MomentumOptions.com Pre-Market Update for 2/24/2020

Bears Snap Bulls 2-Week Win Streak 

8:00am (EST)

The market was weak throughout Friday’s session as the recent risk-off theme returned with traders moving to the sidelines ahead of the weekend. The trend has been common over the past month following ongoing concerns from the coronavirus and the impact to global growth.

Of course, the major indexes were in overbought territory throughout much of last week, and since early February, on the continued run to all-time highs. Friday’s pullback corrected some of the recent froth with late January volatility back in focus. 

The Nasdaq tanked 1.8% after testing a late day low of 9,542. Prior and upper support from the start of the month at 9,550-9,500 was breached but held with a move below the latter opening up risk towards 9,450-9,400.

The S&P 500 sank 1.1% following the intraday plunge to 3,328. Fresh and upper support at 3,325-3,300 was challenged but held with a move below the latter getting 3,275-3,250 and the 50-day moving average back in focus.

The Russell 2000 tumbled 1% after tapping a 2nd half low of 1,673. Prior and upper support at 1,680-1,665 was breached and failed to hold with a move below the latter and the 50-day moving average signaling a further pullback towards 1,650-1,635.

The Dow dropped 0.8% with the session low reaching 28,892. Late January and upper support at 29,000-28,800 was breached and failed to hold with a close below the latter and the 50-day moving average signaling ongoing weakness towards 28,600-28,400.

For the shortened week, the Dow was down 1.4% and the S&P 500 sank 1.3%. The Nasdaq lost 1.6% and the Russell 2000 was lower by 0.6%.

Real Estate and Consumer Staples were the strongest sectors with gains of 0.5% and 0.2%, respectively. Technology was the weakest sector after tanking -2.2% while Communication Services and Consumer Discretionary stumbled -1.5%.

Over the past 5 sessions, Utilities and Real Estate (0.9%) were the best performing sectors followed by Consumer Discretionary (0.3%) and Communication Services (0.2%). Technology (-2.5%) was the worst performing sector followed by Industrials (-1.2%) and Energy (-0.8%).

In economic news, Markit Manufacturing PMI dropped -1.1 points to 50.8 in the flash February print, after slipping -0.5 ticks to 51.9 in January. New orders declined to 50.4 from 52.4, and employment fell as well. Meanwhile, the February services index was down 4 points to 49.4 after edging up 0.6 ticks to 53.4 in January. The new business index fell to a record low. The composite declined 3.7 points to 49.6 following last month’s 0.6 point pop to 53.3. The new orders component also slid to a record low reading. 

Existing Home Sales for January fell -1.3% to 5,460,000, versus forecasts of 5,450,000, and December’s 3.9% bounce to 5,530,000. Single family sales declined -1.2%, while condo/coop sales dropped -1.6%. The months’ supply of homes edged up to 3.1 months from 3. The median sales price increased to $266,300 after December’s rise to $274,500 and is up 6.8% year-over-year. 

Baker-Hughes reported the U.S. rig count was up 1 from last week at 791, with oil rigs up 1 to 679, gas rigs unchanged at 110, and miscellaneous rigs unchanged at 2.

Fed Governor Lael Brainard said policy may have to remain accommodative to get 2% inflation. She said she prefers a flexible inflation averaging approach, and should target a 2%-2.5% zone to make up for the shortfall. 

Brainard worries inflation expectations may have slipped. She said one proposal would be to put on interest rate caps were the funds rate band pushed to the zero bound. She will also use forward guidance.

Atlantic Fed Raphael Bostic noted he is watching the effects of the coronavirus, but isn’t changing his outlook yet. He said businesses are indicating the virus should be disruptive in the short run. However, he added the economy is strong and can stand on its own feet and the Fed should it do that. He’s open to a policy move if there is more weakness than expected. 

St. Louis Fed Bullard noted the labor market is strong and consumption is holding up well. He said the Fed is in great shape and doesn’t have to lower rates. On the elections, Bullard noted they don’t affect the Fed’s deliberations much. He added it is hard to get anything done in Washington and hence he believes the markets are pricing in gridlock in Washington, even if Bernie Sanders were to win.

The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 2nd-straight session and for the 5th time in 6 after testing a fresh 52-week and all-time high of $148.88. New and lower resistance from late August at $148.50-$149 was cleared but held. A move above the latter would signal additionl strength towards $149.50-$150.

Rising support is at $147-$146.50. A close below the $136 level would signal a near-term peak.

RSI remains in an uptrend with January resistance at 70 holding. A close above this level would signal additional strength towards 75-80 and the latter representing overbought and early August highs. Support is at 65-60.

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The S&P 500 Volatility Index ($VIX) fell for the 2nd-straight session after surging to an intraday high of 18.21. Prior and upper resistance from late January at 17-17.50 was breached but held on the close above the former. There is additional risk towards 19.50-20 on a move above the 18.50 level.

Rising support is at 16.50-16 followed by 15.50-15 and the 200-day moving average.

RSI is in an uptrend with resistance at 60. A close above this level would signal a run towards 65-70 with the late January high at 75. Support is at 55-50.

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The Russell 2000 ETF (IWM) had its 2-session winning streak snapped following the pullback to $166.33. An 8-session trading range is in play with current support at $166-$165.50. A close below the latter and the 50-day moving average would be a bearish development with additional weakness towards $164.50-$164.

Current resistance is at $168-$168.50. A close above the $169 level would be a bullish signal for a retest towards $170-$170.50 with the mid-January 52-week and all-time peak at $170.56.

RSI is in a downtrend with support at 50. A close below this level would be an ongoing bearish development with additional weakness towards 45-40. Resistance is at 55-60 with the latter representing the monthly high.

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The iShares MSCI Emerging Markets Fund (EEM) was down for the 2nd-straight session and for the 3rd time in 4 with the afternoon low reaching $43.23. Near-term and upper support at $43.25-$43 was breached but held. A close below the latter would signal additional weakness towards $42.50-$42.25.

Current resistance is at $43.50-$43.75. A close above the $44 level would be a slightly bullish sign for a retest towards $44.25-$44.50 and the 50-day moving average.

RSI is back in a downtrend with support at 40. A move below this level would signal additional weakness towards 35-30 with the latter near the January low. Resistance is at 45-50.

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The percentage of S&P 500 stocks trading above the 200-day moving average closed at 73.66% on Friday, down 2.37%, with the session low reaching 72.27%. Upper support from the beginning of the month at 75%-72.5% was breached and failed to hold. A move below the latter would signal additional weakness with downside risk towards 70%-67.50% and the late January low at 67.32%. Lowered resistance is at 77.5%-80% with the mid-month high at 79%.

The percentage of Nasdaq 100 stocks trading above the 50-day moving average average settled at 65.04%, down 12.62%, with the session low tapping 63.10%. Late January and upper support at 65%-62.5% was tripped but held. A close below the latter would be an ongoing bearish signal with additional weakness towards 60%-57.5% and the last day of January low at 52.42%. Lowered resistance is at 67.5%-70% with last Friday’s peak at 70.87%.

Shares of Dropbox ($22.45, up $3.47) zoomed 20% on Friday after reporting better-than expected earnings and announcing a share buyback. If you happen to still be in the DBX April 20 calls (DBX200417C00020000, $3.00, up $1.85) congratulations. I was a little nervous staying in the position as I was expecting an overall market pullback last week, which we got. Additionally, some of the research I had done was pointing to an earnings miss by the company and the fundamental picture was also souring.

In any event, I got a number of emails over the weekend as many subscribers stayed in the trade at under $1 and wanted to know what to do. Close half the trade and set a Stop at $2.60 to protect the 160% pop on Friday. 

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As far as possible New Trades this week, Rambus and QQQ XLK are at the top of my bearish Watch List. Shares of Rambus (RMBS, $x) had been in a nice uptrend after its earnings release in January. However, if shares fail $15.50, we are likely in for a possible backtest towards $14.50-$14. 

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As far as XLK, a close below $98 would be an ongoing bearish signal for a retest towards $95.50-$95 and the 50-day moving average.

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The portfolio remains light so continue to accumulate cash as we wait for a more defined trend to take place. A late and historical February fade could happen following the late January, short and sweet, 3% pullback. March and April are typically bullish months for the market and a retest to the 50-day moving averages would continue to bring down the frothy and overbought levels.

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, $38.55, down $0.06)

T March 39 calls (T200320C00039000, $0.45, down $0.05)

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

Exit Target: $1.00

Return: -10%

Stop Target: None

Action: Shares traded down to $38.37 with upper support at $38.25-$38 and the 50-day moving average holding. Resistance remains at $38.50-$39.

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