 50-day moving average.
Rigel Pharmaceuticals (RIGL, $4.09, down $0.08)
Original Entry Price: $3.72 (3/10/15)
Lowered Price from Selling Options: N/A
Exit Target: $6.00
Return: 10%
Stop Target: $3.80 (Stop Limit)
Action: Set a Stop Limit at $3.80.
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 this levels would be bullish for a possible run to $4.50-$5.00. Support is at $3.80-$3.60 on a close below $4.00.
Although this is intended to be a longer-term holding, I have set a Stop Limit to protect profits and reduce the portfolio’s exposure to open positions. A close below $3.80 could lead to a test to $3.40 and the 50-day moving average.
You can read my full write-up on RIGL in the March 16 Issue. My near-term Price Target is $5.00-$6.00 with a shot at double-digits by year-end.
Discovery Laboratories (DSCO, $1.12, down $0.26)
Original Entry Price: $1.68 (3/5/15)
Lowered Price from Selling Options: N/A
Exit Target: $3.00
Return: -33%
Stop Target: Lower from $1.00 to $0.50.
Action: Lower the Stop Target from $1.00 to 50 cents. The 52-week low is at $0.99.
Shares tested a high of $1.48 to start the week and were holding the 50- and100-day moving averages before Friday’s 19% pounding. Shares closed below support at $1.20 and tested $1.09. Backup support is at $1.10-$1.00
Friday’s headline news was good and bad as the company suspended its efforts in bringing Surfaxin to market. The decision to cease the commercialization of the drug wasn’t due to safety or efficacy concerns. The company simply decided to preserve capital and to focus their attention in bringing another drug in their pipeline, Aerosurf, to market.
I could write the DSCO October 1 calls (DSCO151016C00001000) to reduce the cost of the trade but I don’t want to reduce our upside exposure on a possible rebound to $1.50-$2.00. The downside risk of the trade is $0, or losing another $1 per share, but the upside could be way more than $1.00. The company has enough cash to get into 2016. By then, phase 3 trials should begin for Aerosurf, and maybe a partnership will be formed if the company needs a cash infusion.
Dot Hill Systems (HILL, $6.12, down $0.26)
Original Entry Price: $4.25 (3/4/15)
Lowered Price from Selling Options: N/A
Exit Target: $5.00-$7.00
Return: 44%
Stop Target: Raise from $5.50 to $5.80 (Stop Limit).
Action: Raise the Stop Limit from $5.50 to $5.80.
Monday’s pullback reached $5.99 before shares zoomed to 52-week highs throughout the week. Thursday’s peak reached $6.53. Near-term support is at $6.00, followed by $5.75. Friday’s low checked-in at $5.82 and I have set a Stop Limit just below this level to protect profits.
If the Stop Limit of $5.80 triggers, the return will be 36%.
Bank of America (BAC, $15.56, down $0.23)
Original Entry Price: $17.63 (12/19/14)
Lowered Price from selling options: $17.28
Exit Target: $20+
Return: -10%
Stop Target: $15.00
Current Dividend Yield: 1.3%
Action: Shares made a run at resistance at $16.00 and the 50-day moving average before Friday’s pullback.
Earlier in the week, the company 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. BAC would have reported $0.36 a share, but the company wrote-off $0.09 in charges, or $1.5 billion, for annual retirement costs and net interest income adjustments.
Morgan Stanley (MS) said last week that Bank of America shares are “cheap” and kept its “Overweight” rating on the stock. They believe shares are worth $21.00.
The earnings miss was a bummer as it represented the fourth time in the past five quarters that the company has come up short.
I may write another call option this week to lower the cost basis. If I do, I will send out a Trade Alert.
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, $1.12, down $0.26)
Original Entry Price: $1.60 (11/11/14)
Lowered Price from selling options: $1.20
Exit Target: Lower from $1.50 to $1.25 (Limit Order).
Return: -7%
Stop Target: None
Action: Lower the exit target from $1.50 to $1.25 and make it a Limit Order. I was looking to lock-in profits at $1.50 last week but Monday’s run to $1.48 came up two pennies short.
The DSCO April 2 options expired last Friday so we are free to write another call option. However, since I already have another DSCO trade open, I want to limit my exposure, which is why I have lowered the Exit Target to $1.25 and made it a Limit Order.
DCSO booked the portfolio profits three times in 2014 for gains of 3%, 9%, and 8%, respectively. By writing covered calls against the stock, I have limited losses as shares were at $2.42 in January 2014. A rebound to $1.25 this week gets us out of this position for a slight profit.
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.
Rave Restaurant Group (RAVE, $13.50, down $0.31)
Original Entry Price: $8 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $20.00
Return: 69%
Stop Target: $12.60 (Stop Limit)
Action: Shares traded above $14.00 throughout the week before Friday’s pullback to the 50-day moving average. There is additional risk to $13.25-$13.00 on a close below this level.
For new subscribers, you can read my February earnings update on RAVE and why this stock is a multi-year hold. The next earnings report is due out in May. Options are still unavailable to trade on the stock.
Huttig Building Products (HBP, $3.60, up $0.32)
Original Entry Price: $4 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $6+
Return: -10%
Stop Target: $2.00 (Stop Limit)
Action: Shares are finally starting to show some life, and I said continued closes above $3.00 would be bullish. Monday’s run to $3.28 and close at $3.00 was a great clue the major moving averages would come into play.
Friday’s high reached $3.70 and cleared the 200-day moving average. Volume was 4x average daily volume and could signal a run to $4+ could be in the works. Fresh support is at $3.50-$3.40.
Rambus (RMBS, $12.91, down $0.09)
Original Entry Price: $17.83 (11/14/2011)
Lowered Price from Selling Options: $16.38
Exit Target: $15+
Return: -21%
Stop Target: $9.00
Action: There is continued risk to $12.50 and the 50-day moving average. However, with earnings due out after today’s close, there is additional downside risk to $12.00, or worse on a miss. There is possible 10% upside potential to $13.75-$14.00 on a better-than-expected quarter. The 52-week high is $14.82.
Wall Street is expecting Rambus to earn $0.06 a share on revenue just shy of $73 million. The company signed a number of partnerships over the past three months so I’m expecting an earnings beat. I also believe the company could be a takeover target based on its intellectual properties.
The company has missed estimates in two of the past four quarters, including a penny miss last time out. This makes me a little uneasy but hopefully this is the quarter they make the turn and also provide upside guidance for the rest of 2015.
On a technical basis, a “mini” golden cross formed in February with the 50-day moving average crossing above the 100-day moving average. Another golden cross developed earlier this month with the 50-day moving average crossing above the 200-day moving average.
We previously sold to open (wrote) the RMBS December 20 calls for $1.45 on Nov. 14, 2011 to reduce the cost basis to $16.38.
Trades on Hold (6): 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.
Special note: Some of these positions below will likely be sold this year for tax losses. While there is a chance a few of these trades can come back (RMBS is a recent example), I have decided to get the process going early. All of these stocks trade options so I will be writing covered calls against them, so look for those recommendations soon. I am not suggesting new positions in any of the possible upcoming trades but some of them could do well, depending on which companies survive. By writing options against the positions, I can still collect some premium while lowering the cost basis.
AKS Steel Holding (AKS, May 2011), DryShips (DRYS, January 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