9:00am (EST) continued…
The Dow added 16 points, or 0.1%, to close at 15,755 on Friday. The blue-chips started the week off with a fight and held positive territory for much of the session following a dip to 16,015 after the open. The high checked-in at 16,058 but the 5-point win was unimpressive as it would be the peak for the week. Tuesday’s test to 15,969 held the 20-day MA but Wednesday’s drop to 15,827 didn’t. Support at 15,800 held but we have been mentioning if broken could lead to 15,600. Thursday’s low reached 15,703 with a close at 15,739 before Friday’s slight rebound to a high of 15,792. The 50-day MA is at 15,654 and will provide a buffer before 15,600 on further weakness while a close back above 15,800 and then 16,000 would be a nice-setup for a yearend rally. For the week, the Dow fell 265 points, or 1.7%, after starting at 16,020. For the year, the blue-chips are up 20.2%.
The S&P 500 slipped a fifth of a point, or 0.01%, to settle at 1,775. The S&P 500 needed to clear 1,810 to start the week but the bulls couldn’t hold the run to 1,811. The S&P did set a new closing high at 1,808.37 but it was all downhill from there. Tuesday’s dip to 1,801 held the 1,800 level but we mentioned a 25-point swing could be setting up. Wednesday’s low reached 1,780 and support held at 1,775 before Thursday’s dip to 1,772 and finish at 1,775.50. Friday’s high reached 1,780 before the flat finish. A close below 1,775 will get 1,750 and the 50-day MA in play while a break back above 1,785 to start the week would be bullish. The 20-day MA is at 1,795. The S&P 500 came into Monday’s session at 1,805 and was down 30 points, or 1.7%, for the week. Year-to-date, the index has advanced 24.5%.
The Nasdaq advanced nearly 3 points, or 0.1%, to finish at 4,000.98. Tech cleared fresh 52-week peaks after trading up to 4,081 on Monday and we mentioned our fluff target of 4,200 was just 3% away. We also warned support at 4,000 was just 2% away as we wanted to see 4,075 hold into the close. Tuesday’s high reached 4,074 and we knew when 4,075 didn’t trip there was going to be a back test. The index sank below 4,000 to 3,998 on Wednesday before closing at 4,003. The close below the 20-day MA opened the door for a test to 3,950-3,900 but Thursday’s low only reached 3,993. The close at 3,998 worried Wall Street but we said Friday should be a bounce back day. We would have liked to have seen a close above 4,025 after the index reached 4,017 but the bulls fell short. The close above 4,000 was slightly bullish but 4,010 and a finish above the 20-day MA would have been better. The Nasdaq began the week at 4,062 and declined 62 points, or 1.5%, by Friday’s close. For 2013, Tech has gained 32.5%.
The Russell 2000 popped 4 points higher, or 0.3%, to end at 1,107 on Friday. The small-caps needed to clear 1,135 to start the week while holding 1,125 and traded up to 1,134 on Monday’s open. The opening pop and drop reached a low of 1,126 and we have been mentioning a close below 1,125 would lead to a back test to 1,110-1,100. Tuesday’s high reached 1,131 but the close at 1,119 was the clue lower prices would be in store. Wednesday’s low checked-in at 1,099.74 with a close at 1,101.50. Thursday’s low reached 1,099.67 but the higher close was our clue the selling pressure might be over as we were calling for a Friday rebound. Friday’s high reached 1,1109.51 and we wanted to see a close above 1,110. If the bulls can clear this on Monday, the small-caps could have a good week and make a run at 1,125-1,135. Another test and close below 1,100 will likely lead to a test down to 1,075. The Russell 2000 was at 1,131 before Monday’s open and gave back 24 points, or 2.2%, for the week. YTD, the small-caps are higher by 30.3%.
The S&P 500 Volatility Index ($VIX, 15.76, up 0.22) came into the week at 13.79 and made an interesting 2% drop into the close after trading just past 14 to 14.07 on Monday. The looked “funny” as we mentioned a close below 13.50 would be bullish. Tuesday’s 3% pop to 13.91 had our guard back up as the peak reached 14.22. We flinched on Wednesday as the index closed at 15.31 and we said the 11% jump was more volatile than the prior week’s close at 15.08. Wednesday’s high reached 15.43 and Thursday’s peak hit 16.09. We have talked about risk up to 17.50 on a close above 15 and although Friday’s high of 15.80 was a lower high than Thursday’s, the VIX still ended higher. A close above 17.50 could lead to a scary ride to 20+. A close back below 13.50 this week would be bullish for the start of a year-end rally.
The bears got their second-straight weekly win and have put the bulls in a December hole. Last week’s win was impressive as the bears cracked several layers of support as continued taper worries weighed on the market.
We mentioned this week’s FOMC meeting could cause Wall Street to book profits and start planning for vacations early as a quarter of them have penciled-in a December taper. Given the steep declines from last week, our game plan is setting up nicely as we said these will be the ones that miss a possible year-end rally.
We have covered why we don’t believe there will be a taper cut this week and we have mentioned this could be Big Ben’s last meeting before Janet Yellen takes over. Bernanke could decide to start a QE pullback but it would be a surprise given his comments of what he wanted to see from the economy.
There will also be a vote this week on Yellen’s confirmation as the next Fed Head after the FOMC meeting. This would also be a great opportunity for Bernanke to step down early and pass the baton to Yellen ahead of his official departure date.
The potential curveball ahead of the FOMC meeting will be the budget deal that was reached between the zombies last week. Although it appears to be a done deal, the Senate still has to vote and there is talk it could be close. There are zombies from both sides that aren’t happy with the Paul Ryan led budget deal and it could be close on officially getting it into law.
The FOMC will be watching these developments and a failed budget agreement could rattle the market since it has already been priced in and one we said would happen. Hopefully, there are no “green eggs and ham” being served on Tuesday’s White House breakfast buffet.
As far as the rest of the week, the Housing sector will be in focus with economic news and a number of companies reporting earnings. New Home Sales, Existing Home Sales and the Housing Market Index will be released throughout the week. More importantly, the Philly Fed Manufacturing and the Kansas Fed Manufacturing reports will also weigh on market direction. Here is a chart of the Home Construction Index:
The market is at a crucial point as additional selling pressure will get the 50-day MA’s and the 100-day MA’s in play. With the VIX spiking past 15, there could be enough volatility for a push to 17.50-20 if the major MA’s are violated. This will be one of the more interesting developments along with the small-caps as they closed a smidge below their uptrend line. To sum things up, the VIX and Russell 2000 should provide the best clues on market direction this week.
Friday is also December option expiration day and Quadruple Witching as all options expire. This is historically a bullish event but with the FOMC meeting and economic news ahead, volatility could get even more elevated.
We have mentioned the January Effect, the possible upcoming Santa rally, and the seasonal patterns that show December is the best month for small-caps and the second best month for the S&P 500. In fact, the Russell 2000 has moved higher 85% of the time over the past 20 years with an average gain of 3.3% in December. The S&P 500 has ended December option week higher in 22 out of the past 28 years.
The Russell 2000 is down 3% for the month so a 3.3% rally from the end of November close would put the small-caps at near 1,150.
Despite the bearish tone last week, the Dow did closer higher on Monday and Friday. The gains weren’t much but a win is a win. If the blue-chips can show some strength on Monday, it could be a good sign but the gains will need to be impressive. If not, there could further selling pressure down to the 100-day MA’s before a possible yearend recovery.
As we head to press, futures are showing a strong open: Dow futures are up 89 points to 15,790 while the S&P 500 futures are higher by 10 points to 1,778. The Nasdaq 100 futures are advancing 17 points to 3,470.
MEMBERS AREA
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 tradesor “Exit Orders” in your brokerage account unless we list one. We will send out a “Profit Alert” or “New Trade” if we want you to close a position OR if a new trade comes out. Otherwise, follow instructions at all times in the 9am and 1pm updates. Also, we will usually give you a heads-up if we think we are going to send an email outside of these time frames. Closed Trades for 2013: 132-74 – the Weekly Wrap is 40-4 for 2013 (84-6 since 2011) and is designed for traders that want to use options with less risk.
Special Notice: We lost 6% and 38% on our 1-day iShares Russell 2000 (IWM, $110.20, up $0.36) and PowerShares QQQ (QQQ, $84.85, down $0.11) trades with Friday’s close.
Vera Bradley (VRA, $22.47, down $0.02)
January 22.50 puts (VRA140118P00022500, $1.10, up $0.05)
Entry Price: $1.20 (12/10/13)
Exit Target: $2.40
Return: -8%
Stop Target: None
Action: Support at $23 is holding but it is thin with risk up to $$24 and the 20-day MA. We are expecting a drop to $21-$20.50 by mid-January.
Ariad Pharmaceuticals (ARIA, $3.98, down $0.07)
January 7 calls (ARIA140118C00007000, $0.15, flat)
Entry Price: $0.45 (12/3/13)
Exit Target: $1.35
Return: -67%
Stop Target: None
Action: On a technical level, there is a gap to fill from $6 to $17. There is risk down to $2, or worse, on negative developments.Shares were recently upgraded by Stifel to a “Buy” rating from “Hold” with a $7 Price Target.
Pulte Group (PHM, $18.03, down $0.03)
January 20 calls (PHM140118C00020000, $0.15, down $0.05)
Entry Price: $0.50 (11/27/13)
Exit Target: $1.00
Return: -70%
Stop Target: None
Action: There is further risk down to $18 and then $17.50. While there could be a near-term test to this level, we still feel as though shares will be north of $20 come mid-January.
Opko Health (OPK, $8.97, down $0.45)
January 11 calls (OPK140118C00011000, $0.30, down $0.10)
Entry Price: $0.65 (11/26/13)
Exit Target: $1.30
Return: -54%
Stop Target: None
Action: Support at $8.50 held but there is further risk to $7.50 on continued weakness. Short-term resistance is at $9.50 and a close above $10 would indicate the short selling is complete.
We have done our own research and we have written about Opko in our Weekly Wrap. We are expecting some good news on the company’s Phase 3 trial results for its cancer drug, Rolipitant, this month.
Galena Biopharma (GALE, $4.14, down $0.05)
January 2.50 calls (GALE140118C00002500, $1.70, down $0.05)
Entry Price: $0.30 (11/11/13)
Exit Target: $0.90 (closed a quarter @ $1 on 11/21/13, closed a quarter @ $1.50 on 12/10/13)
Return: 392%
Stop Target: $1 on remaining half position (Stop Limit)
Action: Support is at $3.75 and we could be forced out on a close below this level. Shares rebounded to clear $4 again following last week’s dip to $3.70. Resistance is at $4.50. We have a stop limit of $1 on the other half of the trade that will likely get triggered if shares fall below $3.50.
Oppenheimer recently initiated coverage of the stock on Tuesday with a Price Target of $6. This is a buck higher than our near-term Price Target of $5. There is little analyst coverage on the Street but the company is starting to get noticed. If shares do reach $6 we will bank nearly a 200% gain.
Other 2013 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 we would not open any new positions. We are still keeping track of the trades and we will record the results, accordingly, when we close them or if the options expire. Click on the 2013Portfolio link in the Members Area to view ALL open/ closed trades.
Millennial Media December 7.50 calls (from October 2013) – HOLD
Peabody Energy December 22 calls (from November 2013)– HOLD
January 23 calls (from November 2013)
Kodiak Oil & Gas December 13 calls (from November 2013) – HOLD
WATCH LIST SECTION
These trades are NOT recommendations. They are trades that we like but have not added to the portfolio as an official recommendation because of market conditions or because we are waiting for better entry prices. We try not to have more than 12-15 open trades at any one time which is why we created a Watch List. We will not list entry prices because these stocks are on the verge of breaking out or they could sell off but these are the trades we are watching as new candidates.
Jabil Circuit (JBL, $19.07, down $0.03)
January 18 puts (JBL140118P00018000, $0.40, flat)
Thoughts: Earnings are due out on Tuesday. We have been bullish on JBL in the past but shares look like they could drop below $18 if earnings come in below expectations.
Oracle (ORCL, $33.23, down $0.37)
December 32 puts (ORCL131221P00032000, $0.30, up $0.05)
January 32 puts (ORCL140118P00032000, $0.60, up $0.05)
Thoughts: Earnings are due out on Wednesday. This is our favorite earnings trade for the week and while we have listed December puts, we will likely use the January puts if take action. Shares could test $30 if Oracle pulls up lame on its earnings numbers.
Carnival (CCL, $35.99, up $0.65)
January 33 puts (CCL140118P00033000, $0.35, down $0.15)
Thoughts: Earnings are due out on Thursday. A close above $36.50 ahead of earnings might be a bullish sign but we feel shares could test the low $30’s if the company offers weak guidance going forward.
SolarCity (SCTY, $51.16, down $1.11)
January 45 puts (SCTY140118P00045000, $1.50, up $0.15)
January 47 puts (weekly) (SCTY140103P00047000, $1.25, up $0.05)
Thoughts: Shares could be headed for a back test to $40 but the options are expensive. We would like to see a test to resistance at double-nickels before possibly going short. However, if $49.95 triggers, we could go short.
Morgan Stanley (MS, $31.09, up $0.61)
January 32 calls (MS140118C00032000, $0.65, up $0.20)
Thoughts: Resistance is at $31.50. Support is at $30. A close below $30 would be bearish.
Exact Sciences (EXAS, $12.14, up $0.30)
January 13 calls (EXAS140118C00013000, $0.40, up $0.05)
Thoughts: Resistance is at $12.25-$12.50 and a close above this level would be bullish for a run past $13 that could lead to $14-$15. Support is at $11.50 and the 50-day MA with risk down to $11 on a close back below these levels.
Twitter (TWTR, $59.00, up $3.67)
January 47 calls (TWTR140118C00047000, $12.75, up $3.55)
January 36 puts (TWTR140118P00036000, $0.10, down $0.10)
Thoughts: Sweet Jesus. For those of you that this trade last week when we listed these options as a possible strangle trade, rock on. The January 47 calls were at $0.95 on December 2nd while the January 36 puts were at $0.90. We mentioned the cost to put this trade on for 10 contracts each would have been $1.85 and at current levels, the value of the position is now at $12.85. In other words, the stock may be up 50% for the month but this strangle option trade is up 1,000%.
Last week’s chart for TWTR:
Spider Gold Shares (GLD, $119.38, up $1.09)
January 115 puts (GLD140118P00115000, $1.40, down $0.40)
Thoughts: We have said the yellow metal could touch $1,100 this year. There were a number-of suit and ties that came out last week saying Gold was going to $1,100 an “O” but they have obviously been late to the party calling the downside slide. We could go short on a break below $117.50 but we would love to see a back test to $122 this week.
Cliff’s Natural Resources (CLF, $23.51, down $0.28)
January 25 calls (CLF140118C00025000, $0.80, down $0.15)
Thoughts: The close below $24 last week was bearish and could lead to the low $20’s.
iShares Russell 2000 (IWM, $110.20, up $0.36)
January 114 calls (IWM140118C00114000, $0.70, up $0.10)
January 107 puts (IWM140118P00107000, $1.50, down $0.10)
Thoughts: We could go short on a close below $109 or long on a pop past $112.50.
International Business Machines (IBM, $172.80, down $0.57)
January 165 puts (IBM140118P00165000, $1.30, up $0.10)
Thoughts: We plan to cover the possible pending breakdown in IBM as we were looking for one last push to $180 before possibly going short. Shares peaked at $177.76 the prior week so the selling pressure could be coming sooner rather than later. Support is at $170 and a close below this level would be very bearish that could have us on board.