MomentumOptions.com Pre-Market Update for 4/2/2020

Market Gaps Lower as Coronavirus Fears Heighten

8:00am (EST)

The market suffered steep losses on Wednesday after President Trump’s grim outlook on the coronavirus for the next few weeks. The gap lower erased the prior week of gains for the major indexes with the small-caps getting hit the hardest.

Economic news also played a role in the downdraft as signs of the fallout are starting to show up in small businesses. Given the smackdown, volatility stayed relatively calm after falling into negative territory shortly after the open while closing modestly higher.

The Russell 2000 plummeted 7% following the the intraday pullback to 1,064. Prior support at 1,075-1,060 was breached and failed to hold with a move below the latter getting 1,050-1,035 back in focus.

The Dow dropped 4.4% after testing a late session low of 20,784. Near-term and upper support at 21,000-20,750 failed to hold with a close below the latter signaling additional weakness towards 20,500-20,250.

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The S&P 500 also sank 4.4% with the 2nd half low kissing 2,447. Current and upper support at 2,450-2,425 was cracked but held with a move below the latter signaling a retest towards 2,400-2,375.

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The Nasdaq gave back 4.4%, as well, following the pullback to 7,301 ahead of the closing bell. Prior and upper support at 7,300-7,250 was challenged but held with a move below the latter reopening downside risk towards 7,200-7,150.

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Real Estate and Financials paced sector laggards after sinking 6.1% while Utilities and Energy lost 6% and 5%, respectively. There was no sector strength.

In economic news, MBA Mortgage Applications were up 15.3% last week, breaking a 2-week slide and recovering half of the prior -29.4% dive. It’s up 67.3% year-over-year versus 72.3% previously. All of the month’s gain was in the refi component which climbed 25.5% after declining -33.8% previously. The index remains sharply higher than last year, but has slowed slightly to a 167.7% year-over-year clip versus 195.4%. The purchase index fell for a third consecutive week, declining -10.8% to the lowest level since November 2016. It’s contracting at a -23.5% year-over-year rate, more than doubling the -11.2% in the prior week. The 30-year mortgage rage slipped to 3.47% after rising for a couple of weeks to 3.82% and compares to a 4.36% rate last year. The 5-year ARM dipped to 3.35% from 3.38%.

ADP Employment Report revealed private payrolls fell -27,000 after climbing 179,000 in February. Forecasts were for a plunge of -180,000. ADP acknowledged the data doesn’t really reflect the realities on the ground as a lot of the firings have taken place after March 12th. A more telling statistic was the -90,000 drop from small businesses, while large sized businesses added 56,000, with a 7,000 gain in medium sized firms. Jobs in the service sector fell -18,000, with a -37,000 slide in trade/transport and an -11,000 tumble in leisure/hospitality jobs. Not surprisingly, health/education jobs increased 48,000. Employment in the goods producing sector fell -9,000 with construction down -16,000 and manufacturing rising 6,000.

PMI Services Index was revised down to 48.5 in the final print for March, just above forecasts of 48.4. It was revised a little lower from the 49.2 flash reading for the month, and is down 2.2 points from February’s 50.7 print. The reading was the lowest since August 2009 and reverses the expansionary trend.

Construction Spending dropped -1.3% in February, below expectations for a rise of 0.6%, with January being revised to a 2.8% jump. Residential spending dipped -0.6% versus the prior 3.8% gain in January. Nonresidential spending declined -1.8% versus the prior 2% pop. Private spending slid -1.2% versus 2% previously while public spending fell -1.5% versus 3.5%.

ISM Manufacturing Index fell 1 point to 49.1 in March, versus forecasts for a print of 44, and follows the -0.8 point dip to 50.1 in February. The new order component fell 7.6 points to 42.2 after the -2.2 point decline to 49.8 in February. The employment index tumbled -3.1 points to 43.8 after edging up 0.3 ticks to 46.9 previously. The new export orders component was down -4.6 points to 46.6 after falling -2.1 points to 51.2. Imports slipped another half-point to 42.1 following the -8.7 point plunge to 42.6. Prices paid dropped -8.5 points to 37.4 following the -7.4 point drop to 45.9 previously. The headline index found some support from the pick up in supplier deliveries, where the index jumped 7.7 points to 65.

Cleveland Fed Loretta Mester said the unemployment rate could rise to 10%-30% due to the coronavirus. She said the final number is likely to fall somewhere above 10% though likely not as bad as the upper range. She added, how things play out really is going to depend on the course of the virus. Mester was the only Fed official to vote against the recent decision to take the benchmark interest rate to near zero.

The iShares 20+ Year Treasury Bond ETF (TLT) snapped a 2-session slide after testing a high of $168.95. Near-term and lower resistance at $168.50-$169 was cleared but held. A close above the $170 level would be a bullish signal for another breakout and run towards $172.50-$175.

Current support is at $166.50-$166 with backup help at $165-$164.50.

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The S&P 500 Volatility Index ($VIX) reached a peak of 60.59 shortly after the open but steadily declined afterwards into negative territory before closing the session higher. Current resistance at 57.50-60 was breached but levels that held. There is risk towards 62.50-65 on a close back above 60 and a level that represents a break above a downward slope from the March high of 85.47.

Near-term and upper support at 52.50-50 was challenged but also held on the fade to 52.76 afterwards. A close below the 50 level would be a slightly bullish signal for the market but still highly elevated levels with the 50/200-day moving averages remaining in strong uptrends.

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The Spider S&P 500 ETF (SPY) was down for the 2nd-straight session after testing an afternoon low of $243.90. Near-term and upper support at $244-$243.50 was tripped but held with a close below the latter reopening risk towards $242.50-$240. A death cross has formed with the 50-day moving average falling below the 200-day moving average and is a bearish technical signal for lower lows.

Lowered resistance is at $247-$247.50 with additional hurdles at $248.50-$249. The gap lower was a bearish development follow 6-sessions of higher highs and higher lows.

RSI is in a downtrend with key support at 40 holding into the close. A move below this level would signal weakness towards 35-30 with the latter area representing the stretched March low. Resistance is at 45-50.

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The Energy Select Sector Spider (XLE) was down for the first time in 3 sessions after tapping an intraday low of $27.23. Support at $27.50-$27.25 was breached but levels that held. A close below $27 would be a bearish development with downside risk towards $25.50-$25. This would retrace the gap higher from last Tuesday.

Near-term and lowered resistance is at $28-$28.50 followed by $29.50-$30.

RSI is in a downtrend following the close below key support at 35. A move below 30 would signal additional weakness towards 25-20 with the March low at 15. Near-term resistance is at 40 with a more important recovery level at 45 and the February peak.

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The action in the VIX gave the bulls a glimmer of hope at holding near-term supports levels going into today’s session but a lot of the smart money continues to feel fresh lows are just around the corner. I have continued to say the VIX needs to close below 50 and Tuesday’s low tapped 50.88.

The good news is the portfolio is super light and we have room for 2-3 new trades depending on how the action plays out today and tomorrow. The market could be in flux for a couple of weeks to see how the curve is flattening so our trades will continue to be quick in nature with tight Stop Limits. 

Momentum Options Play List

Closed Momentum Options Trades for 2020: 14-4 (78%). 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.

Limelight Networks (LLNW, $5.66, down $0.04)

LLNW June 5 calls (LLNW200619C00005000, $1.40, flat)

Entry Price: $0.50 (3/18/2020)

Exit Target: $2

Return: 180%

Stop Target: $1.05 (Stop Limit)

Action: Shares tested a low of of $5.45 with upper support at $5.50-$5.25 getting challenged but holding for the 2nd-straight session. Resistance remains at $5.75-$6.

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