MomentumOptions.com Pre-Market Update for 3/5/2020

Whipsaw Action Continues as Volatility Eases

8:00am (EST)

The market  continued this week’s whipsaw action after closing higher on Wednesday as better-than-expected economic news outweighed ongoing coronavirus concerns. Super Tuesday’s democratic primary elections also played a role as Joe Biden’s resurgence sent the healthcare sector higher with the hype for medicare-for-all taking a blow.

The major indexes failed to make fresh weekly highs as near-term resistance levels held to keep downside risk and last week’s lows in play. However, Tuesday’s lows were avoided as strength was evident throughout the session while volatility showed ongoing signs of simmering.  

The Dow jumped 4.5% following the intraday run to 27,102. Near-term and lower resistance at 27,000-27,250 was cleared and held with a close above the latter and the 200-day moving average getting 27,500-27,750 back in play.

The S&P 500 soared 4.2% after settling on its session high of 3,130 and back above the 200-day moving average. Current and lower resistance at 3,125-3,150 was cleared and held with a move above the latter signaling additional strength towards 3,175-3,200.

The Nasdaq rallied 3.9% while closing a point off the late day high of 9,019. Lower resistance at 9,000-9,050 was cleared and held with a move above the latter and Tuesday’s high of 9,070 signaling a retest towards 9,150-9,200.

The Russell 2000 rose 3% after going out on its session high of 1,531. Prior and lower resistance at 1,525-1,540 was recovered with more important hurdles at 1,550-1,575 and the 200-day moving average.

Healthcare and Utilities were the strongest sectors after zooming 5.8% and 5.7% while Consumer Staples and Technology surged 4.9% and 4.2%, respectively. There was no sector weakness.

In economic news, MBA Mortgage Applications surged 15.1% last week, following the prior week’s 1.5% gain. This represents a 95.7% year-over-year increase versus 67.4% previously. All of the strength was in refis (66.2% of applications), which rallied 26% from the prior -0.8% dip. Refis are higher by 223.6% year-over-year compared to the same week last year. The purchase index declined -2.7%, halving the prior 5.7% bounce, and is higher by 10.3% year-over-year, little changed from last week’s 10.2% year-over-year pace. The 30-year fixed mortgage rate tumbled to 3.57% from 3.73% previously and was at 4.67% a year ago. 

ADP reported private payrolls increased 183,000 in February, versus forecasts of 165,000, and follows the 209,000 surge in January. Jobs in the services sector were up 172,000, with strength in education and health services, where jobs increased 46,000. Leisure and hospitality services added 44,000 while trade/transport jobs increased 31,000. The goods producing sector added 11,000 workers while construction jumped 18,000. Manufacturing dipped -4,000.

PMI Services Index was flat at 49.4 in the final February print, matching estimates and the preliminary print, but also representing the lowest reading since 2013. The new business component dropped to 50.2 from 52.5 but remained in expansionary territory for a 4th-straight month. The composite index was also unchanged at the 49.6 print from the preliminary February report. New orders declined to 50.2 from 52.5 previously and is a record low.

ISM Index increased 1.8 points to 57.3 in February, topping forecasts for a print of 55, after rising 0.6 ticks to 55.5 in January. The employment component popped to 55.6 after falling to 53.1 previously. New orders climbed to 63.1 from 56.2. New export orders rallied to 55.6 versus 50.1 while import orders declined to 52.6 from 55.1. The orders backlog index rose to 53.2 from 45.5, with supplier deliveries rising to 52.4 from 51.7. Prices paid dropped to 50.8 from 55.5.

Fed’s Beige Book reported the economy expanded at a modest to moderate rate, as analysts expected. According to the Fed, the outlooks for the near-term were mostly for modest growth with the coronavirus and the upcoming presidential election cited as potential risks. There were indications the virus was negatively impacting travel and tourism. Manufacturing expended in most Districts. Some supply chain disruptions were noted, but producers feared further disruptions in coming weeks. 

The service sector showed mild to moderate growth. Residential home sales picked up. Employment increased at a slight to moderate pace overall, with hiring constrained by a tight labor market. There was modest growth in selling prices in most Districts, as well as in nonlabor input prices. Weaker demand from China due to coronavirus generally weighed on oil and gas prices. Meanwhile, retail prices rose in much of the nation, though some retailers had lower costs due to improved trade conditions.

The iShares 20+ Year Treasury Bond ETF (TLT) settled lower for the 2nd-time in 3 sessions despite the intraday peak reaching $157.35. Near-term and lower resistance at $157.50-$158 was challenged but held with additional hurdles at $159.50-$160 and the all-time high at $159.70.

The late day fade to $154.19 breached upper support at $154.50-$154, but level that held with backup help at $152.50-$152. A close below the latter would signal a possible near-term top with with additional backtest potential towards $150.50-$150.

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The S&P 500 Volatility Index ($VIX) was higher for the 3rd time in 4 sessions despite trading to a low of 30.30. Current and upper support at 32.50-30 was recovered. A close below the latter would be an ongoing bullish signal volatility is trying to settle down with retest potential towards 27.50-25.

Lowered resistance is at 32.50-35 followed by 37.50-40.

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The Russell 2000 ETF (IWM) flipped-flopped for the 4th-straight session after trading to a high of $152.45. Near-term resistance at $152-$152.50 was cleared and held. A close above the latter would be a more bullish signal for a retest towards $154 and prior support from late October and the beginning of last week.

Current support is at $150.50-$150 with backup at $148.50-$148. A close below the $148 level would be a renewed bearish development with additional selling pressure towards $146-$144 and recent lows.

RSI is back in an uptrend with lower resistance at 35-40 getting cleared and holding. A close above the latter would be an ongoing bullish signal with additional strength towards 45-50. Support is at 30 with a move below this level signaling a retest towards 25-20.

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The Spiders S&P Homebuilders ETF (XHB) was up for the 2nd-time in 3 sessions with the intraday high tapping $46. Prior and lower resistance from late October at $46-$46.50 was cleared and held. Continued closes above the latter would be an ongoing bullish development with upside potential towards $46.50-$47 and the 50-day moving average that is showing signs of leveling out.

Near-term support is at $45.50-$45. A close below the $44.50 level would signal a false breakout and retest potential towards $44-$43.50 and the 200-day moving average.

RSI is in an uptrend with lower resistance at 45-50 getting cleared and holding. A close above the latter would signal additional strength towards 55-60. Support is at 40 with risk towards 35-30 on a close back below this level.

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I was a little hesitant to open fresh bullish positions as the major indexes still need to clear Tuesday’s highs. If so, there could be an opportunity to add additional trades. However, the technical damage is still favoring bearish setups, as well. 

Momentum Options Play List

Closed Momentum Options Trades for 2020: 13-1 (93%). 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.

Rambus (RMBS, $14.16, up $0.09)

RMBS April 15 calls (RMBS200417C00015000, $0.45, flat)

Entry Price: $0.45 (3/2/2020)

Exit Target: $0.90

Return: 0%

Stop Target: None

Action: Wednesday’s high tapped $14.26 with lower resistance at $14.25-$14.50 getting breached but holding. Support remains at $14-$13.75.

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Bank of America (BAC, $28.39, up $0.64)

BAC April 34 calls (BAC200417C00034000, $0.10, flat)

Entry Price: $0.40 (2/26/2020)

Exit Target: $0.80

Return: -75%

Stop Target: None

Action: Support at $27.75-$27.50 was breached but levels that held on Wednesday’s backtest to $27.40. Lower resistance at $28.25-$28.50 held on the rebound to $28.42.

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AT&T (T, $38.18, up $1.88)

T March 39 calls (T200320C00039000, $0.40, up $0.25)

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

Exit Target: $1.00

Return: -20%

Stop Target: None

Action: Shares tested a high of $38.22 with prior and lower resistance at $38.25-$38.50 getting challenged and holding. New support is at $38-$37.75 on the close back above the 50-day moving average.

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