Monday, July 23, 2012 (AM) - Momentum Trades

9:00am (EST) continued,,,

The Dow dropped 121 points, or 0.9%, to end at 12,822 on Friday. The blue-chips tested the 12,600 level on Tuesday’s dip at the open after trading down to 12,645 but by Thursday’s close the index was back above 12,800. The Dow fell just short of 13,000 by 23 points and faces further resistance at 13,200 if 12,800 holds. If not, support is at 12,600 and the 50-day MA followed by 12,400-12,350. The Dow was at 12,777 to start the week and was up 45 points, or 0.4%, by Friday’s closing bell. For the year, the blue-chips are showing a gain of 605 points, or 5%.

Here is last week’s chart of the Dow:

The S&P 500 gave back 14 points, or 1%, to finish at 1,362. The index traded down to 1,345 on Tuesday’s test of support but was able to finish above the 1,350 level by the close. The bulls cleared 1,375 on Thursday’s close after reaching a peak of 1,380 and were eyeing the next level of resistance at 1,400 but ran out of gas. Friday’s drop gets 1,350 back into play and then 1,325-1,300 on a continued pullback. The S&P 500 was at 1356.78 before Monday’s open and was higher by 6 points, or 0.4%, for the week. For 2012, the index is showing an advance of 105 points, or 8.4%.

Last week’s chart for the S&P 500:

The Nasdaq declined over 40 points higher, or 1.4%, to settle at 2,925. Tech fell to a low of 2,871 on Tuesday’s break of the 2,900 level and tested the next level of support at 2,850. These two areas will be in focus this week if there is more downside pressure with a shot at 2,800 if Apple (AAPL, $604.30, down $10.02) reports disappointing numbers. If they blowout Wall Street’s numbers and raise guidance, Tech could challenge resistance again at 2,950-3,000. The Nasdaq came into the week at 2,908 and advanced 17 points, or 0.6%, after the smoke cleared. Year-to-date, the Nasdaq is up 320 points, or 12.3%.

Here is last week’s chart for Tech:

The Russell 2000 fell 11 points, or 1.3%, to close at 791. The small-caps kissed a low of 790 on Tuesday after failing to hold the 800 level on Monday. The bears pushed 792 and the 100-day MA during Tuesday’s session and the close of 795 was a warning sign 800 could come back into play. We said last week if the bears can push 780 there would be a test to 760-750 which is still the case for this week. Thursday’s rally to 808 was just shy of our 810 target the bulls needed to clear to make a run at 825 but we knew when the index finished lower for the session the bulls were running out of ammo. We have been saying to watch the Russell 2000 for one of the better clues for market direction and this was true again last week. The Russell 2000 started Monday’s session at 800.99 and gave back 9 points, or 1.2%, for the week. The index has advanced 51 points for 2012, or 6.8%.

Here is last week’s chart for the Russell 2000:

The S&P Volatility Index ($VIX, 16.27, up 0.82) popped 5% on Friday after closing at 15-and change on Thursday. We said the bulls would push the mid-teens on a continued test to the top of the trading range and Thursday’s low was 15.45. While there could be a test to the low teens, this would mean new market highs and at these levels volatility picks up, which we have seen in recent weeks. The bears will need to clear 17.50 to get the market nervous again and a break above 20 will get the talking heads worried.

Last week’s chart of the VIX:

The market moved higher last week on better-than-expected earnings but economic news continued to show the economy weakening. A deeper look inside the numbers shows companies beating an already lowered earnings bar but expectations were lower than dirt that this wasn’t really a surprise. However, the number of companies who missed revenue expectations was and many of them guided their numbers lower for the current quarter and year.

The Financial sector failed to show any strength and trended lower throughout the week after mixed earnings. This is a troublesome sign as the Financial Sector Spider (XLF, $14.38, down $0.22) failed resistance and is still in a downtrend. After pushing $37 in late June, JPMorgan Chase (JPM, $33.90, down $0.56) fell another 3% for the week while Bank of America (BAC, $7.07, down $0.19) barely held on to $7 after dropping below its 50-day MA.

Gold is still having trouble clearing $1,600:

Europe was relatively quiet but Greece said it would need more money last week and Spain brought the pain on Friday. With earnings entering their third week and the bottom line-up of heavy hitters reporting, Apple and Facebook (FB, $28.76, down $0.24) will be the last bullets the bulls can use to power Tech higher. Apple is in a transition quarter so there could be a surprise miss, but even if they beat expectations we doubt it will be enough momentum to carry the Nasdaq higher all week. Facebook could provide a little pop if they announce great results but we think they are still trying to figure out how to make money on their 900 million users.

The eurozone countries will once again take center stage this week and into August and we mentioned Spain’s problems on Friday. They are at the point where they will soon have to ask for a national bailout as Valencia was the second Spanish region to seek help. Spain is the fourth largest country in the eurozone and is considered too big to fail or bail however you want to look at it.

The week after option expiration is usually pretty bearish and the momentum the bulls were enjoying came to a complete halt on Friday. We mentioned last week that Monday was the sixth consecutive down Monday the Dow had finished lower and a deeper look at the numbers also show only 4 out of the last 7 Friday’s were up days.

We usually like to see back-to-back weeks of Friday/ Monday negative closes for a market breakdown. If there are consecutive positive M/F closes it means the bulls could be controlling the action. Mixed M/F closes lead to trading ranges.

With Apple set to report this week, expect a big move not only in Tech but the overall market as the stock is heavily weighted in a few indexes. The euro hit a 2-year low following Friday’s drop to 120.90 and caught a lot of traders off guard. This could lead to panic selling over the next few weeks as Greece, Spain and soon-to-be Italy will continue ask for bailout loans. The ECB has stated that Spain’s bonds cannot be used as collateral so look for them to hit double-digits soon which means nobody will be buying them. This will make it harder for Spain to sell debt.

As earnings start to wind down, look for euro worries and the U.S. debt issues to once again take center stage.

Futures are showing a nasty open this morning. Dow futures are down 206 points to 12,567 while the S&P 500 futures are lower by 20 points to 1,338. The Nasdaq 100 futures are showing a decline of 43 points to 2,570.

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 trades or “Exit Orders” in your brokerage account unless we list one. We will send out a “Profit Alert” or “Trade Update” 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.

Aetna (AET, $37.67, down $0.49)

August 36 puts (AET120818P00036000, $0.70, up $0.10)

Entry Price: $0.85 (7/10/12)

Exit Target: $1.70
Return: -18%
Stop Target: 90 cents

Action: Shares traded to a low of $37.52 on Friday and we were looking for a close below $37.50. We would like to see a close below $36 this week would should get $32 in play. A close above $42 would force us out the trade.

AOL (AOL, $27.81, down $0.13)

August 24 puts (AOL120818P00024000, $0.30, flat)

Entry Price: $0.53 (6/26/12)

Exit Target: $1.00
Return: -34%
Stop Target: None

Action: Shares kissed a low of $27.40 last week and we were looking for a close below $27.50. The company will report earnings on Tuesday and they could announce another good quarter. We believe they will get a chance to buy their shares at lower prices which is what the company said it was going to do instead of giving its shareholders a special dividend.

Apollo Group (APOL, $29.38, down $0.82)

August 27 puts (APOL120818P00027000, $0.75, up $0.15)

Entry Price: $0.90 (5/10/12)

Exit Target: $1.80
Return: -17%
Stop Target: None

Action: We reiterated a buy rating on the puts when they were at 30 cents a few weeks ago although we didn’t add to the position. We are still underwater with this trade but the sun is coming up following Friday’s break below $30. We have a near-term test of $25 penciled-in and a mid-teen target by year end.

Other 2012 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 2012 Portfolio link in the Members Area to view ALL open/ closed trades.

Bank of America January 12.50 calls 2013

iShares Dow Jones US Real Estate August 57 puts (from June)

Consumer Discret Select Spider August 41 puts (from June 2012)

PowerShares QQQ August 59 puts (from June 2012)

Freeport-McMoRan Copper & Gold August 29 puts (from July 2012)

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.

KLA-Tencor (KLAC, $49.22, down $0.11)

September 40 puts (KLAC120922P00040000, $0.35, flat)

August 46 puts (KLAC120818P00046000, $0.80, flat)

Thoughts: This could be our next trade but earnings are out this week which makes this recommendation risky. We still believe $50 will hold but let’s see
how it goes.

UnitedHealth Group (UNH, $55.41, up $0.42)

August 57.50 calls (UNH120818C00057500, $0.55, up $0.05)

September 57.50 calls (UNH120922C00057500, $1.15, up $0.10)

January (2013) 65 calls (UNH120119C00065000, $0.95, up $0.10)

Thoughts: Watch for a break above $60 before going long. We did a big write-up in our Weekly Wrap on this company and we like them for the long-haul as a possible covered call candidate.