In This Issue:
Dear Momentum Options Subscriber,
The market traded sideways throughout last week before making a break toward the top of its trading range. The good news is that most of the major indices have cleared their range ceilings. The bad news is that the small-caps are still struggling.
The Dow added 20 points, or 0.1%, to close at 18,272 on Friday. The blue-chips opened a point lower and spent much of the session back-testing fresh support at 18,200. The final-hour rally came within 16 points of the all-time high of 18,288 set in March. Continued closes above 18,200 should lead to a run at 18,350-18,500 over the near term. Backup support is at 18,000-17,950 and the 50-day moving average on a close below 18,200.
The S&P 500 gained nearly 2 points, or 0.1%, to finish just under 2,123. The index opened at 2,122 and came within a point of its all-time intraday high of 2,125. The bears pushed a low of 2,116 shortly afterwards, but fresh support at 2,115-2,110 held. A close above 2,125-2,130 will likely get 2,150-2,175 in play. Backup support is at 2,100-2,090 and the 50-day moving average.
The Nasdaq slipped more than 2 points, or 0.05%, to end at 5,048. Tech made an opening run to 5,062 before fading to a low of 5,034. Support at 5,025-5,000 easily held before the bulls rebounded to nearly hold 5,050. Continued closes above this level should lead to 5,100-5,150 over the near term. The recent 52-week high is at 5,119. The all-time intraday high is at 5,134. Backup support is at 4,950 and the 50-day moving average on another close below 5,000.
The Russell 2000 dipped a point, or 0.1%, to settle just below 1,244. The small-caps made a push to 1,246 at the start of trading but were unable to clear their 50-day moving average. The index spent the majority of the session in negative territory following the opening pop and drop to 1,238. Support at 1,230-1,225 and the 100-day moving average held, and there is additional help at 1,210-1,200 on a close below the latter. The next layers of resistance are at 1,250-1,260. The all-time high is at 1,278.
The S&P 500 Volatility Index ($VIX, 12.38, down 0.36) fell 3% and closed below 12.50. This was a very bullish development, as the VIX also held 13.50 on weakness. The next test comes at 11.50. If the bulls can get below this level, there is a good chance that 10 and single-digits could come into play. Consecutive closes above 13.50-14 would signal a short-term top.
My opening paragraph talked about weakness in the small-caps and, although I’m concerned with their performance, the Russell 2000 iShares (IWM) account for less than 10% of the total stock market.
The index is just below its 50-day moving average, and a close above $124 would be a bullish signal. Ideally, I would like to see this happen today, but, as long as it happens this week, this area of concern would be removed.
Another troublesome sign is the Dow Jones Transportation Average ($TRAN, 8,680, up 82). The index fell below its 200-day moving average (again) to test its April low just below 8,550. I have been mentioning for weeks that a close below 8,550-8,500 would be a very bearish development.
I also said that I’m keeping my fingers crossed that this doesn’t happen until later in the year (or next). The late-in-the-week rebound off of the lows may have saved the bulls, but the index is a red flag until 8,800 and the 50-day moving average are cleared.
The importance of the Transports holding their recent lows has a lot to do with Dow Theory. Old school traders like to see both the Dow and the Dow Transports making new highs in tandem in an overall bullish market. Obviously, this is not happening with the blue-chips near all-time highs while the Transports are planted below their 200-day moving average.
The Dow and the Transports tried reaching new all-time highs together back in February and March. There has been a major divergence between the two indices for nearly two months, so this is not really “new” news.
While the suits-and-ties seem worried that the two indices aren’t trading in sync, I’m not too stressed, as the Dow Jones itself is not all that industrial these days. Although the blue-chips and the Dow are comprised of just 30 stocks, over the decades, the industrial stocks have been replaced with banking, tech and other “sector” stocks.
For those of you who have followed me for years, I have talked about Dow Theory in the past, and it has helped confirm some of my greatest market calls ever. I am a huge market historian, so this correlation still means something to me.
There are 20 stocks that make up the Dow Transports, and they include railroad, trucking and airline companies. By market cap, FedEx (FDX, $175.14, up $1.69), United Parcel Service (UPS, $102.13, up $1.46) and Union Pacific (UNP, $103.83, up $1.74) make up the top three stocks in the index. Two of them, FDX and UPS, have cleared their major moving averages, and this is a bullish sign. UNP is below all of its major moving averages.
I don’t usually trade options on stocks over $100 because they can be extremely expensive at times, or pricey, which is the word I like to use. I like to trade option premiums for under $1. Options that trade for $2-$3 are like taking two or three trades at once for me, which is why I shy away from them. In other words, there is also a lot more premium to lose on a $3 option than on a $0.50 option.
Having said that, I did sneak a peek at the option chains for United Parcel Service (UPS), as I love the breakout, and it is a stock I have followed for decades. The close above $102 was bullish, and a move above $104 could lead to a run at its 52-week high north of $114.
There are weekly options that trade on UPS for under $1, but weekly options can be thinly traded and often have wider spreads. Time decay is much shorter in weekly options, which is why the premiums are a little less expensive.
For example, the UPS May 105 calls (UPS150522C00105000, $0.08, down $0.12) that expire this Friday can be considered “cheap” at current levels. However, for them to be “in-the-money,” UPS shares would need to clear $105.08, technically, for the trade to break even. It’s possible, but it would be a big risk for a five-day bet.
Instead, bullish traders can look at the UPS June 105 calls (UPS150619C00105000, $0.60, up $0.22) as a much better “option,” as they would allow the trade more time to play out. If shares trade to $106.20, technically, by mid-June, these options would double from current levels, as they would be $1.20 “in-the-money.”
If UPS shares can rally to $111 by mid-June, the aforementioned call options would be worth at least $6, which would represent a 10-bagger.
If the Transports can resume a rally on their own and last week’s bottom holds, this would be a bullish development. However, it will be interesting to see what happens if there is a close below 8,500 this summer.
I’m more worried about the financial stocks, and there are a number of them in the Dow that can carry the index higher. The slick-talking pros are finally starting to say they would like to see the financial stocks show strength, but I have been on this bandwagon all year (and last).
The Financial Select SPDR (XLF, $24.70, down $0.11) finished last week slightly lower but is trying to hold fresh support at $24.60. This level served as prior resistance, which is one I would like to see hold throughout this week. Continued closes above $24.80-25 would be a very bullish development. A close below $24 would be a bearish, but that’s something I don’t think we have to worry about over the near term.
A lot has been made about the surge in Treasury yields over the past few weeks. I’ve never been a big fan of bonds, but the rise in yields is a positive sign for the economy. I believe yields would not be surging if the economy were weakening, and I have said the same thing about interest rates. Although there hasn’t been a rate hike, I believe one is coming sooner rather than later.
I wanted to see more follow-through on Friday after Thursday’s nice surge, but the fact the blue-chips closed up while the VIX finished lower were both positive signs. The technical picture hasn’t changed and, while it could at some point, it appears that the market is still on track to challenge fresh all-time highs.
From desk to press, futures look like this: Dow (-35); S&P 500 (-5.5); Nasdaq 100 (-17).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 47-15-1 (75%). All trades are dated and time stamped so new subscribers can look at the past history to see how the trades have played out.
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 I list one. I will send out a “Profit Alert” or “New Trade” if I want you to close a position or if a new trade comes out. Otherwise, follow instructions at all times in the 9 a.m. and 12 p.m. – 1 p.m. updates. Also, I will usually give you a heads-up if I think I’m going to send an email outside of these time frames.
All prices given in this update are current as of 8:30 a.m. EST.
I hereby disclose that I will be participating in the following trade(s). Every new Momentum Options recommendation is listed with the price at which I entered my own position. If the price is slightly different than my recommended entry or exit price when you receive the alert, don’t let that keep you from getting into or out of a trade. Occasionally, you might even get a better “fill” price than what is posted in the Open Trades and Closed Trades.
Rigel Pharmaceuticals (RIGL, $4.09, down $0.11)
RIGL September 5 calls (RIGL150918C00005000, $0.70, flat)
Entry Price: $0.50 (5/13/2015)
Exit Target: $1.00
Return: 40%
Stop Target: $0.55 (Stop Limit)
Action: Set a Stop Limit at $0.55.
Support is at $4 and the 50-day moving average. A close below $3.75 would be bearish. Resistance is at $4.25, followed by $4.50. A “symmetrical triangle” pattern has formed, and this technical pattern usually indicates that a major move could be forthcoming.
Diamond Foods (DMND, $29.32, down $0.30)
DMND June 31 calls (DMND150619C00031000, $0.90, down $0.10)
Entry Price: $0.45 (5/12/2015)
Exit Target: $1.35 (closed a third at $0.80 on 5/13/15)
Return: 93%
Stop Target: $0.75 (Stop Limit)
Action: Support is at $29-$28.50 and the 50/100-day moving averages. Near-term resistance is at $30-$30.50 and the 50-day moving average. If cleared, a run to $32-$33 could come.
You can read my full write-up on DMND in the May 13 Pre-Market Update.
Sony (SNE, $32.74, up $0.55)
SNE June 32 calls (SNE150619C00032000, $1.45, up $0.20)
Entry Price: $0.70 (5/8/2015)
Exit Target: $1.75 (closed first half at $1.25 on 5/13/15)
Return: 93%
Stop Target: $0.95, raise to $1.10 (Stop Limit)
Action: Raise the Stop Limit from $0.95 to $1.10 on the second half of the trade.
Shares traded to a fresh 52-week high of $32.77 on Friday. I have talked about a run to $33-$34 coming on a breakout, and the 5-year chart is showing strength to $35. Fresh support is at $32. A close below $31 will likely trigger the raised Stop Limit.
Wells Fargo (WFC, $55.52, down $0.52)
WFC June 57.50 calls (WFC150619C00057500, $0.23, down $0.13)
Entry Price: $0.31 (5/4/2015)
Exit Target: $0.65
Return: -26%
Stop Target: None
Action: Near-term support is at $55-$54.50 and the 50-day moving average. Resistance is at $56 and the recent 52-week high of $56.29. A close above these levels could lead to a push to $58-$60.
Limelight Networks (LLNW, $4.23, up $0.06)
LLNW September 4 calls (LLNW150918C00004000, $0.63, up $0.03)
Entry Price: $0.35 (4/29/2015)
Exit Target: $0.80 (Limit Order on half)
Return: 80%
Stop Target: $0.40, raise to $0.45 (Stop Limit)
Action: Raise the Stop Limit from $0.40 to $0.45.
Shares traded to a fresh 52-week high of $4.30 on Friday. Multi-year resistance is at $4.50. Support is at $4.10-$4.
You can read my full update on LLNW in the May 1 Pre-Market Update.
Opko Health (OPK, $16.92, up $0.24)
OPK June 16 calls (OPK150619C00016000, $1.30, up $0.25)
Entry Price: $0.50 (4/27/2015)
Exit Target: $1.00 (closed first half at $0.60 on 5/13/15)
Return: 90%
Stop Target: $0.80, raise to $1.00 (Stop Limit)
Action: Raise the Stop Limit from $0.80 to $1.00 on the second half of the trade.
Shares traded to a fresh all-time high of $17.24 on Friday. Momentum could carry shares to $20 following the 4-month trading range from February. Support has moved up to $16, with $15 serving backup.
Dot Hill Systems (HILL, $6.83, down $0.08)
HILL September 7.50 calls (HILL150918C00007500, $0.55, down $0.05)
Entry Price: $0.45 (4/20/2015)
Exit Target: $1.35-$1.80
Return: 22%
Stop Target: None
Action: Support is at $6.75-$6.60. Resistance is at $7.
Trades on Hold — other 2015 Portfolio Open positions (2): 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 I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly when the trade closes or if the options expire. Click on the Open Trades and Closed Trades pages to see all open and closed positions.
SunPower (SPWR) June 38 calls (from April 2015) — Resistance is at $32.75 and the 50-day moving average. Support is at $31 and the 200-day moving average — Continue to hold.
BlackBerry (BBRY) June 13 calls (from March 2015) — This is a speculation trade from early March on BBRY receiving a takeover offer of $14 or better by mid-June — Continue to hold.
Trade on!
Rick Rouse
Editor and Chief Options Strategist
Momentum Options
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