Dear Momentum Options Subscriber,
The bears won their fourth-straight session, but they showed why the bulls have been champion for three years running.
The Dow declined 40 points, or 0.2%, to end at 17,678. The blue-chips were weak during the first half of trading after testing a low of 17,579. Near-term support at 17,600 was stretched, but it managed to hold. The rebound to 17,759 fell short of resistance at 17,800.
The S&P 500 slipped 5 points, or 0.2%, to settle at 2,056. The index trading down to 2,045 on the open but split short-term support at 2,050-2,040. Resistance at 2,070-2,075 was challenged but not breached following a run to 2,067.
The Nasdaq lost 13 points, or 0.3%, to close at 4,863. Tech stumbled at the start of trading after the bears push a low of 4,825. Support at 4,825-4,800 held on a dime before the bulls pushed a high of 4,889. Prior support and current resistance at 4,900 stuck like Chuck. A close above this level ahead of the weekend would be a slightly bullish sign.
The Russell 2000 gave back 2 points, or 0.2%, to finish at 1,232. The small-caps kissed support at 1,225 after opening just below 1,229. This was a picture perfect backtest, as I specifically said to watch these two levels. Of course, they need to hold today and on Monday. A close above 1,235-1,240 could be our signal to go long by using an index trade. This ain’t our first rodeo, and I’ve got one ready.
The S&P 500 Volatility Index ($VIX, 15.80, up 0.36) stayed elevated after trading to a high of 17.19 and above 15 throughout the session. The late-day dip to 15.23 was a nice little tease.
I know I have flooded you with a lot of information this week, so this morning’s commentary was short. The hard part has been accomplished, and the game plan is in place.
From desk to press, futures look like this: Dow (-20); S&P 500 (-2); Nasdaq 100 (-2).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 25-7-1 (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 8:00 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.
US Steel (X, $24.84, up $0.03)
X May 21 puts (X150515P00021000, $0.65, up $0.05)
Entry Price: $0.60 (3/26/2015)
Exit Target: $1.20
Return: 8%
Stop Target: None
Action: Shares made a strong move above their 50-day moving average over the past few sessions. This level held briefly in February for a few days before a backtest to $22. Otherwise, the 50-day moving average hasn’t held since October of 2014.
There is risk to $26, but I wanted to get into these options, as I expect shares to trade to $22-$20 on a drop below $24. Yesterday’s low reached $24.04.
There is risk to the trade, as the company asked Congress yesterday to approve trade laws that will help the industry. Steel prices and demand have suffered as a result of the US market being flooded with low-cost imported foreign steel.
US Steel has been idling plants due to the softness, and workers have been laid-off. This is not just a problem with US Steel, as the dominoes have tumbled at other steel manufacturers.
The other risk to the trade is that US Steel is often subject to takeover chatter. With a current market cap of $3.6 billion, I doubt another company comes in at these levels to form a major conglomerate. In my opinion, if shares of US Steel stumbled into the teens, maybe the water cooler talk would become more serious.
Earnings are estimated to be released in early May, but analysts have been dead wrong on their coverage of the stock. There is no homework being done on Wall Street, as the company has beat estimates the past four quarters by a wide margin. Earnings have come in above expectations by $0.95, $0.99, $0.46 and $0.03, respectively.
The suit-and-ties have the company earning $0.32 a share for the current quarter on revenues of $3.54 billion. My guess is that the company will fall short on revenue estimates, but earnings are a mystery.
The company could issue a pre-earnings announcement if they are going to come up short on these numbers, and they should given the current chaos in the industry. The perfect time to sweep the news under the rug would be after next Thursday’s close, with Wall Street on vacation for Good Friday. Of course, with the cuts and trimming of the fat, earnings could top “expectations” once again.
I used the May options to give the trade nearly two months to play out. While there could be short-term volatility, the longer-term chart is showing me that shares could test the mid-teens this year. If a move to $20 comes by mid-May, these options would be valued at $1.00. If shares are at $19.50, technically, by May 15, these options will be worth at least $1.50, which would represent more than a double from current levels.
This is only my third bearish trade for the year. I like it on deteriorating fundamentals and a nasty chart outlook.
Dot Hill Systems (HILL, $5.36, up $0.08)
HILL June 5 calls (HILL150619C00005000, $0.80, up $0.09)
Entry Price: $0.65 (3/24/2015)
Exit Target: $1.30
Return: 23%
Stop Target: $0.67, raise to $0.69 (Stop Limit)
Action: Raise the Stop Limit from $0.67 to $0.69. Yesterday’s low was $0.70.
Shares traded to a high of $5.41 yesterday. My near-term price target is $6+, which is where I would like to close the first half of the trade. Support is at $5.25-$5.
Cypress Semiconductor (CY, $14.12, down $0.31)
CY April 16 calls (CY150417C00016000, $0.19, down $0.04)
Entry Price: $0.40 (3/18/2015)
Exit Target: $0.80
Return: -53%
Stop Target: None
CY June 16 calls (CY150619C00016000, $0.45, down $0.05)
Entry Price: $0.75 (3/18/2015)
Exit Target: $1.50
Return: -40%
Stop Target: None
Action: I mentioned that there was risk to $14-$13.50 and the 100-day moving average on further weakness. Yesterday’s low reached $13.85.
I wanted to see $14 hold into the close, and that we got. If this level holds into the weekend, it would be a bullish signal.
Veeva Systems (VEEV, $25.35, down $0.35)
VEEV April 29 calls (VEEV150417C00029000, $0.25, down $0.05)
Entry Price: $0.60 (3/18/2015)
Exit Target: $1.20
Return: -58%
Stop Target: None
Action: I will likely exit the trade if $25 fails to hold, or possibly by Friday’s close, depending on where shares are trading. Resistance is at $26-$27 and the 200-day moving average.
I could “swap” this trade with another, so stay tuned.
Yahoo! (YHOO, $44.27, up $0.47)
YHOO April 47 calls (YHOO150417C00047000, $0.35, up $0.02)
Entry Price: $0.80 (2/26/2015)
Exit Target: $1.60
Return: -56%
Stop Target: None
Action: Shares tested a low of $43.68 before rebounding to push a high of $44.67. In after-hours trading last night, shares were up 2% and above $45 after announcing a $2 billion share buyback program.
Near-term support is at $44. Continued closes above $45 should lead to a run to $47-$48 and the 100-day moving average.
Additionally, the company will be announcing earnings the week these options expire, which is another reason I will likely hold the trade open. A 10% move on earnings could be in the cards, and that would put shares past $48 (or $40) if current levels hold.
Flextronics (FLEX, $12.34, up $0.13)
FLEX April 12 calls (FLEX150417C00012000, $0.45, up $0.05)
Entry Price: $0.67 (2/24/2015)
Exit Target: $1.35
Return: -33%
Stop Target: None
Action: Short-term resistance is at $12.50. Yesterday’s high reached $12.41.
Support is at $12 following the close below $12.25. A drop below $12 could force me out of the position.
Trades on Hold — other 2015 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 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.
Marvell Technology (MRVL) May 18 calls (from February 2015) — Continue to hold.
BlackBerry (BBRY) June 13 calls (from March 2015) — Earnings are due out on this morning, and I will cover them either this afternoon or on Monday — Continue to hold.
Gogo (GOGO) April 23 calls (from March 2015) — Continue to hold.
Trade on!
Rick Rouse
Editor and Chief Options Strategist
Momentum Options