MomentumOptionsTrading.com Morning Update for 2/24/2014
Trading Range Developing but for How Long?
9:00am (EST)
“Last week’s homework showed a perfect back test to the downside channels we highlighted in our chart work and mentioned there could be an upside move of 2%-3% on a continued rebound. Friday’s closes were right where we expected them to be and the VIX is also confirming the bullish action.
The push towards all-time highs again would require another 1%-2% run and our prior fluff targets from December could come into play on continued strength.
The nasty 8% drop to support to start the month has all been forgotten for the most part as the indexes moved back into their prior 6-week trading ranges. We often say trading ranges can get “stretched” but the break below multiple layers of support was swift and fast. The rally back towards records highs has also been breathtaking.
February is always tricky to trade and we mentioned it was the weakest month of the seasonal bull runs from November thru April. This February has been especially volatile as there were numerous headwinds the market faced but we mentioned last week they were suddenly clearing up.
We touched on the weather and the impact it would have on economic news and earnings going forward and the trick is to figure if this news is already factored into the market or if it will hinder the indexes for the remainder of the first quarter.
The Nasdaq is at fresh 13-year highs and the S&P 500 is on the verge of triggering new all-time highs (less than 1% away). The Dow is a little more than 2% from ringing the all-time high bell and the Russell 2000’s “official” intraday all-time high is 1,182.04 set on January 22, 2014. This would require a 3% move by the small-caps and a 5% move clears 1,200.
A 5% move in the Dow from current levels would mean 17,000; the S&P 500 would be above 1,900 to 1,925; and the Nasdaq would be near 4,475 and pushing 4,500. These levels are right at our December fluff targets, imagine that.
We wanted to mention the Russell’s move in December one last time for the stock market conspiracy theorists:
From our December 24, 2013 Daily Update:
We mentioned the spike in the Russell 2000 was puzzling and from our research it was the result of a “temporary technical issue” in the index’s data feed for real-time index calculations. The issue was supposedly “fully resolved” and the high of 1213.49 was to be corrected after Monday’s closing bell according to the higher ups familiar with the situation.
We will check the Russell’s chart throughout the week to see if there is a correction or it is stands.
There have been a number of these types of occurrences over the past few months and it could be a prelude to what lies ahead. We reported the strange VIX move that occurred a few weeks ago and the overnight reversal of futures on the prior Monday (December 16). These strange moves in futures, the VIX, and now the Russell could be warning signs that more rocky moves and volatility could be ahead.” (END)
We wanted to mention this again because the Historical Prices in Yahoo Finance have also been “corrected” as it now shows an intraday high of 1,157.34 with a close of 1,157.22 for December 23, 2013.
This was the spot we wanted to do our yearend predictions but we need to see how this week plays out as there are still some technical charts we are looking at that are incomplete. There is also one earnings report we want to watch and digest this week and that is Wal-Mart Stores (WMT, $75.79, up $0.43). While the 4Q numbers will certainly move the stock, we are more interested in the current quarter. The company should offer a great (or discouraging) outlook for 1Q earnings as the reporting season starts in mid-April.
The market could stay steady through the end of February but March is setting up to be a battle as 1Q earnings warnings (or upgrades) start trickling in. The zombies said the weather wasn’t a factor in the unemployment numbers but many companies that believe they will miss Wall Street’s numbers will use weather as the number one reason.
We expect a busy week with possible New Trades and Profit Alerts so check your email inboxes frequently and we will do our best to let you know when possible new trades will be coming out (see Watch List in Daily and Earnings section in Weekly Wrap). “ (from 2/17/2014 Weekly Wrap…)
The bulls put together another solid week despite a spooky Fed report and shaky earnings and economic news as the market pushed resistance / was able to clear resistance. The bears made a growl at support midweek after the meeting minutes revealed some of the Fed zombies said it might be appropriate to raise the federal funds rate by next year but that was about it.
Thursday was an important session as the bulls held fort after a back test to support to push resistance. Friday’s gains are suggesting new and continued highs as February winds down but March could be a different story if the bulls fail to hold support. (continued…)
The Dow dropped 30 points, or 0.2%, to end at 16,103 on Friday. The blue-chips needed to clear 16,200 to confirm the next leg higher and made a run to 16,167 on Tuesday before Wednesday’s pop to 16,225. However, the index gave back 185 points by the close to finish at 16,040. We mentioned another dip below 16,000 could lead to a back test to 15,800 and the 100-day MA but the bears could only muster a run to 16,006 on Thursday’s open. The bulls rebounded to get a 93 point win to 16,133 and pushed a high of 16,191 on Friday before closing just below the 50-day MA. There is fluff up to 16,500-16,600 on a close above 16,200 but any break below 16,000 could lead to 15,800-15,600. For the week, the Dow fell 51 points, or 0.3%, after starting at 16,154 and is down 473 points, or 2.9%, for 2014.
The S&P 500 slipped 3+ points, or 0.2%, to settle at 1,836. The bulls were looking to clear 1,850 to get the shorts covering and started Tuesday with a 2-point win to 1,840 after kissing 1,842. The index reached a peak of 1,847.50 on Wednesday before a swift back test to 1,828 by the close. The bulls held support at 1,825 before the bears sniffed 1,824.58 on Thursday’s open but that was as close as they would get. The rebound to 1,842 and close at 1,839 was a good sign the bulls weren’t going anywhere as Friday’s high reached 1,846. A close above 1,850 gets 1,875-1,900 in play while another dip under 1,825 and the 50-day MA will likely lead to 1,800-1,775. The S&P 500 came into the week at 1,838 and slipped 2 points, or 0.1%, by Friday’s close. For the year, the index is lower by 12 points, or 0.7%.
The Nasdaq fell 4 points, or 0.1%, to close at 4,263 on Friday. Tech was strong on Tuesday and easily cleared 4,250 after finishing the session with a 28 point pop to 4,272. We mentioned a close above 4,275 would confirm another run to our December fluff target of 4,400-4,500 for the index but the bulls gave an early sign Wednesday would be rough. The high of 4,274.29 fell short of clearing resistance and it was all downhill from there as the Nasdaq gave back 35 point to end at 4,237. Thursday’s close back above 4,250 to 4,267 was bullish and Friday’s high reached 4,284. The 50-day MA is back at 4,136 and is 4% away. The bulls have a 1.5% cushion to 4,200 before we would take the bears seriously again but that can happen quickly or overnight given the current volatility. The Nasdaq was at 4,244 and added 19 points, or 0.5%, and is up 87 points, or 2.1%, year-to-date.
The Russell 2000 gained 2.5 points, or 0.2%, to finish at 1,164.63. The small-caps needed to clear 1,150 to confirm a possible run to 1,175 and ended Tuesday’s session with a 12-pack to close at 1,161. Wednesday’s high reached 1,163.96 before the fade back to 1,150 and close at 1,149. The index started Thursday’s session with a half-point loss and gave a great clue support would hold as the Russell recovered all of its losses from the prior session and went out at 1,162. Friday’s high reached 1,168. A close above 1,175 would get new all-time highs in play up to 1,200-1,225. If the bears can crack 1,150 and the 50-day MA they could push 1,125 and the 100-day MA over the near-term. These levels are roughly 2% and 4% away, respectively. The Russell came into Monday’s open at 1,149 and advanced 15 points, or 1.3%, for the week and is showing a 1 point gain, or 0.1%, YTD.
The S&P 500 Volatility Index ($VIX, 14.68, down 0.11) came into the week at 13.57 and the bulls needed to get below 13.50 to keep the momentum. There was no dip on Tuesday as the VIX traded up to 14.51 ahead of the Fed minutes while closing at 13.87. Wednesday’s open at 14.85 was a good signal 15 would trip as the high reached 15.73. The close at 15.50 may have looked bearish but we said not to get nearish until 17.50 trips. Thursday’s top checked-in at 15.80 before the bulls took control and got the VIX back below 15 to 14.79 by the closing bell. Friday’s low was 14.19 as the VIX stayed below 15. Same deal for this week – bullish below 13.50, bearish above 17.50.
We mentioned last week there could be another 1% move higher and now that the bulls have pushed the upper trading ranges and channels, figuring out where the market is headed from here is the fun part.
There is still another week of February to trade and at current levels the bulls have a good lead. The Dow is up 405 points while the S&P 500 is higher by 54 points. The Nasdaq has gained 160 points and the Russell 2000 has advanced 34 points. The average gain is 3% across the board.
We have said February is always a tricky month to trade and this one has been especially volatile. The drop at the first of the month to the 100-day and 200-day MA’s was telegraphed and looked like the real deal but like we saw for nearly all of 2013, support held and there was no 10% pullback.
The bears have cried wolf so many times over the past 2 years that the little boy has turned bullish as no correction has come. However, if and when it does, Wall Street will be screaming wolf as any back test could be swift and jaw-dropping.
We mentioned the weather would play an important role in forward guidance/ earnings misses going forward and sure enough there were a number of companies blaming snow AND higher energy costs as the main reasons they fell short of Wall Street’s expectations.
It remains to be seen where the market is between now and the first week of April so March could be crucial in deciding our yearend forecasts.
There were a number of bearish signs in January that we have already talked about but February has been bullish. If the bulls can cruise into this upcoming Friday without much damage the indexes could continue to make new highs. If resistance holds, and the bears start wave riding support, March could get ugly.
We are still on the fence if a 5%-10% back test comes or not but we do believe there could be one between April-July with a bottom coming in October. In the meantime, the indexes could form a trading range into 1Q earnings resistance holds and there is a pullback with support.
We talked in January there could be a 3,000 point swing this year with the Dow dancing around the 16,0000 level that would put the blue-chips at 19,000 or 13,000. We spent a lot of time over the weekend thinking of the best and worst case scenarios and without further ado, here is how we see the market unfolding this year.
For the Dow, we have listed a possible high target of 19,000, or a 16% drop to 14,000 for 2014.
For the S&P 500, we have listed a possible high target of 2,100, or a 16% finish to 1,550 for the year.
For the Nasdaq, we have listed a possible high target of 4,800-5,000, or a 23% loss near 3,200 for 2014.
For the Russell 2000, we have listed a possible high target of 1,400, or a 18% decline to 18%.
We have been fortunate enough to come close to our yearend predictions for the past two years and we were one of the few, if not only options newsletter that said the Dow would gain 3,000 points last year. We are probably the only newsletter that said in January the Dow could move another 3,000 points again this year so let’s see how it plays out.
As we head to press, futures are showing a higher open to start the week: Dow futures are down 7 points to 16,086 while the S&P 500 futures are higher by a point to 1,834. The Nasdaq 100 futures are advancing a point to 3,665.
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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 2014: 19-8 – the Weekly Wrap is 9-2 for 2014 (94-9, or 91% win rate, since 2011) and is designed for traders that want to use options with less risk.
World Wrestling Federation (WWE, $24.67, down $0.07)
March 30 calls (WWE140322C00030000, $0.40, flat)
Entry Price: $0.40 (2/18/2014)
Exit Target: $0.80
Return: 0%
Stop Target: None
Action: Shares held $24 into Friday’s close but there is still risk to $22. We are expecting a pop past $25 with a run to $30 if the company’s subscription model gets off to a good start this week.
Ingersoll-Rand (IR, $59.41, down $0.31)
March 60 calls (IR140322C00060000, $1.15, down $0.15)
Entry Price: $0.85 (2/13/2014)
Exit Target: $1.70
Return: 35%
Stop Target: 95 cents (Hard Stop)
Action: We are looking for a run past $60 and up to $62. The 52-week high is at $63.42. Support is at $58. We have a Hard Stop of 95 cents in case shares stall at $60.
Kodiak Oil & Gas (KOG, $11.80, down $0.08)
March 12 calls (KOG140322C00012000, $0.50, flat)
Entry Price: $0.60 (2/13/2014)
Exit Target: $1.20
Return: -17%
Stop Target: None
June 13 calls (KOG140621C00013000, $0.70, flat)
Entry Price: $0.70 (2/13/2014)
Exit Target: $1.40
Return: 0%
Stop Target: None
Action: Earnings are due out on Thursday. We have a near-term target of $12.75 if shares can clear $12.50 but we need a close above $12, first. Support is at $11.50.
H&R Block (HRB, $31.08, down $0.45)
March 32 calls (HRB140322C00032000, $0.75, down $0.20)
Entry Price: $0.60 (2/11/2014)
Exit Target: $1.20 (2/21/14 closed a third @ $0.85)
Return: 42%
Stop Target: 60 cents (Hard Stop)
Action: We closed THIRD of the trade on Friday as shares struggled at $32. The action felt bearish and why we locked-in half profits but we are still hopeful shares can make a run to $35 as a close above $32 represents blue-sky territory. We could get stopped out of the other half of the trade if shares fall below $30.50.
Ariad Pharmaceuticals (ARIA, $8.87, up $0.14)
March 10 calls (ARIA140322C00010000, $0.70, up $0.10)
Entry Price: $0.95 (1/28/2014)
Exit Target: $1.90
Return: -26%
Stop Target: None
May 11 calls (ARIA140517C00011000, $1.10, up $0.10)
Entry Price: $1.05 (1/28/2014)
Exit Target: $2.10
Return: 5%
Stop Target: None
Action: We are expecting a pop to $10 over the next few weeks. Support is at $7 with $6 serving backup. Earnings could come out this week as we are getting conflicting reports but we will keep you updated once we get a hard date.
The water cooler talk is that Eli Lilly has made a “friendly approach” to buy the company and is willing to pay up to $20 a share. GlaxoSmithKline is also in the hunt along with Shire.
We have said there is a HUGE gap to fill on the stock’s drop from $23 to a 52-week low of $2. Eli is trying to get the company for cheap as it currently has a $1.25 billion market-cap.
Exact Sciences (EXAS, $14.15, up $0.70)
April 19 calls (EXAS140419C00019000, $0.60, up $0.15)
Entry Price: $0.88 (1/22/2014)
Exit Target: $1.75
Return: -32%
Stop Target: None
Action: The close above $14 was super bullish and opened the door for a push to the high teens.
The company should get some FDA news in March on its Cologuard drug. These are April options with 3 months until expiration and we plan to hold through the volatility because we want to be in when the March news is released. We do not have a Stop Limit listed. Support is at $11.75.
Other 2014 Portfolio OPEN positions (5): 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.
Sony April 20 calls (from January 2014) – continue to HOLD
General Electric March 28 calls (from January 2014) – continue to HOLD
Caterpillar March 85 puts (from January 2014) – continue to HOLD
McDonald’s March 90 puts (from February 2014) – continue to HOLD
Apollo Education Group March 29 puts (from February 2014) – continue to 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.
Verizon (VZ, $47.27, down $0.85)
March 49 calls (VZ140322C00049000, $0.55, down $0.25)
April 44 puts (VZ140419P00044000, $0.63, up $0.20)
Thoughts: Shares are on the verge of clearing the 200-day MA at $48.27. If shares clear $48.50 we could go long as shares could reach $50-$52. If resistance holds, we could go short at some point so we have also listed put options. Shares have been volatile of late but they are losing customers. At current levels this could also make a great strangle trade going forward.
Discovery Laboratories (DSCO, $2.55, up $0.05)
April 3 calls (DSCO140419C00003000, $0.60, flat)
Thoughts: Shares cleared the $2.30-$2.40 resistance level with Tuesday’s run to $2.50 and close at $2.46. The stock closed at $2.50 on Thursday after pushing $2.54 and Friday’s peak reached $2.62. The move above $2.50 should trigger $3 but this level needs to hold as short-term support. Backup is at $2.40.
Rosetta Stone (RST, $12.35, up $0.24)
March 12.50 calls (RST140322C00012500, 0.60, up $0.10)
March 12.50 puts (RST140322P00012500, $0.70, down $0.10)
Thoughts: This could be a great straddle trade as shares could make a push towards $15 or flop to $10 based on earnings. A 10% move would get shares near $14 or $11 and would likely be enough to make a nice double-digit return. We could make this an official trade for the Weekly Wrap and if we do we will likely enter the trade this afternoon. If we do, we will send out a Trade Alert.
DreamWorks Animation (DWA, $33.21, up $0.38)
March 35 calls (DWA140322C00035000, $0.95, up $0.10)
Thoughts: The 52-week high of $36 could trigger on better-than-expected earnings.
Philip Morris (PM, $78.97, down $0.74)
March 77.50 puts (PM140322P00077500, $0.75, up $0.15)
Thoughts: Shares may have peaked with resistance at $80 holding. A back test to $85 could be coming.
Krispy Kreme Doughnuts (KKD, $17.97, down $0.26)
March 17 puts (KKD140322P00017000, $0.65, flat)
March 16 puts (KKD140322P00016000, $0.40, flat)
Thoughts: Resistance is at $18.50 and where we would like to see a back test to continue.
S&P 500 Spiders (SPY, $183.89, down $0.21)
March 170 puts (SPY140322C00170000, $0.40, flat)
March 173 puts (SPY140322C00173000, $0.58, flat)
Thoughts: Continue to watch.
iShares Russell 2000 (IWM, $115.66, up $0.36)
March 105 puts (IWM140322P00105000, $0.30, down $0.05)
March 110 puts (IWM140322P00110000, $0.75, down $0.05)
Thoughts: We could go short on a drop below $112.50 or long on a close above $116.