MomentumOptionsTrading.com Morning Update for 1/27/2014
Bears Push December Lows
9:00am (EST)
“The 4-week trading range continued last week but there were bullish signs another leg higher could be in store as long as support holds. Although the VIX stayed rather subdued, the recent triple-digit moves in the Dow has made a lot more traders nervous. The talking heads and suit-and-ties were in overdrive during Monday’s “selloff” and we calling for a continued correction. We disagreed and told our subscribers to stay long.
Most of the clues given to us to start the week showed support holding and the run to new highs on the Nasdaq and S&P 500 were the payoff. The charts will show the small-caps at new record highs and we have talked about the Russell 2000 clearing 1,200. What is NOT being mentioned is the erroneous print of 1,213.49 that occurred back in December.
The charts we have been drawing for you on the Russell 2000 showed the surge past 1,200 to 1,213 on December 23 but last week that “bar” was reduced as we mentioned the head officials said it would be fixed.
Here were our thoughts from our Midday Daily update on December 23, 2013:
“The Russell 2000 opened at 1,212.81 and kissed 1,213.49 in the opening minutes before coming back down to earth. The 5% move could have been a rebalancing act and either marks the high for the year or is one hell of a clue this level will be triggered in January”. (END)
Here was the chart work we did the following at the beginning of the year that also shows the run past 1,200:
We aren’t sure why the Russell 2000 was “changed” because a print is a print in our mind. Call it erroneous or a fat finger, but we were watching it on out trading screens and on the tube and is one of the main reasons we have said to remain long.
Of course, other technical indicators have held up as well for us to remain bullish but the fact this was changed isn’t fair. Most of the “Average Joe’s”, and Wall Street pros for that matter, have no idea the small-caps tripped 1,200 back in December.
If the Russell 2000 does happen to make a trip to 1,200 this month (or next) with a little fluff, we may consider this a “double-top” and a great indicator to go short into February and March.
New investors or traders that don’t do their homework may see the small-caps tripping 1,200 in the coming weeks and decide there is a continued rally in the works on the breakout to new record highs.
This scenario is still possible but we want to wait until February before we make our longer-term predications on where the market is headed. We have been pretty accurate on yearend prices for the past few years but this year could be tricky.
There is a chance the Dow trades to 20,000 by the end of 2014 – or – falls to 13,000 over the next 6 months. These would be our extreme upper and lower end Price Targets for the blue-chips this year but we are still redefining them and have a host of other headline risks to consider. February has also been a hard month to trade in recent years.
The upcoming week will be the busiest time for 4Q earnings announcements and there are a number of heavy-hitters stepping up to the plate. With economic news playing second fiddle, volatility could increase.
We nearly laughed when we heard one talking head say they pay no attention to the VIX until it trades in the 20’s. Other knuckleheads have disregarded the VIX as an indicator for market direction but we continue to view it as one of the most important indexes we follow that continues to give great clues.
The Dow Monday/ Friday closes looked bearish following the prior week’s down days and this prior Monday’s debacle. However, the Dow was the only index to finish in the green on Friday and finished the week in positive territory following a nice comeback.
We still see the bulls pushing news highs over the near-term and at some point there will be a correction but we will be prepared if and when it comes. We doubt 2014 will be as smooth as 2013 was but as long as the uptrend lines continue to hold, the indexes could return medium to high double-digit gains.” (from 1/20/2014 Weekly Wrap…)
The market has been stuck in a 5-week trading range that has seen support and resistance tested numerous times but last week’s run to the top of the range and sudden drop to December lows has Wall Street spooked. The bulls are on the verge of a major collapse while the bears come out of hibernation and this week could determine if the longer-term trend is lower or the short-term trend means a continued trading range. (continued…)
The Dow dropped 318 points, or 2%, to close at 15,879 on Friday. The blue-chips started Tuesday with a test to prior support at 16,400 after failing to hold a 62-point pop to 16,520 at the open. Although the index closed at 16,414 the dip to 16,316 signaled a 200-point swing and opened the door for a test to 16,200. Wednesday’s rebounded to 16,453 was a lower high and the close at 16,373 sealed the deal for Thursday’s trip to. 16,140 and close at 16,197. We said a close below 16,200 would get 16,000-15,800 in the mix and the Dow went out as its session low. There is further risk to 15,600-15,400 on continued weakness while a close above 16,000 would be short-term bullish. For the week, the Dow declined 679 points, or 3.5%, after starting at 16,458 and is down 697 points, or 4.2%, for 2014.
The S&P 500 sank 38 points, or 2.1%, to settle at 1,790. The index traded down to 1,832 on Tuesday after testing 1,849 but finished with a 5-point gain to 1,843. We were looking for a close above 1,850 and Wednesday’s peak reached 1,846.87 before a pullback to 1,840 and close just below 1,845. We warned of a back test to 1,825 if the bulls failed to clear resistance and Thursday’s back test to 1,820 and close at 1,828 looked textbook. However, the selling pressure continued into Friday and we warned another dip below 1,825 would trigger 1,810-1,800. If the bulls can reclaim these levels by Monday’s close there is a chance they keep the trading range intact. However, the finish below 1,800 on Friday opens the door for a test to 1,775-1,750. The S&P 500 came into the week at 1,838 and gave back 48 points, or 2.6%, by Friday’s close. For the year, the index is down 58 points, or 3.1%.
The Nasdaq tanked 90 points, or 2.2%, to finish at 4,128. Tech traded to a high of 4,227 and closed at 4,225 after testing a low of 4,193 to start the week. This signaled continued strength to 4,250-4,300 and Wednesday’s high reached 4,246 with a finish at 4,243. Thursday seemed like a back test to support at 4,225-4,200 but the low of 4,192 made us nervous despite a close of 4,218. We said Friday morning there was risk to 4,150 if the bears got below 4,200 again and said to specifically watch the 20-day MA at 4,173 if there was another break below support. The bulls are less than 2% away from recovering 4,200 and stellar earnings from Apple and Google could help fuel a rally back to the top of the trading ranges. The next levels of support are at 4,100 and then 4,050-4,000. The Nasdaq was at 4,197 and got spanked for 69 points, or 1.7%, and is off 48 points, or 1.2%, year-to-date.
The Russell 2000 got hammered for 28 points, or 2.4%, to end at 1,144 on Friday. The small-caps made a brief trip into negative territory by less than a point to start the week and closed at 1,175 on Tuesday. This was a bullish sign for a possible run to 1,200 and Wednesday’s high of 1,182 and close at 1,181 looked good. Thursday’s dip to 1,166 and close back below 1,175 to 1,172 looked bad. Friday’s low of 1,141 was ugly. The bulls will need to clear 1,150 to start the week or they face further pressure down to 1,125-1,100. The Russell came into Monday’s open at 1,168 was fell 24 points, or 2.1%, for the week and is lower by 19 points, or 1.7%, YTD.
The S&P 500 Volatility Index ($VIX, 18.14, up 4.37) jumped 32% to clear 15 and 17.50 in the blink of an eye to end the week. The VIX reached 13.42 on Tuesday but stayed below 13.50 after closing at 12.87. Wednesday’s dip to 12.55 nearly got the bulls below 12.50 but the flat close at 12.84 was nerve-racking. Thursday’s peak of 14.66 held 15 but the close above 13.50 was a warning sign. With the VIX ending at session highs, there is risk to 20-21 and a close above these levels would be bearish. The bulls will need to get back below 17.50 and then 15 to calm Wall Street’s nerves.
The bulls came into the week ready to make a continued run to new highs and a break out of the current trading ranges. To a degree they did by midweek as the S&P 500 and Nasdaq kissed fresh 52-week intraday peaks. We didn’t include the Russell 2000 because the index cleared 1,200 on December 23 although the morning spike has been eliminated from a lot of charts since. That is the good news.
There were a number of developments that came to a head late in the week that helped the bears regain the momentum as they were able to push the bottom of the current trading ranges, in a hurry. We often say the bulls like to take steps to higher ground while the bears use the elevator to make their appearance.
China got the snowball rolling Wednesday night after they reported a weaker-than-expected PMI number of 49.6 – an indication the country is falling back into contraction. Anything under 50 is negative and the 6-month low in China’s PMI spooked world markets.
Emerging currency markets also played a major role in the pullback as Argentina significantly devalued its currency with inflation ballooning while Brazil’s real currency fell to a five-month low. Meanwhile, Japan’s yen rebounded sharply while Venezuela is on the verge of collapse along with Puerto Rico.
We didn’t even mention the issues surrounding Turkey, Egypt and Russia and the Olympic games. These are potential contagion problems that usually don’t get resolved in days and could be a continued drag on the market.
Earnings have been sketchy at best although the official numbers tell a different story. Companies seem to be beating on the earnings per share side as 63% of the roughly 100 S&P 500 names have reported numbers above expectations. The rest of the breakdown reveals 12% have matched expectations while 25% have missed expectations.
This will be the busiest week for Q4 earnings as you can tell from our Weekly Wrap Earnings section. The main names we will be watching is Caterpillar (CAT) on Monday before the bell and Apple (AAPL) after the close; AK Steel Holding (AKS), DuPont (DD) and Pfizer (PFE) on Tuesday morning – AT&T (T) after the close; Boeing (BA) Wednesday before the open – Facebook (FB) and Qualcomm (QCOM) after the bell; 3M Company (MMM)/ Exxon Mobil (XOM) and Visa (V) before Thursday’s open – Chipotle Mexican Grill (CMG) after the close; and Mastercard (MA) Friday morning.
There are a number of higher priced Dow components reporting this week along with Apple and Google. We are expecting big price moves from the majority of the heavy-hitters and the impact will be felt – good or bad.
The major averages fell below significant psychologically levels on Friday and the VIX surged 44% for the week. This combination could lead to further weakness and a test to the 100-day moving averages (MA’s) on continued weakness.
The Dow’s 100-day MA is at 15,745 with the S&P’s at 1,762. The Nasdaq is above its 100-day MA (3,946) and faces near-term risk to the 50-day MA at 4,087. The Russell 2000 is also above its 100-day MA (1,109) but is just a 6-pack above the 50-day MA at 1,138.
The VIX had its biggest week since July 2011 and surged 44% for week. The pop past 15 made us flinch and we warned a run to 17.50 could come if triggered. The VIX went out on Friday at session highs and there is now risk to 20. A break above 20 could lead to 22-24 and where we would expect buyers to step in.
If the VIX clears 25, there will be blood in the streets and the indexes would likely see a test to their 200-day MA’s. We doubt the market gets this out of control but stranger things have happened so we at least have to prepare for the worst.
For a 10% correction to occur off the highs, the Dow would have another 950 points to go. The blue-chips kissed 16,588 on the last trading day of 2013 and a 5% pullback would put the Dow at 15,759.
If we run the numbers on the S&P, a 10% correction off the mid-January 1,850 high would push the index down to 1,665. A 5% pullback would put the S&P near 1,750.
A 10% debacle on the Nasdaq would spell 3,820 while a 5% haircut would put Tech near 4,035 following last Wednesday’s trip to 4,246.
And while we’re at it: the Russell 2000 kissed 1,213 “unofficially” on December 23 so a 10% spanking would get the small-caps down to 1,082. A 5% beating would push the index to 1,152.
The 5% levels will likely trigger if there is further weakness and if these levels fail to hold we could aggressively start to look at put options as the 200-day MA’s would then be in play.
There hasn’t been a 10% pullback for the market in over 400 days. The Dow Transports reached all-time highs again midweek and was another reason why we felt the bulls might hold support. However, they had their worst day since April 2013 on Friday after Kansas City Southern (KSU, $99.49, down $17.79) imploded 15% on weaker-than-expected results.
We covered the Dow Theory in early November and talked about how the Transports usually reach new highs first, followed by the Dow during bull markets. However, the blue-chips will need to rebound in a hurry to confirm a continued uptrend or this could be another sign this pullback could turn into a correction.
The shortened week didn’t include a Monday with the market closed for a holiday and Friday’s have been bullish of late with shaky Monday’s. We mentioned the Dow had it first negative Monday/ Friday close a few weeks ago for the first time since November and this week’s closes could also confirm a negative trend developing if the index end lower both day. An up Monday, along with an up Friday could help the bulls hold the current trading ranges but if not, prepare for more selling pressure.
Besides earnings, the FOMC meeting on Tuesday and the decision on rates Wednesday will be another headline risk. The suit-and-ties are expecting another $10 billion in taper cuts from the Fed to a $65 billion for February. Of course, the recent nasty headlines could also prevent the Fed zombies from further tapering.
We expect the Fed to continue with the $10 billion monthly cut at least for now because if they don’t it would seem like an overreaction to a bad tape.
Caterpillar (CAT, $86.17, down $2.31) is expected to report earnings of $1.28 a share on revenue of $13.64 billion. There are 22 analysts that follow the company and the range for earnings is $1.20-$1.39 so there could be a big miss or beat. The revenue range is $13.16-$14.11 billion and anything over $14 billion would be a home run. This will be the first hurdle for the bulls as a miss by Caterpillar to start the week would not be good.
The President will also be addressing the nation Tuesday night and his remarks could also weigh on the indexes. We are sure he will talk about inequality, Obamacare, and the economy but we doubt he will talk about his approval rate.
As we head to press, futures are showing a slightly higher open to start the week: Dow futures are up 23 points to 15,839 while the S&P 500 futures are higher by 5 points to 1,787. The Nasdaq 100 futures are advancing 8 points to 3,540.
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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: 13-1- the Weekly Wrap is 6-1 for 2014 (91-8 since 2011) and is designed for traders that want to use options with less risk.
BlackBerry (BBRY, $9.89, down $0.56)
February 11 calls (BBRY140222C00011000, $0.35, down $0.22)
Entry Price: $0.65 (1/22/2014)
Exit Target: $1.30
Return: -46%
Stop Target: None
Action: There could be a back test to $9-$8.50 if volatility picks up but we still like the position. A close back above $10.50 would be bullish but we will exit the trade on a drop below $8.50.
Exact Sciences (EXAS, $14.27, down $0.39)
April 19 calls (EXAS140419C00019000, $0.80, down $0.10)
Entry Price: $0.88 (1/22/2014)
Exit Target: $1.75
Return: -9%
Stop Target: None
Action: There is a chance for a breakout past $15 or a drop below $13.50 when earnings come out this week but it is not a hard date. The company should also 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 and why we do not have a Stop Limit listed.
PowerShares QQQ (QQQ, $86.74, down $1.74)
February 90 calls (QQQ140222C00090000, $0.30, down $0.40)
Entry Price: $0.75 (1/22/2014)
Exit Target: $1.50
Return: -60%
Stop Target: None
Action: There is risk to $86 and we may give the trade wiggle room to $85. We should know by Friday if this trade comes back or if we need to cut the cord.
Ariad Pharmaceuticals (ARIA, $8.99 up $1.47)
February 8 calls (ARIA140222C00008000, $1.80, up $1.10)
Entry Price: $0.45 (1/17/2014)
Exit Target: $0.90-$1.35, raise to $3 (closed a QUARTER @ $1.50 on 1/24/14)
Return: 283%
Stop Target: $1.20 (Stop Limit)
Action: We closed a quarter of the trade on Friday at $1.50 on the run to $9 but shortly afterwards shares zoomed to a high of $9.83 as the options reached a peak of $2.30.
Shares tried to clear $7 to start the week but after kissing $6.95 they slipped to a low of $6.46 before closing at $6.60 on Tuesday. Support held again on Wednesday after a dip to $6.41. The push past $7 on Thursday started in after-hours trading on Wednesday with the high checking in at $7.56 and close of $7.52. We mentioned last week and again Friday morning “if $7.75 clears, the floodgates could open for a surge past $10”. We have also mentioned a possibly run to $13-$13.50 could come once double-digits trigger and our extended target is $15-$16. Support will try to hold at $7.75 and prior resistance on any pullback.
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.
Sony (SNE, $16.72, down $0.07)
February 19 calls (SNE140222C00019000, $0.10, flat)
Entry Price: $0.45 (1/8/2014)
Exit Target: $0.90
Return: -78%
Stop Target: None
April 20 calls (SNE140419C00020000, $0.25, flat)
Entry Price: $0.55 (1/8/2014)
Exit Target: $1.10
Return: -55%
Stop Target: None
Action: Support is at $17 with the possibility of a test to $16.50. If shares fall below this level we will likely exit the trade but may give it wiggle room down to $16. Resistance is at $17.50-$17.75.
Other 2014 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.
SLM February 27 calls (from January 2014)
General Electric March 28 calls (from January 2014)
PulteGroup February 22 calls (from January 2014)
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.
Aruba Networks (ARUN, $20.42, down $0.58)
February 22 calls (ARUN140222C00022000, $0.65, down $0.20)
April 25 calls (ARUN140419C00025000, $0.50, down $0.15)
Thoughts: We were stopped out of the February 21’s last week for a 108% gain and we could add one or both of these options on a pop past $22.
H&R Block (HRB, $28.08, down $0.92)
February 30 calls (HRB140222C00030000, $0.20, down $0.20)
April 31 calls (HRB140419C00031000, $0.50, down $0.20)
Thoughts: Shares tested support at $28.50 on Tuesday but made a run at $29.50 midweek after closing at $29.34 and session highs. H&R held $29 on Thursday before Friday’s 2% drop below support at $28.50. There is risk down to $27.50 on a continued pullback. A run past $29 would be bullish but we wouldn’t initiate new positions until shares clear $29.50-$30.
iShares Russell 2000 (IWM, $113.45, down $2.97)
February 117 calls (IWM140222C00117000, $0.60, down $1.00)
February 110 puts (IWM140222P00110000, $1.25, up $0.77)
Thoughts: We could go long on a pop back above $115 or short on a drop below $110.
Galena Biopharma (GALE, $5.70, up $0.41)
February 6 calls (GALE140222C00006000, $0.50, down $0.20)
April 10 calls (GALE140419C00010000, $0.40, down $0.10)
Thoughts: We still like the company and the stock and feel a run to double-digit will come but we need to make sure $5.50 holds as support. We have listed the April 10 calls to buy the trade more time and to get through the volatility and we can use these options on another break above $7.
Osiris Therapeutics (OSIR, $16.84, down $0.08)
February 19 calls (OSIR140222C00019000, $0.45, flat)
May 21 calls (OSIR140517C00021000, $1.10, flat)
Thoughts: Support is at $15 on a back test. We are expecting a run to $20 over the near-term.
Twitter (TWTR, $61.74, down $1.06)
February 90 calls (TWTR140222C00095000, $0.85, up $0.05)
February 40 puts (TWTR140222P00040000, $0.30, up $0.05)
Thoughts: Earnings are due out on February 5 and we believe shares will either be above $80 or testing $40 when the announcement is made. We will update this trade throughout the week to see if there is a possible trade for next week.
Krispy Kreme Doughnuts (KKD, $18.13, down $0.43)
February 18 puts (KKD140222P00018000, $0.70, up $0.20)
May 15 puts (KKD140517P00015000, $0.60, up $0.10)
Thoughts: We believe a test to $18, possibly the mid-teens, could be coming. Resistance is at $20. We could use the May puts as a “protection” trade for when the bears make a move.
Fossil (FOSL, $113.28, down $0.34)
February 90 puts (FOSL140222P00090000, $0.60, up $0.05)
Thoughts: Earnings are due out on February 11 and we are expecting a drop below $100 over the next month.
Cliff’s Natural Resources (CLF, $19.33, down $0.96)
February 25 calls (CLF140222C00025000, $0.20, down $0.05)
February 20 puts (CLF140222P00020000, $1.80, up $0.55)
Thoughts: A close back above $24.50 might get us interested in a bullish trade. A drop below $22 would be bearish for a possible test to $20.
Morgan Stanley (MS, $30.45, down $1.03)
February 32 calls (MS140222C00032000, $0.35, down $0.25)
Thoughts: If support at $32 holds we could go long on a move above $33.50 again.