MomentumOptions.com Pre-Market Update for 2/10/2020

Bulls Snap 2-Week Losing Streak Despite Friday Fade

8:00am (EST)

The market closed lower on Friday to snap 4-session winning streaks despite a solid employment report that showed job gains and rising earnings. Additional shutdowns of Chinese factories and ongoing warnings regarding the negative impact of the coronavirus globally weighed on sentiment.

Profit taking ahead of the weekend has occurred over the past 3 Friday’s and remains in play given the increasing death toll and spread of the coronavirus. However, the pullback in the major indexes held near-term support levels while snapping 2-week losing streaks.

The Russell 2000 sank 1% with the session low tapping 1,654. Near-term and upper support at 1,665-1,650 was breached and failed to hold with a close below the latter and the 50-day moving average getting 1,640-1,625 back in focus.

The Dow declined 0.9% after trading to a 2nd half low of 29,056. Current and upper support at 29,000-28,800 held with a close below the latter signaling additional weakness towards 28,600-28,400 and the 50-day moving average.

The S&P 500 fell 0.5% with the intraday low reaching 3,322. New and upper support at 3,325-3,300 was breached but held with retest potential towards 3,275-3,250 on a close below the 3,300 level.

The Nasdaq was also lower by 0.5% following the afternoon pullback 9,496. Fresh and upper support at 9,500-9,450 was breached but held with a close below the 9,400 level signaling a possible near-term top.

For the week, the Nasdaq zoomed 4% and the S&P 500 soared 3.2%. The Dow was up 3% and the Russell 2000 rallied 2.7%.

Consumer Staples and Real Estate were the only sectors that showed strength after rising 0.1%. Materials fell 1.4% to pace sector laggards while Technology and Healthcare were down 0.9% and 0.8%, respectively. 

In economic news, Nonfarm Payrolls for January increased 225,000, easily topping expectations for 160,000, after December’s revised 147,000 gain. The unemployment rate edged up to 3.6% from the 50-year low of 3.5%. Earnings rose 0.2% versus 0.1% in December, and it’s now at a 3.1% year-over-year versus 3% previously. The labor force rose 50,000 following December’s 209,000 gain, while household employment declined -89,000 from 267,000 previously. The labor force participation rate rose to 63.4%, the best since June 2013, versus the prior 63.2%. Construction employment jumped 44,000, helped by good weather and the gains in the housing sector. Manufacturing employment fell -12,000. The government added 19,000 jobs, with Federal employment up 12,000, and some support from Census workers.  

Wholesale Trade dropped -0.7% in December, while inventories fell -0.2%, both below forecasts. This follows a downwardly revised 0.9% increase in November sales and a 0.1% gain in November inventories. The inventory-sales ratio was unchanged at 1.36.

Baker-Hughes reported the U.S. rig count was unchanged from last week at 790, with oil rigs up 1 to 676, gas rigs down 1 to 111, and miscellaneous rigs unchanged at 3. The U.S. Rig Count is down 259 rigs from last year’s count of 1,049, with oil rigs declining 178, gas rigs off 84, and miscellaneous rigs up 3 to 3. The U.S. Offshore Rig Count is up 2 rigs to 23 and up 4 rigs year-over-year.

Consumer Credit climbed $22.1 billion in December, nearly doubling the $11.8 billion gain in November. Revolving credit led the hefty advance, surging $12.6 billion after the prior -$2.9 billion decline. Non-revolving credit rose $9.4 billion after rising $14.7 billion previously. This left a $52.5 billion increase in Q4 credit after a $50 billion Q3 gain.

The Fed’s upcoming Monetary Policy Report reveals the coronavirus is a new threat to the outlook, just as there were “tentative signs of stabilization,” according to the released statements to next week’s testimony from Chairman Jay Powell. The report indicated downside risks had receded late last year, as the global trade conflicts diminished, as growth abroad showed signs of stabilizing, and amid easier financial conditions. However, disruptions from China could spillover globally. 

The Fed reiterated the economy continued to grow “moderately” and the labor market “strengthened further,” though inflation was below the long run 2% objective. There was nothing new on the policy front with a steady stance the base case, and nothing more on the balance sheet. 

Fed Chairman Powell can indicate in his testimony that the economy remains in a good place, especially with Friday’s upbeat jobs report. However, he will likely caution about the potential threat from the coronavirus outbreak, and other downside risks that could come into play.

The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 2nd-straight session with the intraday high reaching $144.74. Prior and lower resistance at $144.50-$145 was breached but held. A close above the latter would signal additional strength towards $145.50-$146 and late January levels.

Current support is at $144-$143.50. A move below the latter would signal additional weakness towards the $142.50-$142 area.

RSI remains in an uptrend with resistance at 65-70 and the latter representing the January peak. Key support is now at 60 with a move back below this level signaling weakness towards 55-50 and the latter holding since mid-January.

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The S&P 500 Volatility Index ($VIX) snapped a 4-session slide after trading to an intraday high of 16.16. Prior and lower resistance at 16-16.50 was cleared but held on the close back above the 200-day moving average. A move above 16.50 would be an ongoing bearish signal with upside risk towards 17.50-18.

Current support is at 15-14.50 with more important recovery levels at 14-13.50 and the 50-day moving average. 

RSI is back in a slight uptrend with resistance at 55-60. A close above the latter would signal additional strength towards 65-70. Key support is at 50 with a move below this level signaling a retest towards 45-40 and the latter holding since mid-September.

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The Invesco QQQ Trust (QQQ) traded to an intraday and all-time high of $230.44 before closing slightly lower on Friday. Fresh and lower resistance at $230-$230.50 was cleared but held with momentum towards at $232-$232.50 on continued closes above the $231 level.

The 2nd-half pullback to $228.54 breached but held near-term and upper support at $229-$228.50. A move below the $227.50 level would signal additional risk towards $225.50-$225.

RSI has leveled out with support at 65-60. A close below the latter would keep downside potential towards 55-50 in play with the latter representing the January low. Current resistance is at 70. Continued closes above this level would signal additional strength towards 75-80 with the latter also representing the overbought January peak.

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The Spiders S&P Homebuilders ETF (XHB) extended its losing streak to 2-straight sessions following Friday’s backtest to $47.87. Near-term and upper support at $48-$47.75 was breached and failed to hold. A close below the latter would signal additional weakness towards $47.50-$47 with the late January low at $46.87.

Current resistance is at $48.25-$48.50. Continued closes above the latter would be a renewed bullish development with upside potential towards $48.75-$49 and the recent all-time at $48.98.

RSI is in a downtrend with upper support at 55-50 holding. There is risk towards 45-40 on a close below 50 and a level that has basically been holding since late December. Resistance is at 60 with strength towards 65-70 on a move back above this level.

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The percentage of Nasdaq 100 stocks trading above the 50-day moving average closed at 74.75% on Friday, down 3.89%, with the session low reaching 72.81%. Upper support at 75%-72.5% was breached and failed to hold. A move below the latter would signal additional weakness towards the 70% area. There is gap down potential towards 62.5%-60% if 70% fails to hold with last Tuesday intraday low at 69.90%. Lowered resistance is at 75%-77.5% with last Thursday’s peak at 79.61%.

The percentage of S&P 500 stocks trading above the 200-day moving average settled at 72.87%, down 2.37%, with the session low reaching 72.47%. Prior and upper support at 72.5%-70% was breached but held. A close below the latter would be an ongoing bearish signal with additional weakness towards 67.5%-65%. Lowered resistance is at 75%-77.5% with last Wednesday and Thursday’s high at 77.22%.

The Q4 earnings season has turned out to be a pretty good one as we are over the halfway point with 65%, or 323 S&P 500 companies, having announced numbers. Total earnings and revenues are up 0.3% and 4%, respectively. The proportion of these companies have also topped EPS and revenue estimates by 72.1% and 67.8%, respectively.

For the quarter as a whole, combining the results that have come out with estimates for the still-to-come companies, Q4 earnings are expected to be up 0.6% on a year-over-year basis. This is the first time that the blended Q4 earnings growth rate has turned positive this earnings season and would follow the -1.7% decline in S&P 500 earnings in the preceding period of 3Q 2019.

The anemic earnings growth pace in 2019 is primarily because of tough comparisons to the 2018 numbers that were boosted by the tax cut legislation. Normal growth appears to be resuming in the current period (2020 Q1) and should accelerate into the back half of the year and into 2021.   

While estimate revisions for 2020 Q1 were recently raised in January, that has clearly reversed over the past week or so with the coronavirus adding to the typical negative revision that would take place any way.

Our current trades held up well despite Friday’s slight pullback in the market. We have locked-in triple-digit profits on T and the outcome of our CSCO trade will likely be determined on Wednesday. BBBY and DBX have April expiration dates and over 2 months of time to play out.

Given this setup, I should have more new trades this week and maybe as early as this afternoon. I want to see how the open plays out this morning along with the action in the VIX. My Watch List is loaded with both bullish and bearish setups but we still need to be nimble and take what the market gives us.

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.

AT&T (T, 38.45, up $0.01)

T March 38 calls (T200320C00038000, $1.20, up $0.05)

Entry Price: $0.55 (2/4/2020)

Exit Target: $1.10, raise to $2

Return: 118%

Stop Target: $1.00, raise to $1.10 (Stop Limit)

Action: Raise the Exit Target from $1.10 to $2. Raise the Stop Limit at $1.00 to $1.10 to lock-in another triple-digit protect profit. 

Call buying was heavy in the T March 40’s with over 7,800 contracts trading and why there was a bump in these call options despite the penny rise in the stock.

Friday’s peak reached $38.72 with prior and lower resistance at $38.50-$38.75 getting cleared but holding. Support remains at $38.25-$38.

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Bed Bath & Beyond (BBBY, $15.31, down $0.31)

BBBY April 12 puts (BBBY0417P00012000, $0.50, up $0.05)

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

Exit Target: $1.10

Return: -9%

Stop Target: None

Action: Shares tapped a low of $15.13 with prior and upper support at $15.25-$15 getting breached but holding. Lowered resistance is at $15.50-$15.75 and the 50-day moving average.

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Cisco Systems (CSCO, $47.97, down $0.72)

CSCO March 52.50 calls (CSCO200320C00052500, $0.30, down $0.10)

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

Exit Target: $1.10

Return: -45%

Stop Target: None

Action: Prior and upper support at $48-$47.75 was tripped and failed to hold on Friday. Lowered resistance is at $48.25-$48.50. Earnings are due out after Tuesday’s close.

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Dropbox (DBX, $18.10, down $0.16)

DBX April 20 calls (DBX200417C00020000, $0.70, down $0.05)

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

Exit Target: $1.80

Return: -22%

Stop Target: None

Action: Current and upper support at $18-$17.75 held on the backtest to $17.97. Resistance remains at $18.25-$18.50.

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