MomentumOptions.com Pre-Market Update for 2/3/2020

Bears Get January Win Following Friday’s Selloff

8:00am (EST)

The market was weak throughout Friday’s session and stayed in a steady decline into the close following heightened concerns over the coronavirus that has now infected over 10,000 people around the world, with the vast majority of the figure still contained in China. Adding to the worry was news that the U.S. Department of State increased the China travel advisory to Level 4.

The action clearly showed investors didn’t want to be long over the weekend as volatility closed at its highest level to end January. The losses put most of the major indexes into the red for the year with the Nasdaq escaping the carnage but looking vulnerable.

The Dow dropped 2.1% with the late day low tapping 28,169. Prior and upper support at 28,400-28,200 and the 50-day moving average failed to hold on the close above the former. A close below the latter would signal additional weakness towards the 28,000 level and key resistance throughout November and into mid-December.

The Russell 2000 was roasted with a 2.1% loss, as well, after testing a fresh January low of 1,610. Prior and upper support from early December at 1,625-1,610 was breached and failed to hold with risk towards 1,600-1,585 and the 200-day moving average on continued weakness.

The S&P 500 stumbled 1.8% after trading to a 1st half low of 3,214. Late December and upper support at 3,225-3,200 was breached but held by a half-point. There is additional selling pressure towards 3,175-3,150 on a close below the 3,200 level and the 50-day moving average.

The Nasdaq gave back 1.6% with the intraday low reaching 9,123. Prior support at 9,150-9,100 was split but held with risk towards 9,000-8,950 and the 50-day moving average on a close below the 9,100 level.

For the week, the Dow was down 2.5% and the S&P 500 sank 2.1%. The Russell 2000 plummeted 2.9% and the Nasdaq lost 1.8%. 

In January, the Dow shed 1% and the S&P 500 edged 0.2% lower. The Nasdaq gained 2% while the small-caps tanked 3%.

Consumer Staples were the only sector that closed higher on Friday after climbing 0.3%. Energy showed the most sector weakness after getting crushed for a loss of 3.1% while Technology and Industrials were lower by 2.7% and 2.3%, respectively.

Over the past 5 sessions, Utilities (0.9%) were the only sector that showed a gain. Energy (-5.6%) was the worst performing sector followed by Materials (-3.5%) and Healthcare/ Communication Services (-3.2%).

For January, Utilities and Technology zoomed 7.6% and 7.3%, respectively, while Energy dove 7.6% and Materials were off 3.4%. 

In economic news, Personal Income rose 0.2% in December, with a 0.3% increase in spending, versus forecasts for a rise of 0.3% for both. This follow respective gains of 0.4% for both in the previous month.. Compensation was up 0.3%, with wages and salaries rising 0.3% as well. Disposable income edged up 0.2%. The savings rate fell to 7.6% from 7.8%. The Fed’s preferred PCE price data showed chain prices increased 0.3% after the 0.1% gain in November, and accelerated to a 1.6 % year-over-year clip versus the prior 1.4% pace. The core rate rose 0.2% in December from 0.1%, and is up 1.6% year-over-year versus 1.5% previously.

The Employment Cost Index rose 0.7% in Q4, the same as in Q3. Wages and salaries were up 0.7% as well, slowing slightly from the robust 0.9% pace in the prior quarter. Benefit costs slipped to a 0.5% rate from 0.6% previously. On a 12-month basis, ECI is up 2.7% year-over-year versus 2.8% in Q3, with wage and salary growth steady at 2.9%. Benefit costs posted a 2.2% year-over-year pace versus Q3’s 2.3% reading.

January Chicago PMI dropped -5.3 points to 42.9, missing expectations for a print of 48.5, after rising 1.6 ticks to 48.2 in December. The index has been sub-50 for 7-straight months, since July at at its lowest since the 42 print from December 2015.

Consumer Sentiment rose to 99.8 in the final January print from the University of Michigan survey, versus expectations of 99.1 and the preliminary reading for this month. The current conditions index dipped to 114.4 versus December’s 115.5, and perhaps a function of the virus. However, the expectations component improved to 90.5 from 88.9 in December. The 12-month inflation gauge was 2.5% in January, up from December’s 2.3%. The 5-year price index also posted a 2.5% rate, rising from the all-time low of 2.2% in December.

Baker-Hughes reported the U.S. rig count was down 4 rigs to 790, with oil rigs down 1 to 675, gas rigs off 3 to 112, and miscellaneous rigs unchanged at 3. The U.S. Rig Count is down 255 rigs from last year’s count of 1,045, with oil rigs declining 172, gas rigs down 86, and miscellaneous rigs up 3 to 3. The U.S. Offshore Rig Count is unchanged at 21 and up 2 rigs year-over-year. 

The iShares 20+ Year Treasury Bond ETF (TLT) extended its winning streak to 3-straight and was up for 8th time in 9 sessions after testing a high of $145.99. Prior and and lower resistance from early October at $145.50-$146 was cleared and held with a move above the latter signaling additional strength towards $146.50-$147 and late August highs.

Rising support is at $145-$144.50. A close below the $144 level would signal a possible near-term top with further backtest potential towards $143.50-$143.

RSI remains in a slight uptrend with resistance at 75-80 and prior highs from early August. Support is at 70 with a close back below this level signaling possible weakness towards 65-60.

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The S&P 500 Volatility Index ($VIX) stayed elevated throughout the session while zooming to a high of 19.99 ahead of the closing bell. Prior and lower resistance from early October at 19.50-20 was breached but held. A close above the latter would signal additional upside potential towards 21-21.50.

New support is at 18-17.50 followed by 16.50-16. The 50-day moving average is in an uptrend and the 200-day moving average is starting to curl higher, as well, with both being bearish signals for the overall market.

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The Spider Small-Cap 600 ETF (SLY) was down for the 3rd-straight session following the late day plunge to $69.45. Prior and upper support from late December at $69.50-$69 was challenged but held. A close below the latter would be an ongoing bearish development with backtest potential towards $68-$67.50 and the 200-day moving average.

Lowered resistance is at $70-$70.50 with more important recovery levels at 

$71.50-$72 and the 50-day moving average.

RSI is in a downtrend with key support at 30 holding. While this is signaling oversold levels, there is additional risk towards 25-20 and December 2018 lows on a close below the 30 level. Resistance is at 35-40.

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The Spider Gold Shares (GLD) extended its winning streak to 3-straight and settled higher for the 9th time in 10 with the intraday 52-week and 7-year high reaching $149.68. Multi-year and lower resistance at $149.50-$150 was cleared but held. A close above the latter would be an ongoing bullish signal with upside potential towards $151.50-$152.

Current and rising support is at $149-$148.50 with backup help at $148-$147.50.

RSI remains in a slight uptrend after clearing key and lower resistance at 70-75. A move above the latter would signal additional momentum for a retest towards 80-85. Current support is at 65-60.

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The percentage of Nasdaq 100 stocks trading above the 50-day moving closed at 55.33% on Friday, down 10.68%, with the session low reaching 52.42%. Upper support from late October at 55%-52.5% was breached but held. A move below the 50% level would signal additional weakness with possible gap down potential towards 47.5%-45%. Lowered resistance is at 57.5%-60% with Friday’s top at 59.22%.

The percentage of S&P 500 stocks trading above the 200-day moving average average settled at 45.34%, down 12.08%, with the session low tapping 44.15%. Mid-October and upper support at 45%-42.5% was tripped but held. A close below the latter would be an ongoing bearish signal with additional weakness towards 40%-37.5% and early October levels. Lowered resistance is at 47.5%-50% with last week’s peak at 62.30%.

China’s stock market was crushed for nearly 9% last night following a week long holiday and the first trading day back. However, U.S. futures were in the green but the more important issue will be how the market closes today. Lower Friday/ Monday closes usually signal money is moving out of the market and I have repeatedly warned of the typical February fade over the past couple weeks. 

Of course, we saw early signs of the technical damage being done last week with the VIX and we were able to have a great month on the run to continued record highs. The two 200+% winners in LLNW and SPCE gave us great confidence to start the year and we don’t have to force the action.

The portfolio is light and we do have 2 bullish positions that remain open. I used longer-term calls to protect us against the possible February flush towards the 50-day moving averages and I still like them. I have started to add put options to the portfolio and there a few more on my Watch List. However, I don’t want to get too aggressive because the market is also setting up to give us incredible buying opportunities into March, April and May. 

Index options have become very inflated and are commanding high premiums but there are some ETF’s we can use to for possible put plays. As usual, stay locked-and-loaded in case I take action today.

Momentum Options Play List

Closed Momentum Options Trades for 2020: 7-1 (88%). All trades are dated and time stamped for verification. New subscribers can look at the past history to see how the trades have played out or to research our Track Records. 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 “Stops” entered to close any trades or “Limit 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 Daily‬ updates.

Bed Bath & Beyond (BBBY, $14.25, down $0.70)

BBBY April 12 puts (BBBY0417P00012000, $0.70, up $0.15)

Entry Price: $0.55 (1/30/2020)

Exit Target: $1.10

Return: 27%

Stop Target: None

Action: Shares tested a low of $14.10 with prior and upper support at $14.25-$14 getting breached but holding. Lowered resistance is at $14.50-$14.75.

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Cisco Systems (CSCO, $45.97, down $1.27)

CSCO March 52.50 calls (CSCO200320C00052500, $0.20, down $0.10)

Entry Price: $0.55 (1/22/2020)

Exit Target: $1.10

Return: -64%

Stop Target: None

Action: Friday’s low tapped $45.84 with prior and upper support from late October at $46-$45.75 getting breached and failing to hold. Lowered resistance is at $46.25-$46.50 and the 50-day moving average.

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Dropbox (DBX, $17.02, up $0.01)

DBX April 20 calls (DBX200417C00020000, $0.35, flat)

Entry Price: $0.90 (1/6/2020)

Exit Target: $1.80

Return: -61%

Stop Target: None

Action: Shares tested a high of $17.23 on Friday with lower resistance at $17.25-$17.50 holding. Support remains at $16.75-$16.50.

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