MomentumOptions.com Pre-Market Update for 2/18/2020

Bulls Get 2nd-Straight Weekly Win

8:00am (EST)

The market showed some strength on a Friday for the 1st time in 4 weeks with the gains for the week giving the bulls their 2nd-straight weekly win. The major indexes have been very resilient to profit-taking resulting from the coronavirus development but concerns about an overbought market still remain.

Defensive dividend-paying stocks, along with Utilities and REITs, also showed strength on Friday, due to renewed coronavirus concerns going into a long weekend with Wall Street closed on Monday. However, volatility eased after closing below a key level of support and is still giving a bullish signal for the market and possible higher highs going into next week.

The Nasdaq gained 0.2% after trading to a morning high of 9,746. Key resistance at 9,750 was challenged but held for the 2nd-straight session with a close above this level and the all-time high at 9,748 signaling momentum towards 9,800-9,850.

The S&P 500 was also up 0.2% following the intraday push to 3,380. Near-term resistance at 3,400 held for the 3rd-straight session along with upper support at 3,375-3,350.

The Dow closed slightly lower for the 2nd-straight session after giving back 0.1% with the intraday low tapping 29,283. Current and upper support at 29,400-29,200 was breached and failed to hold with a close below the latter signaling a further backtest towards the 29,000 level.

The Russell 2000 fell 0.4% with the late day low reaching 1,683. Upper support at 1,685-1,670 was breached and failed to hold with a close below the latter signaling additional risk towards 1,665-1,650 and the 50-day moving average.

For the week, the Nasdaq jumped 2.2% and the Russell 2000 soared 2%. The S&P 500 was up 1.6% and the Dow gained 1%.

Real Estate and Utilities led sector strength for the 2nd-straight session after rallying 1.2% and 0.7%, respectively. Energy was the weakest sector after giving back 0.5% while Consumer Discretionary dipped 0.2%.

In economic news, Import Prices were flat in January, and Export Prices rose 0.7%, following respective December prints of 0.2% and -0.2%. On a 12-month basis, import prices climbed 0.3% year-over-year versus 0.5% previously and export prices firmed 0.5% year-over-year from -0.9%. Petroleum prices were a big drag, falling -1.7% after a prior 1.0% jump. Excluding petroleum, import prices were 0.2% firmer. For export prices, agricultural was 2% higher, and excluding ag grew 0.7%.

January Retail Sales increased 0.3% for both the headline and ex-autos, matching forecasts. December’s 0.3% headline gain was revised down to 0.2%, while the 0.7% ex-auto gain was bumped to 0.6%. Headline and core sales were 4.6% year-over-year  higher. Sales excluding autos, gas and building materials were 0.2% higher versus December’s 0.4% gain. Gas station sales declined -0.5% after a 1.7% gain. Clothing sales dropped -3.1% following a 2.7% December bounce. Car sales edged up 0.2% from -1.7%. Non-store retailer sales were up 0.3% from -0.1%. Miscellaneous sales climbed 2.3%.

Industrial Production fell 0.3% in January, with capacity utilization slipping to 76.8%, with matching expectations. Production dropped -0.4% in December and posted declines in 7 of the 12 months for 2019. Manufacturing production dipped -0.1% after the prior 0.1% gain, with motor vehicle production bouncing back 2.4% versus December’s -5.1% print. Excluding vehicles, manufacturing production fell -0.3% after the prior 0.5% gain. Utilities remained weak, falling another -4%, versus December’s -6.2% plunge. Mining rose 1.2% after rebounding 1.5% in December.

The Preliminary Consumer Sentiment report for February was up 1.1 to 100.9, versus forecasts for a print of 99.7, after edging up 0.5 points in January. There was some negative impact seen in the current conditions index, which dipped to 113.8 from January’s 114.4. However, the expectations component rose to 92.6 from 90.5. The median 12-month inflation gauge was steady at 2.5% while the 5-year price measure dipped back to 2.3% from 2.5%. 

Business Inventories rebounded 0.1% in December, matching forecasts, with sales dipping -0.1%. For inventories, retailers’ stocks were unchanged, with manufacturers’ up 0.5% and wholesalers’ falling -0.2%. All of the weakness in sales was via the wholesalers, which declined -0.7% while retailers were flat and manufacturers rose 0.5%. The inventory-sales ratio edged up to 1.40 from 1.39.

Baker-Hughes reported that the U.S. rig count was unchanged from last week at 790, with oil rigs up 2 to 678.

The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 2nd-straight session with Friday’s peak reaching $145.08. Prior and lower resistance at $145-$145.50 was cleared but held. A move above the $146 level would signal a fresh breakout with upside momentum towards $146.50-$147 and prior peaks from late August.

Rising support is at $144-$143.50. A close below the $143 level would signal a near-term top with backtest potential towards $142.50-$142.

RSI is in a slight uptrend with resistance at 60. A close above this level would signal additional strength towards 65-70 with the latter representing the late January peak. Support is at 55-50.

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The S&P 500 Volatility Index ($VIX) fell for the 2nd time in 3 sessions with the afternoon low reaching 13.38. Key and upper support at 14-13.50 and the 50-day moving average was recovered with the series of lower lows throughout last week being an ongoing bullish signal. A close below the 13.50 level could lead to a quick kiss towards 13-12.50.

Lowered resistance is now at 14.50-15. A close above the latter and the 200-day moving average would be a clear signal for a return of heightened volatility.

RSI is showing signs of flatlining with key support at 45 in play. A close below this level would signal additional weakness towards the 40 area and the mid-December/ late January bottom. Key resistance is at 50 with a move above this level likely leading to a retest towards 55-60.

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The Spider S&P 500 ETF (SPY) was up for the 4th time in 5 sessions with the late day peak reaching $337.73. New and lower resistance at $337.75-$338.25 was challenged but held. A close above the latter and last Thursday’s all-time high at $338.12 would be an ongoing bullish signal for a run towards $339.50-$340.

Current support is at $336.50-$336. A close below the $335 level would signal a possible near-term top with backup help at $333-$332.50.

RSI has leveled out with key resistance at 70. Continued closes above this level would be a bullish signal for additional strength towards 75-80 and prior highs from the past couple of months. Support is at 60. A close below this level reopens weakness towards 55-50. 

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The Utilities Select Spider (XLU) closed higher for the 5th-straight session with Friday’s all-time peak reaching $70.45. Uncharted territory and lower resistance at $70.50-$71 was challenged but held. Continued closes above the latter would be an ongoing bullish signal with additional strength towards $72-$72.50.

Rising support is at $69.50-$69. A close below the latter would be a slightly bearish development and signal a possible near-term top with backtest potential towards $68.50-$68.

RSI remains in overbought territory with key resistance at 80. Continued closes above this level keeps 85-90 and 10-year highs in play. Support is at 75-70 with the latter holding since mid-January.

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The percentage of Nasdaq 100 stocks trading above the 50-day moving closed at at 81.55% on Friday, unchanged, with the intraday low tapping 80.58%. Upper support at 80%-77.50% was challenged but held. A move below the latter would signal additional weakness towards 75%-72.5% and levels from earlier in the month. Lowered but overbought resistance remains at 82.5%-85% with Friday’s high at 82.52%. The late December high reached 91.26% over 3-straight sessions. 

The percentage of S&P 500 stocks trading above the 200-day moving average average settled at 76.83%, down 0.59%, with the session low reaching 75.74%. Near-term and upper support at 75%-72.5% was challenged but held with last week’s low at 71.88%. A close below the 70% level would be a bearish development with additional weakness towards 67.5%-65% and levels from late January. Current and slightly overbought resistance is at 77.5%-80% with last week’s peak at 79%.

The Q4 earnings season is three quarter completed with results from 388 S&P 500 members, or 77.6% of the index’s total membership, in the books. Total earnings and revenues are up 1.3% and 4.8%, respectively, with companies topping EPS and revenue estimates at 72.9% and 66.2%, 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 0.8% on a year-over-year basis on 4.3% higher revenues. This would follow the -1.7% decline in S&P 500 earnings in the preceding period (Q3, 2019) and growth rates of 0.6% and -0.1% in 2019 Q2 and Q1, respectively.

As far as Tech, Q4 results from 92.4% of the sector’s total market capitalization in the S&P 500 index have been reported. Total earnings are up just over 7% from the same period last year on 5.8% higher revenues, with 86% beating EPS estimates and 87.5% topping revenue estimates.

On that note, current Q1 estimates are coming down, with the Coronavirus outbreak adding to the typical negative revision that would take place any way. The market got off to a good start with respect to estimate revisions for 2020 Q1, but that has clearly reversed over the last few weeks.

I was a little hesitant to get into AT&T (T) on Friday due to the 3-day weekend and the slight loss of time premium. I also wanted to see if the 50-day MA would hold. Given the current overbought market conditions, we might get a February fade at some point this week, or next, so stock selection will be key getting into new trades.

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My Watch List has both bullish and bearish positions as I mentioned this VIX is still giving a near-term bullish signal for possible higher market highs. I wanted to get us back into Virgin Galactic (SPCE) but the call options have become extremely expensive. 

The March 14 calls (SPCE200320C00014000, $15.00, up $5.70) were in parabolic mode last week and options we profiled at 65 cents. Of course, I got too trigger happy after getting us out for over a 200% return and just above the $2 level. Yes, I had a cold one over the weekend. 

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There will be another stock like this at some point this year, trust me. If SPCE shares ever come back to earth there may be an opportunity to use puts as overbought conditions remain in play and the company doesn’t make a profit. The current quarter expectations are for a loss of 22 cents a shares with revenues south of $2 million.

On that note, I have raised the Stop Limit on BBBY while deciding to exit DBX.

Momentum Options Play List

Closed Momentum Options Trades for 2020: 9-1 (90%). 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, $11.18, down $0.63)

BBBY April 12 puts (BBBY0417P00012000, $1.80, up $0.20)

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

Exit Target: $2.25 

Return: 227%

Stop Target: $1.35, raise to $1.50 (Stop Limit)

Action: Raise the Stop Limit at $1.35 to $1.50 to further protect profits.

Friday’s low tapped $11.07 with upper support at $11-$10.75 getting challenged but holding. I’m still looking for a possible plunge towards $10 and a close below $11 should get the ball rolling. Lowered resistance is at $11.25-$11.50.

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Dropbox (DBX, $18.53, down $0.08)

DBX April 20 calls (DBX200417C00020000, $0.90, flat)

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

Exit Target: $1.80

Return: 0%

Stop Target: None

Action: Close the trade today for a scratch. This has been our longest trade of the year and I’m getting a little nervous on the company’s earnings this week. More in a minute after the technical update.

Upper support at $18.50-$18.25 was breached but held on Friday’s fade to $18.41. Resistance remains at $18.75-$19. RSI has flatlined and is trending slightly lower with shares likely to remain in a tight range for a couple of days.

Earnings are due out this Thursday, after the close, with Wall Street pegging earnings at $0.14 a share on revenue north of $443 million. The company has topped estimates by 2 cents in 3 of the past 4 quarter with the other a 4-cent beat. While this seems impressive, shares have struggled for 6 weeks despite the market’s run to record highs.

Of course, a significant breakout could occur on another earnings beat and a rosy outlook for 2020. However, an earnings miss could send shares tumbling back towards the $16 area. Given the premium in this trade, I would rather find more attractive and cheaper plays that won’t be effected by earnings. 

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