In This Issue:
Dear Momentum Stocks Weekly 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 Stocks Weekly Play List
All prices given in this update are current as of May 15, 2015
The Momentum Stocks Weekly Closed Trade Track Record for 2015 is 15-0, for a 100% win rate (128-17, or 88% win rate, overall since the start of 2011).
View the entire list of open and closed trades by clicking here.
Dot Hill Systems (HILL, $6.83, down $0.08)
Original Entry Price: $6.80 (5/5/15)
Lowered Price from Selling Options: N/A
Exit Target: $10
Return: 0%
Stop Target: Raise from $5.00 to $6.81 (Stop Limit).
Action: Raise the Stop Target from $5 to $6.81 and make it a Stop Limit Order.
Support is at $6.75-$6.60. Resistance is at $7.00.
I have a Price Target of $8.00-$10.00 for HILL over the next three to six months. However, I wasn’t fond of last week’s price action after the stock made and failed multiple attempts to clear $7.00.
Psychemedics (PMD, $14.99, down $0.03)
Original Entry Price: $15.67 (5/5/15)
Lowered Price from Selling Options: No options available
Exit Target: $18.00-$20.00
Return: -4%
Stop Target: $12.00
Action: Support is at $14.75 and the 200-day moving average. A close below these levels could lead to $14.50-$14.00. Resistance is at $15.50 and the 100-day moving average
PMD currently yields 3.6% and pays a 60-cent annual dividend. Psychemedics provides drug testing services for companies and organizations through the analysis of hair samples. It is a more accurate way of detecting abuse for illegal drugs and helps companies manage these types of issues.
Wells Fargo (WFC, $55.52, down $0.52)
WFC October 60 calls (WFC151016C00060000, $0.55, down $0.10)
Entry Price: $0.67 (5/5/2015)
Exit Target: $1.35
Return: -18%
Stop Target: None
Action: Near-term support is at $55.00-$54.50 and the 50-day moving average. Resistance is at $56.00 and the recent 52-week high of $56.29. A close above these levels could lead to a push to $58.00-$60.00.
Limelight Networks (LLNW, $4.23, up $0.06)
Original Entry Price: $3.91 (3/18/15)
Lowered Price from Selling Options: None
Exit Target: $7.00
Return: 8%
Stop Target: Raise from $2.00 to $4.00 (Stop Limit).
Action: Raise the Stop Target from $2.00 to $4.00 and make it a Stop Limit order.
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-$4.00.
Discovery Laboratories (DSCO, $0.96, up $0.04)
Original Entry Price: $1.68 (3/5/15)
Lowered Price from Selling Options: None
Exit Target: $3.00
Return: -43%
Stop Target: $0.50
Action: Support is at 90 cents and a close below this level would be bearish. Resistance is at $1.00-$1.10.
Bank of America (BAC, $16.35, down $0.17)
Original Entry Price: $17.63 (12/19/14)
Lowered Price from selling options: $17.28
Exit Target: $20+
Return: -5%
Stop Target: $15.00
Current Dividend Yield: 1.3%
Action: Support is at $16.25 and 200-day moving average. A close below this level could lead to a test to $16.00 and the 50/100-day moving averages. Resistance is at $16.75.
We previously sold to open (wrote) the BAC January 18 calls for 30 cents on Jan. 2, 2015, to reduce the cost basis to $17.33, and the calls expired for the full premium on Jan. 16, 2015.
Bank of America paid a 5-cent dividend on March 4. This lowered the cost basis of the trade to $17.28.
Rave Restaurant Group (RAVE, $14.14, up $0.02)
Original Entry Price: $8 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $20.00
Return: 77%
Stop Target: $12.60 (Stop Limit)
Action: Near-term support is at $13.75 on closes below $14.00 with $13.50 serving as backup. Resistance is at $14.25-$14.50.
Huttig Building Products (HBP, $3.51, up $0.11)
Original Entry Price: $4 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $6+
Return: -12%
Stop Target: $2.00 (Stop Limit)
Action: Support is at $3.40 and the 200-day moving average. Backup support is at $3.25. The 50/100-day moving averages are curling higher and are in the midst of forming a mini golden cross. Resistance is at $3.75-$4.00.
Rambus (RMBS, $14.17, down $0.11)
Original Entry Price: $17.83 (11/14/2011)
Lowered Price from Selling Options: $16.38
Exit Target: $15+
Return: -13%
Stop Target: $9.00
Action: Resistance is at $14.25. A close this level could lead to $14.50-$14.75. Near-term support is at $13.75. A close below this level would be bearish that could lead to a backtest to $13.25 and the 50-day moving average.
We previously sold to open (wrote) the RMBS December 20 calls for $1.45 on Nov. 14, 2011 to reduce the cost basis to $16.38.
Trades on Hold (6): These are trades that are still open in the portfolio but are down from the original recommended price. These trades are on “hold” and are not a buy until I bring back coverage of the stock. This means I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly when a trade closes.
I do not recommend adding to these positions or opening new positions, but if you are already holding the stocks, we recently opened covered calls on these positions. If you missed the alert, you can find it here.
AKS Steel Holding (AKS, May 2011) – We sold to open (wrote) the AKS September 6 calls (AKS150918C00006000) on 4/30/2015 for 40 cents. Continue to hold.
DryShips (DRYS, January 2011) – We sold to open (wrote) the DRYS September 1 calls (DRYS150918C00001000) on 4/30/2015 for 5 cents. Continue to hold.
Bebe Stores (BEBE, February 2012) – We sold to open (wrote) the BEBE September 4 calls (BEBE150918C00004000) on 4/30/2015 for 35 cents. Continue to hold.
Vivus (VVUS, July 2012) – We sold to open (wrote) the VVUS September 4 calls (VVUS150918C00004000) on 4/30/2015 for 10 cents. Continue to hold.
Zynga (ZNGA, March 2014) – We sold to open (wrote) the ZNGA September 3 calls (ZNGA150918C00003000) on 4/30/2015 for 16 cents. Continue to hold.
Galena Biopharma (GALE, February 2014) – We sold to open (wrote) the GALE October 2 calls (GALE151016C00002000) on 4/30/2015 for 15 cents. Continue to hold.
Trade on!
Rick Rouse
Editor
Momentum Stocks Weekly
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