MomentumOptions.com Pre-Market Update for 2/20/2020

Bulls Continue Record Run on Fresh Breakouts

8:00am (EST)

The market rebounded on Wednesday following better-than-expected news from the housing sector and a strong PPI reading. Meanwhile, the Fed minutes expressed confidence in the most recent meeting about the state of the U.S. economy and figured interest rates would likely remain unchanged for a while.

The Nasdaq surged 0.9% following the intraday run to 9,838 and fresh record high. Uncharted territory and lower resistance at 9,850-9,900 was challenged but held with a close above the latter signaling additional strength towards 9,950-10,000.

The Russell 2000 rallied 0.6% with the afternoon high tapping 1,698. Major resistance at 1,700 was challenged but held with a close above this level signaling further upside towards 1,715 and the current 52-week peak.

The S&P 500 soared 0.5% after testing a 2nd half and all-time high of 3,393. Near-term resistance at 3,400 was challenged but held with a close above this level signaling additional strength towards 3,425-3,450

The Dow was up 0.4% to snap a 3-session losing streak with the session high reaching 29,409. Near-term and lower resistance at 29,400-29,600 was cleared but held with last week’s record high at 29,568.

Energy and Technology were the strongest sectors after jumping 1.3% and 1.2%, respectively. Real Estate and Utilities were the weakest sectors after falling -1.4% and -1.1%, respectively.

In economic news, MBA Mortgage Applications dropped -6.4% following solid consecutive gains over the prior 3 weeks. However, the index is up 74.9% year-over-year versus a year ago. The refi index declined -8% but is 165.1% higher on a year-over-year basis. The purchase index slid -3.4%, though is up 10.3% year-over-year. The 30-year fixed mortgage rates rose to 3.77% from 3.72% previously and was at 4.66% last year. The 5-year ARM edged up to 3.23% versus the prior week’s 3.21% reading, and was at 4% a year ago.

Chain Store Sales slipped -0.7% last week, versus unchanged in the prior week. Sales were at a 1% year-over-year clip, having slowed from 2.2% previously. Though the pace of sales fell, the report indicated some pick up in certain discretionary spending categories such as electronics and furniture.

Producer Price Index jumped a surprising 0.5% in January for both the headline and core, easily topping expectations for a rise of 0.1%. There were no revisions to December’s 0.1% gains for both. Strength was in the services component where prices increased 0.7% from unchanged previously. Goods prices edged up 0.1% last month following December’s 0.3% uptick. Energy prices fell -0.7% after January’s 1.5% increase, while food prices increased 0.2% versus the -0.3% drop previously. On a 12-month basis, headline PPI climbed to a 2.1% year-over-year clip versus 1.3% previously. The core rate rose to a 1.7% year-over-year rate versus 1.1%.

Housing Starts fell -3.6% in January to a 1,567,000 pace versus expectations for a print of 1,400,000. Weakness was in single family starts which declined -5.9% after climbing 14.12% previously, while multifamily starts rose another 0.7% versus the prior 25.4% jump. Building permits rebounded 9.2% to 1,551,000 following a -3.7% drop to 1,420,000 previously. Starts under construction were up 1.3% from a prior 1.6% gain. Housing completions declined -3.3% versus the 8.6% gain in December.

The FOMC Minutes offered nothing new as the Fed reiterated participants generally judged that the current stance of monetary policy was appropriate. The FOMC mostly gauged the distribution of risks as somewhat more favorable than at the December meeting, as trade uncertainties had diminished, as had chances for a hard Brexit, while there were signs of stabilization in global growth. However, a number of downside risks remained prominent, including geopolitical risks from the Middle East, and the new threat of the coronavirus, which participants agreed warranted close watching.

The labor market was seen remaining strong with a number of Fed heads noting an increase in nominal wages, while several noted possible reasons why there wasn’t stronger upward pressure. Also, several raised the possibility that labor force participation could rise further, suggesting a lack of wage-price pressures. On inflation, several Fed members would tolerate above target prices for a period of time. 

The FOMC will continue bill purchases into Q2, though the pace is expected to slow as Treasury holdings align with trend growth in liabilities. As expected, there was nothing new in the minutes that analysts didn’t already know from the policy stance, the presser, Fed Chairman Powell’s testimonies, and general Fedspeak.

Cleveland Fed Loretta Mester expects the U.S./ China trade and USMCA deals will help ease uncertainties. She said a strong labor market is crucial for the economy. She also added the Fed does have a role in addressing income inequality, but the funds rate isn’t the tool to use, and believes education is the best means.

Minneapolis Fed Neel Kashkari said Federal Reserve is likely to keep interest rates where they are until mid-2020 but may then need to cut them, pointing to the coronavirus in China as one potential risk to the U.S. economy.

The iShares 20+ Year Treasury Bond ETF (TLT) had its 3-session winning streak snapped following the intraday pullback to $144.98. Current and upper support is at $145-$144.50 was breached but held. A close below $144 would signal a near-term top with additional weakness towards $143.50-$143.

Resistance remains at $146-$146.50. A move above the latter would signal additionl strength towards $147.50-$148 and late August highs.

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The S&P 500 Volatility Index ($VIX) flipped-flopped for the 9th-straight session after testing a session low of 14.21. Current and upper support at 14.50-14 was recovered. A close below the latter and the 50-day moving average would be a more bullish signal for a retest towards 13.50-13.

Resistance remains at 15-15.50 and the 200-day moving average.

The higher/ lower closes over the past 9 sessions have created a broader trading range between 13.50-16.50. A move below or above these levels will likely confirm if all-time highs remain in play, or, a pullback towards the 50-day moving averages is forthcoming.

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The Wilshire 5000 Composite Index ($WLSH) broke out of a mini 5-session trading range after flip-flopping for the 5th-straight session on the rebound to 34,616 and fresh all-time high. 

Key resistance at 34,400 and last Thursday’s all-time high of 34,474 were cleared and held. Continued close above the 34,600 level would signal ongoing momentum with uncharted territory towards 34,800-35,000.

Current and rising support is at 34,400-34,200. A close below the latter would signal a possible near-term peak with further risk towards 34,000-33,800.

RSI had been flatlining but is curling higher with lower resistance at 65-70 getting cleared and holding. A close above the 70 level would signal additional strength towards 75-80 with the latter representing the January and December peak. Support is at 60 with weakness towards 55-50 on a close below this level.

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The Financial Select Sector Spiders (XLF) bounced back after trading to an intraday high of $31.21. Lower resistance at $31-$31.25 was cleared and held. A close above $31.50 and the current 52-week high at $31.38 would signal a return of strength with additional upside towards $31.75-$32.

Current support is at $30.75-$30.50 and the 50-day moving average. A close below $30.50 would be a bearish development with additional risk towards $30.25-$30.

RSI is back in a slight uptrend with resistance at 60 and the monthly high. A move above this level would signal continued strength toward 65-70 with the latter representing the December peak. Support is at 55-50.

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The portfolio is light for the first time in awhile but that can be a good thing at times, especially given current market conditions. It appears Tech wants to trip the 10,000 level and the blue-chips are on pace to tag 30,000. Perhaps, that is when we get a market top and some backtest potential towards the 50-day MA’s that would come in March or April. 

The Watch List remains 50/50 with bullish and bearish setups and I would like to get into 1-2 more new trades this week. As usual, stay locked-and-loaded in case I take action.

Momentum Options Play List

Closed Momentum Options Trades for 2020: 11-1 (92%). 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, $38.44, up $0.18)

T March 39 calls (T200320C00039000, $0.45, up $0.07)

Entry Price: $0.50 (2/19/2020)

Exit Target: $1.00

Return: -10%

Stop Target: None

Action: Wednesday’s peak reached $38.65 with lower resistance at $38.50-$39 getting cleared but holding. Support remains at $38.25-$38.

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