Dear Momentum Options Subscriber,
The market rebounded last Monday, but the bulls failed to hold near-term resistance, and the VIX stayed above 15. The bears followed up by doing damage on Tuesday and Wednesday, but the action in the small-caps mid-week went unnoticed.
The indices rebounded again on Thursday, but Friday’s pullback still has Wall Street calling for a selloff. The headlines will say that the bears got their second weekly win, but higher highs are still in store if the break out of the current trading range goes the bulls’ way.
The Dow dropped 145 points, or 0.8%, to finish at 17,749 on Friday. The blue-chips fell below shaky support at 17,800 thirty minutes into the session while testing a low of 17,629. Backup support at 17,600 and the 100-day moving average held, but the close below the 50-day moving average was slightly bearish. There is additional risk to 17,300-17,250 and the 200-day moving average on a fall below 17,600. A recovery of 17,800 to start the week keeps 17,900-18,000 in play.
The S&P 500 sank 12 points, or 0.6%, to end at 2,053. The index traded in negative territory throughout the session and tested 2,041 intraday. Support at 2,040 and the 100-day moving average was solid, but the failure to hold 2,060 and the 50-day moving average on Friday was a bummer. There would be additional risk to 2,025-2,000 and the 200-day moving average on dips below 2,040, but I’m hoping Thursday and Friday’s low of 2,041 may have formed a “soft” double bottom. Continued closes above 2,060 keep 2,075-2,085 in the mix.
The Nasdaq fell 21 points, or 0.4%, to settle just under 4,872. Tech saw a little daylight on the open and reached a peak of 4,904 before fading to a low of 4,842. Near-term support at 4,850 was stretched, but the close above this level was slightly bullish. There is additional risk to 4,800 and the 50-day moving average if the bears get below 4,850 again. Resistance is at 4,900-4,925, and closes above these levels this week could lead to a short sweet spot for the market.
The Russell 2000 slipped a little over 4 points, or 0.4%, to close at 1,232. The small-caps made a slight trip into positive territory by a tenth of a point before a backtest to 1,220. Friday’s action was slightly bullish, as I wanted to see 1,225-1,220 hold on a pullback. The index held its 50-day moving average and the 1,200 level after back-to-back tests to 1,206 last week. This was a very bullish sign, along with Friday’s close above 1,230. Although there is still downside risk on a lower Monday close, the 52-week high of 1,243 is just 1% away. If this level clears, Wall Street will be forced to play catch-up as the first quarter comes to a close.
The S&P 500 Volatility Index ($VIX, 16.00, up 0.58) stayed elevated after trading to a high of 16.74 on Friday. I have been warning that any closes above 17.50 could lead to a jump to 20-22, but the bulls held this level throughout last week. If the bulls can get below 15 to start the week, it would be a nice signal that higher highs are in store. I will have more on the VIX in a minute.
The Financial Select SPDR (XLF, $24.32, down $0.17) went into a “bear trap” following the dips to $23.82 and $23.86 last week. This was a slightly bearish development, as a mini “death cross” is forming. This happens when the 50-day moving average falls below the 100-day moving average (or 200-day moving average).
Tuesday and Wednesday’s pullback came ahead of the Federal Reserve’s stress tests and, while the rebound back above $24 on Thursday was bullish, the sector remains an anomaly.
The second part of the bank stress tests were released after Wednesday’s close, and they didn’t go as smoothly as the first round. The 31 banks that were in focus passed last week’s tests with flying colors, but some weren’t as fortunate this time around.
For the most part, 29 banks passed the Federal Reserve’s annual tests, with three of them needing to alter their plans. Deutsche Bank Trust and Santander Holdings failed outright, but, overall, this may be one of the “safest” sectors in the market.
While there could be some near-term pain, the financial stocks will gain once the Fed starts raising rates. I have also mentioned that closes for the XLF above $24.50 would be a big deal, and Thursday’s high reached $24.51. There is still a chance that $25-$25.50 will trip if the major moving averages hold support this month.
The Dow Jones Transportation Average ($TRAN, 8,945, down 60) failed to recover its 50-day moving average to start the week, which was a troubling sign despite Monday’s overall market rebound.
Tuesday’s 130-point drubbing and close just below 8,800 was scary, but Wednesday and Thursday’s rebound back to 8,900-9,000 was bullish.
I have warned of additional risk to 8,600 and the 200-day moving average on continued closes below 8,800. A mini “death cross” is also forming, as the 50-day moving average is in danger of falling below the 100-day moving average. A move back above 9,000-9,025 this week would be helpful in supporting a run higher for the market.
While the action in March has been bearish on the surface, there were bullish signs last week that kept a mini trading range intact. The major indices had a strong February that lasted into the first trading day for March.
I have been warning of a possible trading range developing coming into the month, and I have also mentioned the possibility of a “sweet spot” that could come afterwards.
The backtest to the 50-day moving averages was nearly a given and, while the MAs have been stretched to a degree on the Dow and S&P, they are holding for the most part. The choppy, volatile action has once again confused Wall Street, as there is concern for an additional 5%-10% pullback. While this can still happen, the suit-and-ties are hoping for a correction so they can get in the game.
I talked about volatility returning in March, and it remains to be seen how this trading range will unravel.
The buying opportunity Wall Street has once again begged for is here. The problem is that most of the suits and ties don’t read the charts, so they don’t know when a buying opportunity is presenting itself.
Of course, the slick-talking pros that have called for a selloff are patting themselves on the back and are feeling good. I’m still hopeful that the bulls can buck the trend once again, as the action could get extremely volatile with the Fed speaking this week.
Wall Street is fretting over whether the Fed will remain “patient” ahead of Wednesday’s statement. The removal of this word from the policy meetings might be the green light that a rate hike is coming soon.
Most of the higher-ups have penciled in an interest rate increase that could come as soon as June. Analysts are worried that the market might fall further on interest rates hikes.
The worry here is a June rate hike, but, if Janet Yellen can somehow spin things into September, the market might respond in a different way. I have argued that a quarter-point rate hike isn’t that big of a deal in the grand scheme of things. Regardless, it has heightened volatility over the past week.
More on the VIX: The bears have held the 15 level for six-straight days, and this has produced the trading range I warned about coming into March. The bulls pushed a low of 12.86 in late February and 12.87 in early March. This may have formed the temporary bearish “double bottom” that led to the backtest to 17.19 last week.
The setup here is an easy one and probably the most telling market sign we will get this week. If the VIX closes above 17.50, it could lead to panic selling. If the VIX closes below 15 in consecutive sessions, it would be a very bullish sign for a retest to 13.50-12.50.
This would produce the “sweet spot” I have been hoping for that sometimes accompanies the month of March. I’m also prepared to go short or use put options, as the end of March can be bearish. However, we need further clues before going aggressively short.
This week is setting up to be one of those “hope for the best, but prepare for the worst” scenarios.
From desk to press, futures look like this: Dow (+67); S&P 500 (+9); Nasdaq 100 (+16).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 22-6-1 (76%). 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.
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.
Yahoo! (YHOO, $42.87, down $0.08)
YHOO April 47 calls (YHOO150417C00047000, $0.36, down $0.02)
Entry Price: $0.80 (2/26/2015)
Exit Target: $1.60
Return: -55%
Stop Target: None
Action: Shares rebounded into Friday’s close to trade to a high of $42.98. Resistance is at $43-$43.50. Support is at $42.25-$42 and the 200-day moving average.
Western Union (WU, $19.51, up $0.09)
WU April 20 calls (WU150417C00020000, $0.40, up $0.05)
Entry Price: $0.36 (2/25/2015)
Exit Target: $0.75
Return: 11%
Stop Target: None
Action: Shares traded down to $19.30 on Friday before finishing above $19.50. Support is at $19.25-$19. Resistance is at $19.50-$19.75. I’m expecting WU to make a push past $20 this week or next. If shares trade to $20.75-$21, these options will easily double from current levels.
American Express (AXP, $80.60, down $0.96)
AXP April 87.50 calls (AXP150417C00087500, $0.20, down $0.10)
Entry Price: $0.56 (2/25/2015)
Exit Target: $1.15
Return: -64%
Stop Target: None
Action: Shares tested support at $80 on Friday following a low of $79.95. There is risk to $79-$78 on a close below this level. Resistance is at $83-$84 and the 50-day moving average.
Flextronics (FLEX, $11.69, up $0.14)
FLEX April 12 calls (FLEX150417C00012000, $0.25, up $0.05)
Entry Price: $0.67 (2/24/2015)
Exit Target: $1.35
Return: -63%
Stop Target: None
Action: Support is at $11.50 and the 50-day moving average. There is risk to $11.25-$11 and the 100- and 200-day moving averages on continued closes below $11.50. Resistance is at $11.75-$12.
Marvell Technology (MRVL, $16.06, down $0.01)
MRVL May 18 calls (MRVL150515C00018000, $0.35, flat)
Entry Price: $0.50 (2/18/2015)
Exit Target: $1.00
Return: -30%
Stop Target: None
Action: Friday’s low reached $15.91. Support is at $16-$15.75 and the 50-day moving average. A close below $15.50 would be bearish. Resistance is at $16.25-$16.50.
BlackBerry (BBRY, $9.81, down $0.12)
BBRY June 13 calls (BBRY150617C00013000, $0.26, down $0.05)
Entry Price: $0.60 (3/2/2015)
Exit Target: $1.20+
Return: -57%
Stop Target: None
Action: This is not a new trade, but one that was previously on hold. Resistance is at $10 and the 200-day moving average following the downgrade from Goldman Sachs (GS) last week. Support is at $9.75-$9.50. This is a speculation play that BBRY will get a takeover offer by mid-June.
Trade on!
Rick Rouse
Editor and Chief Options Strategist
Momentum Options