MomentumOptionsTrading.com Morning Update for 11/4/2013
Dow Showing Bullish Signs for a Continued Run
9:00am (EST)
“There were a lot of bullish developments that confirmed the market would continue its push towards new highs despite a mini-trading range and continued calls for a pullback by the market pros. Of course, we weren’t in that camp as our charts were still showing upside potential as long as fresh support levels held that served as prior resistance.
The back tests on the indexes and the VIX were great clues the bulls would be heading to higher ground but we also got confirmation from other sectors to reaffirm the move. We mentioned last week a breakout to new highs could last through October and into November so it was good to see the Dow Jones Transportation Average join the party.
One of the Dow Theories of technical analysis is that the Transports should mirror the blue-chips rise to new highs to confirm the uptrend. Although the Transports have reached new highs while the Dow hasn’t, they don’t have to reach new highs simultaneously to confirm the uptrend. However, the less time in between the new highs it takes for the Dow to catch up, the stronger the signal.
The 52-week high for the Dow is 15,709 and is 139 points away, or less than 1%. This is one trading day so ideally it would very bullish if the Dow cleared this level to start the week, especially on a Monday.
Apple (AAPL, $525.96, down $5.95) shares came into the week just south of $509 and peaked just north of $533 on Friday. We mentioned last week a run to $550 could be coming and with the company reporting earnings after the close on Monday, we said on Friday the stock could be north of $575 or south of $475 based on a 10% move.
There are 47 Wall Street analysts that follow the company and expectations are for the company to report a profit of $7.93 a share on revenue of $36.84 billion, on average. The high estimate is $8.49 a share with a low estimate of $7.23. Apple has beaten estimates the last 3 quarters but missed a year ago during this time frame.
We think the momentum is there for shares to rally on an earnings beat of $8.50 or more and while that could be a lot to ask, Apple typically sandbags their quarterly numbers and we believe sales in China will come in much better than anticipated.
Apple is also gaining market share with its iRadio and recently released a number of new products. Although there was no watch announcement, the hiring of Angela Ahrendts, former CEO of Burberry, is a good indication one is coming. She won’t be joining Apple until early next year but with Buffet’s recent comments on management, these were good clues Apple is getting its house in order as it gears up to take on Samsung and Google.
Shares of Apple will weigh on Tech during Tuesday’s session and could be the wild card that helps push the Nasdaq past 4,000. Of course, an earnings miss it could have the same major impact and if shares fall below $500 its likely the Nasdaq will test 3,900.
Facebook (FB, $51.95, down $0.49) will be announcing their numbers on Wednesday and will also have an influence on the market. Shares have made an incredible rebound since bottoming in the mid-teens and have rewarded the patient investors who bought even after the IPO.
This quarter could be one of the most important quarters for Facebook as Wall Street will want to see continued mobile ad growth. If they can top estimates of 18 cents on revenue of $1.87 billion then shares could soar. However, they not only need to beat estimates, they need to smash them. A profit of $0.22 a share or more and revenue of over $2 billion could push shares towards $60. A disappointing quarter or a lowered outlook could easily hammer shares back below $50 and down to $47.50.
The Fed news midweek will also be a market-moving event as the talking heads bring back the taper talk. We have been on record since May saying the Fed wouldn’t taper until December at the earliest but that could now get pushed out until next March. The wording in their policy statement will be key and the devil will be in the details but if the market sees QE lasting into 2014, the bulls could push continued new highs. If the taper tap dance is indicated to be coming to an end sooner than later then the market could take a hit.
The zombie shutdown has caused some of the recent economic data to come in late and incomplete and the Fed usually relies on these numbers to make their statements. A muddy or cloudy picture will likely keep the printing presses on and with another zombie battle slated for January the Fed isn’t easing anytime soon.
The Monday/ Friday closes on the Dow were mostly positive although there was a slight dip in the blue-chips on Monday. If the Dow can start the week on a positive note and if Apple says some good things then we expect the upper channels of our charts for the indexes to get tested throughout the week with a flat Friday. A lower Monday, a weak Apple and Facebook report(s), a rising VIX, a break in support levels, and a lower Friday will be clues a possible top is in.” (from 10/27/2013 Weekly Wrap…)
The market traded in a tight range to start the week but had a terrific Tuesday as the bulls pushed fresh all-time highs. There was a little follow through on Wednesday ahead of the Fed Speak as the Dow finally joined the party and triggered new highs. However, the Dow Transports started to fade along with the rest of the market as the bears made a stand and pushed resistance by the close. The small-caps took the biggest hit, falling 1.4%, while the VIX went whacky.
Thursday’s session was choppy and offered both bullish and bearish clues as the bulls held support at the open following Wednesday’s pullback to push prior resistance during the morning session. But once again, the bears made another late-day comeback to push support again by the close.
The catcalls on a bubblicious and frothy market started to come out of the woodworks on the back test to support and all week but nothing was broken in the charts and we said we were still riding the bulls’ backs. After a mixed open to start Friday’s session, the bulls didn’t let us down as they rolled into positive territory by the close to get the weekly win – for the most part. (continued…)
The Dow added 70 points, or 0.45%, to close at 15,615 on Friday. The blue-chips fell to a low of 15,533 and held 15,500 on Monday before making a run to resistance at 15,600. The high checked-in at 15,599. Tuesday’s run reached 15,683 and the previous all-time high of 15,709 was cleared with Wednesday’s peak at 15,721. This put 15,800-16,000 on the bulls radar but the index fell back towards 15,600 after ending at 15,618 – down 61 points. Thursday’s action saw a triple-digit swing in the index as the low/ high reached 15,544/ 15,651. The lower low was a good sign as Friday’s high reached 15,649. For the week, the Dow added 45 points, or 0.3%, after starting at 15,570. For the year, the blue-chips are up 2,511 points, or 19%.
The S&P 500 advanced 5 points, or 0.3%, to finish at 1,761. The index traded to an all-time of 1,764.99 on Monday after dipping to 1,757 to start the week and kissed 1,772.09 on Tuesday. We said a run to 1,800 would come once 1,775 cleared and Wednesday’s intraday high reached 1,775.22. The bears then started an ambush and knocked 12 points off by the close as the index ended at 1,763. Thursday’s low reached 1,755 but support at 1,750 held along with Friday’s low of 1,752 before an intraday high of 1,765. The S&P 500 came into Monday’s session at 1,759.77 and was up over 2 points, or 0.1%, for the week. Year-to-date, the index has surged 335 points, or 23%.
The Nasdaq gained 2 points, or 0.1%, to settle at 3,922. Tech struggled with resistance at 3,950 on Monday before fading to 3,927 and ending at 3,940. Support at 3,925 held and the bulls were able to clear resistance on Tuesday’s close at 3,952 and peak at 3,957. This opened the door for a run at 3,975-4,000 but Wednesday’s run only reached 3,966 before a 47 point fade to 3,919. The close at 3,930 held 3,925 but suggested a dip to support at 3,900 would come. Thursday’s low checked in at 3,909 with a close at 3,919. Friday’s bottom reached 3,904 but Tech kissed 3,938 shortly after the open. The Nasdaq began the week at 3,943 and was down 21 points, or 0.5%, by Friday’s close. For 2013, Tech has still zoomed on 903 points, or 30%.
The Russell 2000 slipped 4 points, or 0.4%, to end at 1,095 on Friday. The small-caps traded up to 1,119.56 on Monday’s open but dipped to 1,113 shortly afterwards and had to wait until Tuesday before they reached another all-time high of 1,122.64. We mentioned a close above 1,125 gets 1,150 in the mix and Wednesday’s peak reached 1,123.26 before a nasty test to 1,104 and close at 1,105. Thursday’s high reached 1,108 before a drop dead close right on 1,100. The low checked-in at 1,097 and we said a close below 1,100 would get 1,075 in the picture. Friday’s low was 1,087 and the close below 1,100 is now slight resistance and needs to be respected. The Russell 2000 was at 1,118 before Monday’s open and fell 23 points, or 2%, for the week. YTD, the small-caps are higher by 246 points, or 30%.
The S&P 500 Volatility Index ($VIX, 13.28, down0.47) came into the week at 13.09 and reached 13.72 on Monday and peaked at 13.63 on Tuesday. Wednesday was a wild day we spent 2 days talking about as the VIX reached a high of 21.26 according to a few financial websites but as you can see from the chart below, the high shows 14.46. We said we would file this in the memory bank but as a trader the CLOSE below 15 was the most important factor in us staying bullish. Remember, we have said not to flinch, or go bearish, until the VIX closes above 15. The action shook the braches on Wall Street as some of the slick-talking pros fell off the money tree but Thursday’s high on the VIX reached 14.01 and was another good clue support might hold. Friday’s high reached 13.92 before the VIX closed near its low of 13.22. From Wednesday through Friday, the VIX made lower highs and lower lows which is bearish for a stock but bullish for the VIX. We have said a test to 12.50 could come before there is a pullback.
October has a history of big crashes but the bulls sailed through the month with minor scratches as they pushed all-time highs. The bears might be waking up but they have several layers of support to crack before there is a trend change.
The Dow came into October at 15,129 and gained 486 points, or 2.8%, for the month. The S&P 500 was at 1,681 and was up 80 points, or 4.5%. The Nasdaq jumped 151 points, or 3.9%, after starting the month at 3,771 while the Russell 2000 advanced 22 points, or 2.5%, after starting at 1,073. The Dow Transports surged 5.9%.
Last week we touched on 1 of the basic 6 Dow Theory technical analysis as we talked about the blue-chips and their relationship to the Dow Transports. The Dow Theory was created by Charles Dow who was the first editor of the Wall Street Journal and with the index being the last index NOT to trigger our year-end target (from February we remind you), we wanted to cover why the blue-chips are still on track to push 16,000.
We mentioned the Dow would need to trigger a new high sooner rather than later following the Dow Transports surge to fresh all-time highs. That was achieved in 3 days and was a bullish sign as we said the sooner it came, the stronger the signal.
Another Dow Theory we like to follow is volume as it confirms price trends. When the Dow (or market) moves on low volume, there could be a bevy of reasons why and can cause choppiness. However, when price movements are accompanied by higher volume, it usually represents a more accurate trend.
This could be where the classic Wall Street saying “the trend is your friend” comes from as it confirms the direction in which the market anticipates continued movement. Although volume is not at robust levels, it has improved since August and could explode in November and December on a continued breakout and a possible blowoff top that has yet to come.
A third Dow Theory is that a trend exists until definitive clues prove that they have ended. We often talk about “clues” and “market noise” as there might be a temporary move in the direction opposite of the current trend but like we have seen all year, the trend will soon resume the prior move. In other words, the trend should be given the benefit of the doubt during reversals or tests to support and why we have stayed calm and bullish.
We talked about all of the noise last week and we mentioned determining whether a top or high for the market is or the start of a new trend is one of the hardest crystal balls to read. This is why we use a number of other, simple to follow technical analysis to confirm or refute the current action. We like to use Channels and the Moving Averages to help us predict where prices are headed along with market sentiment, history, the VIX and a few others.
The other 3 main Dow Theories that are also in play are “movement”, “phase” and the fact the market is discounting all news. We will talk more about the technical analysis of each of these theories next week to wrap up our lesson but the first 3 are still showing a continued uptrend.
The Dow is also at a triple-top and these types of chart patterns can be bullish or bearish but this one looks bullish. The blue-chips peaked in August and September and are on the verge of a triple-top breakout as the index is in an uptrend. These types of setups are usually reliable and a breakout on higher volume would confirm another rally that should carry the Dow towards our yearend target of 16,000.
Although the Monday/ Friday closes have been mixed in the past few weeks, the bears have not scored big on Monday’s and support has held while the bulls continue to make Friday’s a good ending to the week. A higher M/F close this week would be bullish.
The only bearish signal we are seeing is the small-caps as the close below 1,100 needs to be respected. There could be a shakedown to 1,075 to flush out the weaker hands but if there is a close below this level, the Dow fails at its triple-top, and a rising VIX would be cause for concern as a possible trend change would be developing.
As we head to press, futures look like this: Dow futures are up 36 points to 15,578 while the S&P 500 futures are higher by 4 points to 1,758. The Nasdaq 100 futures are advancing 9 points to 3,376.
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 “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: 124-63 – 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.
Cliff’s Natural Resources (CLF, $27.34, up $1.66)
November 25 calls (CLF131116C00025000, $2.45, up $1.20)
Entry Price: $0.95 (10/21/13)
Exit Target: $1.90 (closed half @ $1.25 on 10/31/13)
Return: 95%
Stop Target: $1.25, raise to $1.75 (Stop Limit)
December 30 calls (CLF131221C00030000, $0.85, up $0.50)
Entry Price: $0.70 (11/1/13)
Exit Target: $1.40
Return: 21%
Stop Target: 50 cents
Action: Shares traded to a high of $27.77 on Friday as the November 25 call options reached a high of $2.88. We added the December 30 calls on the breakout as you can see from the chart below and they reached a peak of $1.00. We have said the short sellers would cover at $25 and that a run to $30 could come quick. A break above $28 should do the trick. Support is at $25.
H&R Block (HRB, $28.89, up $0.45)
December 30 calls (HRB131221C00030000, $0.70, up $0.05)
Entry Price: $0.60 (10/29/13)
Exit Target: $1.20
Return: 17%
Stop Target: None
Action: Shares tested the lower upper trend line late in the week but rebounded on Friday and what we wanted to see. Resistance at $29 is next up and a close below this level should get the low $30’s in play. Support is at $28.
Millennial Media (MM, $7.04, up $0.01)
December 7.50 calls (MM131221C00007500, $0.75, flat)
Entry Price: $0.65 (10/25/13)
Exit Target: $1.30
Return: 15%
Stop Target: None
Action: Shares are hovering around the 50-day MA with resistance at $7.25. A close above this level could lead to a run to $8 and we have a longer-term target of 10+. Support is at $6.75-$6.50.
DuPont (DD, $61.09, down $0.11)
December 62.50 calls (DD131221C00062500, $0.70. down $0.05)
Entry Price: $0.60 (10/24/13)
Exit Target: $1.20
Return: 17%
Stop Target: 60 cents
Action: We have a near-term target of $65 for the stock. Support is at $61 and we will likely close the trade if shares fall below $60.
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.
Boston Scientific November 12 calls (from October 2013)– HOLD
Aruba Networks November 20 calls (from October 2013) – HOLD
Catamaran November 52.50 calls (from October 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.
AOL (AOL, $36.68, up $0.84)
November 40 calls (AOL131116C00040000, $0.80, up $0.15)
November 34 puts (AOL131116P00034000, $0.90, down $0.15)
Thoughts: Our first choice would be to buy puts but shares could surge higher after earnings as they have matched or beat expectations 4-straight quarters. Shares have traded lower the past 2 reports but a few analysts have upgraded the stock over the past 2 months. There has also been a public firing and the Patch division closure that could lead to a one-time charge.
If the market looks like it ends higher on Monday, the call options could be worth a gamble but the best trade could be a strangle trade using these options. However, the premiums are rich and will likely keep us on the sidelines.
Fossil (FOSL, $128.66, up$1.72)
November 100 puts (FOSL131116P00100000, $0.45, down $0.10)
November 155 calls (FOSL131116C00155000, $0.45, up$0.05)
Thoughts: In May 2012, we had a Fossil put trade on our Watch List that was a monster after the stock fell from $125 to $75. The company has been smashing earnings ever since and shares are back at historic levels. The over/ under is $1.35 a share for this quarter.
A $50 move may be asking a bit much this time around but a big beat or miss could cause a $30 move. This would be enough to make this a profitable strangle option trade as we are unsure if a breakout or breakdown is coming. Shares surged $23 higher back in August from $107 to $129 on earnings and this might not be enough to make this strangle trade profitable if a $20 move or less comes this time around.
As you can see, either way, the trade is a lottery pick as a directional or strangle play.
Coors Brewing (TAP, $53.99, down $0.01)
November 55 calls (TAP131116C00055000, $0.65, down $0.05)
Thoughts: a run past double-nickels could come on an earnings beat.
Cedar Fair (FUN, $45.49, down $0.36)
December 40 puts (FUN131221P00040000, $0.35, flat)
Thoughts: A push past $50 could come on good earnings or a drop below $40 on an earnings disappointment. The company reported a profit last time out but losses were heavy in the prior 3 quarters. We don’t have any current put options open in our Daily and we could add these puts as “insurance” with the chance at making a triple-digit return on a free fall below $40.
These are cheap options as a 10 contract trade would cost $350 at current levels. If shares are at $39 by mid-December the options would be worth at least $1-$1.05 and would represent a 200% return. The $350 insurance premium would be worth $1,000-,$1,050.
We love the risk/ reward these options offer and if we take action it will likely be Tuesday or Wednesday. We will send out a Trade Alert if we do.
ViroPharma (VPHM, $39.00, up $0.19)
December 45 calls (VPHM131221C0004500, $0.70, up $0.05)
Thoughts: We could add these call on a pop past $40.
Annie’s (BNNY, $47.53, up $0.28)
November 50 calls (BNNY131116C00050000, $0.70, up $0.10)
Thoughts: The bid/ ask is a little wide and while puts might be the better options, these calls could do well if revenues come in above expectations.
AbbVie (ABBV, $48.96, up $0.51)
December 50 calls (ABBV131221C00050000, $1.05, up $0.15)
Thoughts: We could get into these call options on a move past $50.
Kodiak Oil & Gas (KOG, $12.38, down $0.59)
December 13 calls (KOG131221C00013000, $0.55, down $0.35)
Thoughts: We would like to see a continued back test to $12 and where we may look into a new position. However, we may need to watch the stock for another week to ensure support holds up. A close above $12.50 would be slightly bullish and we may have to wait until $13 clears to start new positions.
Opko Health (OPK, $10.02, flat)
December 11 calls (OPK131221C00012000, $0.60, flat)
January 12 calls (OPK140118C00012000, $0.60, flat)
Thoughts: There is risk down to $9.50 and we will likely wait for $11 to clear before getting back into this name. We made some huge profits on the run to $13 last month and shares are volatile which is what we like to see.
Keryx Biopharmaceuticals (KERX, $10.64, up $0.29)
December 13 calls (KERX131221C00013000, $0.75, flat)
Thoughts: Support at $10 has been holding strong and a run to the mid-teens could be coming over the next 3-6 months.
iShares Russell 2000 (IWM, $108.71, down $0.48)
December 114 calls (IWM131221C00114000, $0.55, down $0.20)
December 102 puts (IWM131221P00102000, $0.80, up $0.10)
Thoughts: We could go long on a pop above $111 or short on a close below $108.
Salesforce.com (CRM, $53.96, up $0.60)
December 60 calls (CRM131221C00060000, $1.05, up $0.10)
Thoughts: We believe shares will make a run past $60 as long as $50 holds and $55 is cleared.
Intel (INTC, $24.33, down $0.14)
December 24 calls (INTC131221C00024000, $0.65. down $0.10)
January 24 calls (INTC140118C00024000, $0.95, down $0.10)
Thoughts: Analysts are bearish but we like Intel for the long-term. Support is at $24 but we believe shares can trigger $26-$27 by yearend.