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Bulls Make Another Run
8:00pm(EST)
The futures were pointing towards a nasty opening for the market early Friday morning but things got better as the bulls starting rising with the sun.
Thursday’s surprise discount rate hike by the Fed after the market closed scared the be-Jesus out of everyone as the Asian markets tanked and the Dow futures were down 90 shortly after midnight. However, the Fed may have done the bulls a big favor as they were able to take the market higher for the fifth day in a row.
We rarely talk about the specific indexes of the foreign markets but we often watch the action as they can and do have an effect on our markets. Hong Kong’s stock market is known as the Hang Seng and it tanked 2.6% on our Fed news and closed at 19,894, down 528 points, on Friday. Japan’s Nikkei fell 2.1%, or 212 points, and closed at 10,123.
A 2% drop in the Dow would have crushed the current rally but the Fed news was softened by the fact that the market had all night and some of the morning to figure out this really wasn’t a big deal. A better-than-expected consumer prices report also gave the bulls a lift.
The Dow traded in a narrow range for most of the day and ended at 10,402, up 9 points. The S&P and Nasdaq hit a “double-deuce” as each index gained 2 points and closed at 1,109 and 2,243, respectively.
It was a great week for the bulls as the Dow added 303 points, or 3%, and closed above 10-4 for the first time in over a month. It was also the Dow’s biggest weekly point and percentage gain since the start of November.
The S&P 500 was up 34 points last week, or 3.1%, and closed above the all important 1,100 level.
Finally, the Nasdaq jumped 60 points for the week, or 2.8%, and settled above 2,200 for the first time in a month.
We are back in that “upper” trading range we have been talking about for weeks and months which for the Dow are between 9,700 and 10,700. Once again, the targets we set back in August will now come into play again and they are at 1,175 for the S&P 500 and for the Nasdaq our target is 2,275. For the Dow, we have a target of 10,800.
The S&P traded 1,150; the Dow hit a high of 10,767; and the Nasdaq reached 2,326…all by mid-January which brings us to our next point.
The market was an easy read in 2008 as the Dow collapsed from 13,338 to a low of 7,392 by November. The Nasdaq fell from a high of 2,661 to a low of 1,295 by October of that year. Folks, that is a 50% haircut.
In 2009, the Dow rebounded off a low of 7,856 to a high of 10,605 while the Nasdaq soared from 1,476 to a high of 2,295. As you can see, this basically amounts to 50% gains which shows us two things.
In 2008, it was easier to trade put options and make money on the way down. Our track record shows this. In 2009, we mainly recommended call options. As we release our results for 2010 for all of our closed trades you will see our track record is around 60% for our trades.
It’s possible to make a good living if you hit 60% of your trades but we are more accustomed to hitting over 70% of our trades. The good news is that we aren’t ashamed of hitting 60% of our trades but we wanted to show you the “transition” the market is currently going through.
We saw this in mid-January when the market was approaching our targets and we knew we would either “breakout” or “retreat” from current levels. We still trade, regardless of market conditions, but we protected ourselves by going out to May, June and September with some of our call options trades. We have also used put options this year because when the market is this choppy and with this volatile, you need protection.
Even better news, is that there will be a pure play on the trend over the next few months as we think the volatility continues. We still think there is a chance the bulls push through our targets but we wouldn’t be surprised at all if we touch those targets and fade. If the market fades again, then the bears will take center stage.
As far as our portfolio, we are trying to preach these market conditions but IT IS a tougher market to trade and we do not send out trades just to grow our subscriber base. In fact, many of you know we will be limiting our membership to 1,000 subscribers because we don’t want to be like other option newsletters. One of our recent subscribers said that he was with another service which sent out 14 straight losing trades from mid-January up until now. The problem was his service dropped coverage of the trades and never responded to his emails about the current trades. Folks, we don’t roll that way.
We thought we would take some time to talk about the current market conditions and the trading atmosphere we are in to give you a better perspective on things. That said, we remain extremely excited because the current volatility will continue to offer us some fat trading opportunities but there will be risks.
Looking ahead to this week, we have a number of events that will be headwinds for the market.
Toyota’s (TM, $73.35, down $0.09) President changed his mind and will testify at a congressional hearing on Wednesday about the company’s recent recalls. The House Oversight and Government Reform Committee is investigating Toyota’s recall of more than 8.5 million vehicles for gas-pedal and sudden-acceleration problems.
Federal Reserve Chairman Ben Bernanke will be in front of Congress again on Wednesday and Thursday to give his semi-annual monetary policy report to Congress.
There will be some economic news the market will have to digest as well. The government will release new homes sales data for the month of January on Wednesday, while the National Association of Realtors will report its data for existing home sales on Friday.
We will be back in the morning with a fresh outlook and a complete update for all of the current trades. We are also looking at a number of stocks that we will be adding to our Watch List.
As we head to press, Dow futures are up 26 points…
MomentumOptionsTrading.com Weekly Wrap for 3/28/10
Sunday, March 28th, 2010
7:15pm (EST)
All things considered, Friday’s close wasn’t too bad…
We were hoping the bulls would post a strong showing going into the closing bell but the market settled near even after spending much of the session marching higher.
Of course, Wall Street’s eyes were on Greece and there was a sense of relief after the European leaders agreed to bail out the debt-laden country, with help from the International Monetary Fund, if conditions get significantly worse.
The safety net for Greece took pressure off the euro, sending it up slightly against the dollar but that will most likely be short-lived. Expect the euro to get weaker.
We also had some geopolitical concerns over North and South Korea that made the market nervous and sparked the afternoon sell-off but those reports were overblown. All-in-all it was another solid weekly victory for the bulls – their fourth in a row - as many analysts continue to doubt the rally.
The Dow ended the day with a 9 point gain to close at 10,850 after hitting a high of 10,934. For the week, the index was up 108 points, or 1%, and still looks poised to break 11,000. As many of you know, we were hoping for a break above 10,800 which had been the first wave of resistance before we could set our site on 11,000. Mission accomplished. On Thursday, the Dow reached a high of 10,985.
The S&P 500 added a point to settle at 1,166 and for the week the index added nearly 7 points, or 0.6%. On Thursday, the S&P hit a high of 1,180 and all week it toyed with 1,175. We would like to see a close ABOVE this level which could then carry us to 1,200.
As far as the Nasdaq, we were a little disappointed to see the index finish in the red as it lost 2 points and closed at 2,395. For the week, Tech was up 20 points, or 0.9%, and traded above 2,400 each day. We are looking for a close above this level to clear way for us to test 2,500.
Unless the wheels fall off the wagon, it looks like the major indexes are poised to post solid quarterly gains going into the final week of trading for the first quarter. The Dow is up 4%, the S&P is up 4.6%, and the Nasdaq is up 5.6%.
As we near the top of our trading ranges, we remain bullish but we also know the current environment won’t last forever. We think the market can rally into April but at some point the talking heads will get their pullback and they will be the first to tell you we are in correction mode.
The S&P hasn’t seen a 1% correction in over a month so sooner or later the law of averages will catch up with the bulls but for now the trend is our friend.
One sector that continues to see new life is the IPO market. This has been a bullish sign as companies become public at their offering prices and the good ones are also getting a pop. Many IPOs so far this year had been cut, postponed or canceled as investors shied away from risk but that is changing.
MaxLinear (MXL, $18.62, up $0.58) went public on Wednesday as shares opened at $17.95, nearly 30% higher than its IPO price, and later rose to $18.70, on its first day of trading.
The company sold 6.4 million shares for $14 each, and pocketed a little over $90 million. MaxLinear makes chips that are used mainly in mobile handsets but its products can also be found in cable boxes, digital televisions and PCs.
China Lodging (HTHT, $13.92, up $1.67) went public Friday and priced its IPO of 9 million shares at $12.25. The company, which operates a chain of budget hotels in China, raised about $110 million.
Neither of these IPO’s trade options, yet, but they will over the next few weeks. MaxLinear will be the one we are more likely to trade down the road but we still have to wait for momentum to develop.
In other IPO news, Baltic Trading (BALT, $13.48, down $0.02) and Crude Carriers (CRU, $16.95, flat) are two new offerings and are newly formed bulk shippers. Baltic Trading plans to conduct a shipping business focused on the dry-bulk industry spot market while Crude Carriers plans to go after a shipping business focused on the crude tanker industry. We aren’t too crazy about this sector right now and would stay away from both of them.
AVEO Pharmaceuticals (AVEO, $8.81, up $0.26) popped its cherry but closed below its IPO price on their first day of trading.
There were also two other pricings that struggled to make their debut. Another dry shipping company, Alma Maritime, postponed its IPO due to market conditions, while Chinese ad firm Redgate Media failed to price after lowering its expected range.
As far as earnings news, we will update this topic in the morning but the only company we are interested in playing this week is Research In Motion (RIMM, $75.06, up $1.63). The company reports earnings on Wednesday after the bell.
We are going to show our subscribers several ways to play this event in detail inside our Members Area on Monday morning but here is the breakdown.
The straddle option trade (or chicken trade) is pricing in a 10% move in the stock and here is the math. If you do the straddle trade we profile, RIMM will need to be at $82+ or below $68. This trade could yield 10% or more depending on how the stock reacts or it could lose money if shares stay flat.
As far as a strangle option trade, the odds favor an even better return as we can play some out-of-the-money options in anticipation of a huge price move for the stock. At current prices, we would need RIMM to trade above $83 or below $67 before we can start ringing the register.
These two types of trades provide protection because we would be using both call and put options. It’s a safety net and we would need a huge move in the stock after earnings and into April. The beauty of these trades is that it’s possible to make money on BOTH the calls and puts if the stock pops and then drops or drops and then pops.
Of course, we can also play RIMM with no protection in hopes of doubling our money. The calls we would use are priced right under $2 and we would use those if we expect RIMM to trade above $79. If the stock made it to $82 they will likely return 100%.
There is also the chance that RIMM misses their numbers or disappoints Wall Street and the stock tanks. We could use the put options which are priced near $1.50. In this case, we would need RIMM to trade below $70 to make triple-digits.
We are still doing the research (pun intended) on this one but we might be pulling the trigger on a possible option trade in the morning.
There is also another interesting trade we are putting the finishing touches on that we think has a good chance of doubling quickly or by the summertime. The stock was approaching its 52-week high of $45 last week but fell 10% over Thursday and Friday. We smell a “BUY”.
As we head to press, Dow futures are up 21 points while the S&P futures are up 2.5 points. Nasdaq 100 futures are higher by 3.5 points. It looks like the bulls are up doing their homework with us and unless something changes we should be starting higher on Monday. We will be back at 9am (EST) sharp!
Tags: chicken option trade, option picks, option signals, options alerts, Research In Motion earnings, stock options trading, straddle option trade, strangle option trade
Posted in Earnings, Market Analysis, Market Commentary, Strategies, Trading Tips, Weekly Wrap, strangle option trades | Comments Off