MomentumOptionsTrading.com Morning Update for 9/23/2013
Bears Strike Late on Quadruple-Witching
9:00am (EST)
“We wanted to update our thoughts on the 3 stocks we said to watch last week as we mentioned how important they would be in shaping the technical picture. The chart we drew up on International Business Machines (IBM, $192.17, up $1.44) had shares testing $187.50, or the top of its downward channel (purple lines), on continued strength. Shares rallied slightly past resistance to the 50-day MA on Wednesday after gaining $4, or 2%, on deal-making news. The pop was good enough for 28.5 Dow points as the index pushed 15,350 and its next wave of resistance. Shares could see further strength to $197.50 and a close above this level would be bullish for a push past $200.
The downtrend channel for Caterpillar (CAT, $87.01, up $0.17) was at $85 but shares broke above their 200-day MA after closing at $87.13 midweek. There is a chance shares make a run to $90 over the near-term but we are watching the $84 level as a possible short opportunity down the road.
A symmetrical triangle had formed on Apple’s (AAPL, $464.90, down $7.79) chart and is usually a classic sign a huge breakout, or breakdown is forthcoming. Shares came into the week and needed to clear $510 based on our chart work from last week. We knew when Monday’s peak only reached $508 and Tuesday’s open produced a lower high ahead of the midday announcement there could be trouble. The stock fell $12 by the close and tanked another 5%, or $27, to close at $467 after failing to announce a China deal (and no new products). The 50-day MA at $463 was tested on Thursday and Friday and a close below this level would be bearish for a test down to $450-$440. A rebound past $475 would take some of the pressure off shares.
The changes in the Dow we reported on last week were very bullish news and we wanted to comment on them in more detail as well.Alcoa (AA, $8.08, down $0.08), Bank of America (BAC, $14.49, up $0.01), and Hewlett-Packard (HPQ, $22.07, up $0.11) were dropped from the index while with Goldman Sachs (GS, $164.00, up $0.65), Nike (NKE, $67.91, down $0.17) and Visa (V, $189.00, up $3.94) taking their place.
The addition of the 3 newest “blue-chips” will significantly change the ratio of the index as it is price weighted. We mentioned International Business Machines is the heaviest weighted stock and that Goldman Sachs and Visa will now take over as the second and third heaviest, respectively, when they are added to the Dow on next Monday’s open.
Alcoa, Bank of America and Hewlett-Packard were the three lowest priced stocks in the Dow and were replaced by two in the triple-digits. Nike was trading over $100 before Christmas of last year and did a 2-for-1 split the day after. To put this in perspective, the 3 “old” blue-chips stocks totaled just over a 2% weighting in the Dow because of their low prices. IBM alone is 11%.
The 3 new blue-chip stocks will create additional volatility and larger moves in the Dow as all of them are capable of making huge price swings. The buying of these stocks could create some upside bias as fund managers add them to their portfolios. These additions should also create the juice needed for the bulls to make a run at our yearend target of Dow 16,000 we set back in February.
Gold ($1,327.60, up $6.70) continues to break down like a rented mule following the drop below $1,400. The yellow metal rebounded on Friday but had a terrible week, falling over$60, or 4%. We have said Gold could test $1,175-$,1,150 this year and following a rebound in August off the 50-day MA to a high of $1,434, this could be the slide that gets it there. The next wave of support is at $1,300 and a close below this level would be the green light to go short.
Silver ($22.28, up $0.51) tanked nearly 6% for the week after testing $22 and a late August high of $25 following a low of $19. Silver held its 50-day MA of $21.40 but a close below this level should lead to $20-$19. We have been waiting for $17.50 to come into play before we said we would start adding Silver to our portfolio and we are hoping the current tumble takes it there. However, we talked about the huge “spot” prices in the American Eagles back in August and why we didn’t nibble then.
When Silver dropped to $19, spot prices were $5-$6 on a single coin through the US mint and on eBay they weren’t much better.
One of the main reasons Gold and Silver has taken a beating is due to the easing of the geopolitical tensions concerning Syria. Expectations for a QE taper cut and a rebounding dollar also weighed on the metals. However, if Syria does something stupid during a shakedown or if the Fed doesn’t do a taper cut, Gold and Silver could rebound sharply.
The bulls finally got a positive Monday/ Friday close on the Dow for the first time since July. Monday’s have been weaker than Friday’s over the past few months and this week’s M/F closes could be crucial. If the bulls get a win to start the week and can make it past the Fed with a positive Friday close, the market could see new highs. If the Dow finishes with a lower M/F close this week it could be signs of an upcoming pullback into the current trading range.
It was too early to tell if the market had “cleared” the Syria news but as tensions eased last week, the market reached new highs. There has been some more progress this weekend on getting the country to give up its chemical weapons but nothing is a given until the U.S. ships leave the area.
The main event this week will be the Federal Open Market Committee (FOMC) meeting on Tuesday and Wednesday. A decision on whether or not the Fed will taper or cut back its bond purchases is expected at 2pm, midweek. How much of this is factored into the market is the bigger question.
Wall street has been expecting the Fed to cut its bond purchases and that might imply that a little bit of tapering is already factored into the market. We have been in the camp that a QE cutback won’t come until December and with the amount of taper talk all summer it could be a shock to the market if the zombies don’t do one.
We mentioned earlier one of our February targets for the market was Dow 16,000. We also said the S&P 500 would trigger 1,700 and the Russell 2000 would trip 1,025. When those targets were hit over the summer, we didn’t raise them like many of the Wall Street pros did. Instead, we prepared for a choppy range that we have played flawlessly as we called a test to the bottom and at the end of August we said the indexes would reach the top of their ranges.
There could be a little more fluff as the Nasdaq makes a bid at our 3,800 target (and the Dow shoots for 16K), but as we have seen with our other prices targets, when reached, there has been a pullback. We still believe these targets will trip but we are cautious as the market still must deal with a debt-ceiling resolution and upcoming 3Q earnings.” (from 9/15/2013 Weekly Wrap…)
The market got a huge pop to start the week despite a looming Fed meeting that would take center stage midweek. We aren’t sure what the Vegas odds of a taper cut were but Wall Street had the Fed as 10-to-1 favorites to cut back on its monthly quantitative easing program. Nearly 90% of the suit-and-ties had penciled-in a cut in September and we were in the 10% camp that figured the Fed would wait.
We did a tap dance of our own on Wednesday when they Fed stayed pat. Many believed Fed head Ben Bernanke chickened out by not doing at least a small cut but he is well aware of the upcoming debates in D.C. and decided he couldn’t trust the zombies (or the economy) enough to slow down the printing presses. As a result, the market soared to new highs as the shorts ran for cover.
There was a little consolidation on Thursday and into Friday’s session before the bears made a late week ambush. There were a lot of factors in play that contributed to the pullback but we doubt the bulls are through running as the look to end September on a strong note. However, a continued selloff to start the week and a break below support could give the bears optimism heading into October. (read more…)
The Dow tanked 185 points, or 1.2%, to finish at 15,451 on Friday. The blue-chips faced resistance at 15,400 coming into the week and needed to clear this level in order to make a run at 15,600. The bulls pushed a high of 15,549 on Monday and 15,555 on Tuesday. The Dow tested a low of 15,470 ahead of the Fed announcement on Wednesday but rebounded 239 points to reach an all-time high of 15,709. The close at 15,676 easily held 15,600 and set the stage for a run at 16,000. The index reached 15,695 on Thursday and 15,654 on Friday but gave up 200 points into the close while finishing 3 points off its low. Another close above 15,500 could lead to 15,600+ but a drop below 15,400 could lead to a back test to 15,300-15,200 and the 100-day and 50-day MA’s. A close below these levels would be bearish. For the week, the Dow was up 75 points, or 0.5%, after starting at 15,376. For the year, the blue-chips have zoomed 2,347 points, or 17.9%.
The S&P 500 dropped a dozen points, or 0.7%, to settle at 1,709. The index made a run past 1,700 to 1,704.95 to start the week but had to wait until Tuesday’s close at 1,704.76 to clear resistance. We mentioned a finish above this level and then 1,710 would get 1,725 in play and new all-time highs. The S&P tested 1,700 on Wednesday’s session before surging nearly 2% to 1,729.44 and ending exactly on our 1,725 fluff target. We also mentioned last week, if cleared, there could be a continued push to 1,750-1,775. Thursday’s high reached 1,729.86 (short-term double-top?) before a close at 1,722. Friday’s run to 1,725.23 was a nice bear trap as the index stumbled to 1,708 by the close. The bulls are trying to build a floor of support at 1,700 but there is still risk down to 1,675 (100-day MA)-1,650 (50-day MA) on a pullback. If 1,725 is cleared again, the bulls will be looking to push 1,750+. The S&P 500 came into Monday’s session at 1,688 and added 21 points, or 1.3%, for the week. Year-to-date, the index is higher by 284 points, or 19.9%.
The Nasdaq fell 14 points, or 0.4%, to end at 3,774. Tech reached a peak of 3,756 to start the week before falling to a low of 3,712 and holding support at 3,700. We have been mentioning a run to 3,750-3,800 would come on a close above 3,725 and Tuesday’s pop to 3,747 and close above this level was a good clue continued highs were in store. The index traded to a low of 3,737 before Wednesday’s big news and held 3,725 before a 65-point surge to 3,790. Thank you Mr. Bernanke. Thursday’s trip to 3,798.16 came within 2 points of our yearend target for the Nasdaq we set back in early February and we thought for sure it would be triggered on Friday. However, the bulls could only push 3,798.76 (short-term double top?) before giving up ground and closing a point below 3,775. There is danger down to 3,650 and the 50-day MA on a break and close below 3,700 and anything below these levels could cause some immense selling pressure if the snowball turns into an avalanche. If the bulls clear 3,800 there could be fluff up to 4,000. The Nasdaq began the week at 3,722 and advanced 52 points, or 1.4%, by Friday’s closing bell. For 2013, Tech is in the green by 755 points, or 25%. This is a nice round number for the fund managers to lock-in gains if they see weakness ahead.
The Russell 2000 slipped 2 points, or 0.2%, to close at 1,072 on Friday. The small-caps looked poised to test all-time highs after closing above 1,050 the prior week. We said the bulls needed to clear 1,060 for a run at 1,075. They pushed 1,065 to set an all-time high on Monday but failed to hold 1,060. The index quietly kissed 1,066 on Tuesday and additional all-time highs with the close before a dip to 1,058 ahead of the Fed news. After the announcement, the Russell soared to 1,080 before settling at 1,076. Thursday’s high was 1,079.76 (another DT?) and Friday’s peak came in at 1,078. A close above 1,080 should trigger a run to 1,100 while a drop below 1,060 needs to be watched. There would be additional wiggle room down to 1,050-1,040 but a drop below the 50-day MA would be troublesome. The Russell 2000 was at 1,054 before Monday’s open and was higher by 18 points, or 1.8%, for the week. YTD, the small-caps have ballooned 223 points, or 26.3%.
The S&P 500 Volatility Index ($VIX, 13.12, down 0.04) came into the week at 14.16 and we said to watch 13.50 and 15 as bullish and bearish targets. The bulls made a run to 14.49 on Monday’s open before falling to 13.87 and finishing as 14.42 despite the rally. Tuesday’s trip to 14.61 ended with a close at 14.53. The VIX traded up to 14.68 ahead of the Fed announcement on Wednesday and was a good clue Wall Street would be caught off-guard when 15 held. The index plunged to a low of 13.23 before ending at 13.59 once the dust settled. We can’t call it much better than that, folks. Thursday’s low was 13.02 and Friday’s bottom reached 12.50. We mentioned there was a chance the 52-week low of 11.05 could come into play on continued momentum but a close back below 13.50 might put this theory in jeopardy. If the bears can get above 15, watch for the Peggy Panic’s as a trip to 17.50 could come into play.
The charts from last week showed one last push to the top of the upper channels before a possible pullback. The bulls have had smooth sailing all September but we mentioned on Friday once the zombie talk heated up the close would be important. It was the perfect setup for a pullback following Wednesday’s surge to new all-time highs and Thursday’s mixed range-bound session.
From our 7/22/2013 Weekly Wrap:
“All of the major indexes are rapidly approaching our yearend target of Dow 16,000; S&P 1,700; Nasdaq 3,800; the Russell 2000 has cleared our 1,025 target and has even triggered our 1,050 fluff target. The 2013 gains aren’t unbelievable because we predicted them at the beginning of February. What is body-tingling is how fast the market has climbed in 6+ months and the incredible bounce off the 100-day MA’s.
It feels like the current rally could last through July and our other yearend targets could come into play on continued strength. At that point, it could be time to look at short positions heading into August and September but betting against the bulls or waiting on them to fall out of bed has punished a lot of traders this year.” (END)
From our 7/29/2013 Weekly Wrap:
“We have fluff targets of Dow 15,800-16,000; S&P 1,700-1,725; Nasdaq 3,650-3,700 and Russell 1,075-1,100 on a continued move higher but some of these are our yearend targets so we are a little cautious on how much further the bulls can push before there is a pullback. We have mentioned the rally could last through the end of July but the bulls appear to be stumbling at the finish line as the market experienced lower lows throughout the week after higher highs to start.
We will need to be careful in going long put options or short the market because it is possible a trading range forms if there is a pullback and support holds.” (END)
We mentioned September options would be expiring on Friday and “quadruple-witching” made for a volatile second half of trading. The rebalancing and shuffling of the S&P 500 and the Dow also added fuel to the fire.
The S&P 500 assigns new weightings to each of the stocks in the index depending on share buybacks and other factors so there was heavy action in Apple (AAPL, $467.41, down $4.89) and Google (GOOG, $903.11, up $4.72).
We talked about the upcoming musical chairs on the Dow as old blue-chippers Alcoa (AA, $8.29, down $0.15), Bank of America (BAC, $14.44, down $0.17) and Hewlett Packard (HPQ, $21.22, down $0.09) were booted on Friday’s close.
The new kids on the block will be Nike (NKE, $69.37, down $0.13), Goldman Sachs (GS, $169.75, up $1.97) and Visa (V, $198.83, up $4.12). Nike announces earnings this week and will be a preseason preview of upcoming 3Q earnings.
The debt ceiling, budget, and ObamaCare debates now take center stage and it is going to be an ugly battle. This is perhaps the Republicans last chance to try and do away with ObamaCare by not funding it.
The debt ceiling has been raised 82 times since America has been in the red. The increases have become more common since the 1960’s as the debt ceiling has been raised 73 times with Obama accounting for 3 of them.
On Friday, the House zombies passed a budget bill that would keep the government running through mid-December while defunding Obama’s healthcare law. The Senate zombies will reject it early this week and the hot potato will be back in the Houses’s hands.
The wrangling could continue throughout the week but without a a budget deal by the first of October, a government shutdown could become a real possibility.
The US Treasury has indicated that mid-October is when the zombies will run out of “extraordinary measures” and when a default would occur. The Treasury has been helping the zombies pay the bills for more than a month and prioritizing what they pay first and what can wait. This story will gain more traction the longer the bickering lasts as we doubt a solution is reached by next Monday.
As we head to press, futures look like this: Dow futures are up 27 points to 15,430 while the S&P 500 futures are higher by 2 points to 1,705. The Nasdaq 100 futures are advancing 7 points to 3,223.
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: 107-53, including the Weekly Wrap that is 34-3).
Skyworks Solutions (SWKS, $25.59, down $0.04)
October 26 calls (SWKS131019C00026000, $0.75, flat)
Entry Price: $0.75 (9/19/13)
Exit Target: $1.50
Return: 0%
Stop Target: None
Action: Shares traded to a high of $26 on Friday before closing at their low for the session. They are still in a solid uptrend with support at $25. We are looking for a run past $26.50 this week that should get $30 in play. We could exit the trade on a close below $24.50 and the 100-day MA.
Rackspace Hosting (RAX, $53.65, down $0.20)
October 55 calls (RAX131019C00055000, $1.40, down $0.20)
Entry Price: $1.10 (9/17/13)
Exit Target: $2.20
Return: 27%
Stop Target: $1, raise to $1.10
Action: We got into this trade on the break above the 200-day MA and we said we expected a run to $55 to come once cleared. Friday’s high was $54.09 and a close above double-nickels could lead to $60 on continued strength. Short-term support is at $52 and we will likely close the trade if there is a drop below $50.
JC Penney (JCP, $12.96, down $0.18)
October 12 puts (JCP131019P00012000, $0.38, up $0.06)
Entry Price: $0.28 (9/11/13)
Exit Target: $0.60
Return: 36%
Stop Target: 25 cents
November 12 puts (JCP131116P00012000, $0.80, up $0.10)
Entry Price: $0.65 (9/11/13)
Exit Target: $1.30
Return: 23%
Stop Target: 65 cents
Action: We said the drop below $13.50 should get $12.75-$12.50 in play and Friday’s low was $12.83. Shares were down another 2% to $12.65 in extended trading after news broke the company needed to raise some cash. Our neat-term target is $11.50 but a trip to $10 could be in the works.
Other 2013 Portfolio OPEN positions (4): 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 October 25 calls (from July 2013) – HOLD
eBay October 45 puts (from September 2013) – HOLD
Microsoft October 30 puts (from September 2013) – HOLD – We could bring back coverage of this trade soon as shares fell 2.5% on Friday. The puts are at a dime and we still expect a drop below $30 is coming.
Jos. A. Bank Clothiers October 35 puts (from August 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.
CarMax (KMX, $51.19, down $0.06)
October 55 calls (KMX131019C00055000, $0.50, flat) Earnings on Tuesday
January 55 calls (KMX140118C00055000, $1.75)
Thoughts: We have traded KMX is the past and we should have made the stock a Weekly Wrap recommendation back in the $20’s. We believe the company will beat current expectations and a 5%-10% pop could get shares pushing $55 and fresh 52-week highs. The options only trade in $5 increments and we like the January calls over the October calls as it gives the trade more time to play out. If we take action, we will send out a Trade Alert.
Carnival (CCL, $37.08, down $0.62) Earnings on Tuesday
October 36 puts (CCL131019P00036000, $0.50, up $0.15)
Thoughts: There were numerous negative headlines in the cruise industry over the summer and we like this put options to play a possible drop to under $35. Over 4,000 contracts traded on Friday and these put options will double if shares fall below $35.
Jabil Circuit (JBL, $23.11, down $0.56) Earnings on Wednesday
October 24 calls (JBL131019C00024000, $0.50, down $0.15)
Thoughts: We have been bullish on this stock since the mid-teens and we are expecting good numbers when the company reports. Depending on how the market is acting, we may get into this trade before Wednesday’s close.
Nike (NKE, $69.37, down $0.13) Earnings on Thursday
October 72.50 calls (NKE131004C00072500, $0.62, down $0.17)
October 65 puts (NKE131004P00065000, $0.55, up $0.05)
Thoughts: We have played Nike in the past and we usually use call options. With shares at 52-week highs and the stock being added to the Dow, this is an important announcement. We have also listed put options to make this a possible strangle trade because if Nike comes up short on estimates, shares could tank. These are also WEEKLY options we have listed and expire earlier than the regular options.
Apple (AAPL, $467.41, down $4.89)
October 500 calls (AAPL131019C00500000, $4.00, down $0.85)
Thoughts: There could be a run to $500 again over the next week or two and we should get some news on how the new iPhones are doing early this week.
MGM Resorts International (MGM, $19.92, down $0.26)
October 20 calls (MGM131019C00019000, $0.70, down $0.10)
Thoughts: Watch for now.
Diamond Foods (DMND, $22.01, down $0.06)
October 23 calls (DMND131019C00023000, $0.75, flat)
Thoughts: Earnings are next Monday and we will be doing a feature story in our Weekly Wrap this Sunday on the company.
Yahoo (YHOO, $30.92, down $0.11)
October 31 calls (YHOO131019C00031000, $1.10, down $0.05)
Thoughts: We should have been in this trade on the move above $30.
iShares Russell 2000 (IWM, $106.59, down $0.39)
October 107 calls (IWM131019C00104000, $1.50, down $0.30)
October 99 puts (IWM131019P00099000, $0.35, flat)
Thoughts: Watch for now.
Spiders Dow Jones Industrial Average (DIA, $154.30, down $1.71)
October 155 calls (DIA131019C00155000, $1.60, down $0.95)
October 147 puts (DIA131019P00147000, $0.40, up $0.05)
Thoughts: Watch for now.
Caterpillar (CAT, $84.75, down $3.00)
October 85 puts (CAT131019P00085000, $1.95, up $0.01)
Thoughts: These options opened at $1.01 on Friday and traded to a high of $1.98 on CAT’s late day plunge.
Salesforce.com (CRM, $52.76, down $0.62)
October 55 calls (CRM131019C00055000, $0.80, down $0.20)
Thoughts: Watch for now.
Intel (INTC, $23.77, down $0.15)
October 23 calls (INTC131019C00023000, $1.10, down $0.05)
January 24 calls (2014) (INTC140118C00024000, $0.95, down $0.10)
Thoughts: Watch for now.
Wendy’s (WEN, $8.41, down $0.09)
October 8 calls (WEN131019C00008000, $0.60, down $0.10)
November 8 calls (WEN131116C00008000, $0.80, down $0.10
Thoughts: Shares could be setting up for a run at $10.
Aruba Networks (ARUN, $17.71, down $0.01)
October 18 calls (ARUN131019C00018000, $0.65, flat)
Thoughts: We would wait for a close above $17.50 before going long.