MomentumOptions.com Pre-Market Update for 4/6/2020

Trading Range Developing Ahead of Next Major Move 

8:00am (EST)

The market ended the week on a down note following a dismal employment report. While the numbers missed forecasts by a mile, it was no big surprise given the shutdown of the economy from mid-March. The rollout of the small business lending program that the federal government is rolling out weighed on sentiment as the process was far from smooth. 

The losses kept the major indexes in a 3-session trading range while avoiding fresh weekly lows. The technical outlook is still signaling a possible retest of the March lows, but surprisingly, volatility settled lower and back below a key level of support.

The Russell 2000 tanked 3.1% following the intraday pullback to 1,035. Current and upper support at 1,050-1,035 was breached but held with a move below the latter reopening risk towards 1,025-1,010.

The Dow was down 1.7% after testing a late day low of 20,863. Upper support at 21,000-20,750 was tripped but held with a close below the latter signaling additional weakness towards 20,500-20,250.

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The Nasdaq lost 1.5% following the 2nd half backtest to 7,288. Near-term and upper support at 7,300-7,250 was breached but held with a close below the latter signaling additional risk towards 7,200-7,150.

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The S&P 500 was also off 1.5% with the afternoon low tapping 2,459. Current and upper support at 2,475-2,450 was breached but held with a move below the latter keeping downside risk towards 2,425-2,400 in focus.

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For the week, the Russell 2000 plummeted 7.1% and the Dow dropped 2.7%. The S&P 500 declined 2.1% and the Nasdaq stumbled 1.7%.

Consumer Staples were the only sector that showed strength after rising 0.8%. Utilities and Materials were the weakest sectors after stumbling 3.6% and 2.4%. respectively, while Communication Services and Financials declined 2%.

Over the past 5 sessions, Energy (5.3%), Consumer Staples (3.4%), and Healthcare (2.1%) were the best performing sectors. Financials (-7.5%), Consumer Discretionary (-7.3%), and Utilities (-7%) were the weakest sectors.

In economic news, Nonfarm Payrolls from March sank -701,000, versus forecaats for a decline of 148,000, and follows February’s 275,000 increase. The unemployment rate jumped to 4.4% from 3.5% with forecasts at 3.9%. The labor force declined -1,633,000, with household employment tumbling -2,987,000 after the former slipped -60,000 in February with the latter rising 45,000. The labor force participation rate declined to 62.7% after holding at 63.4% for the prior two months. The workweek fell to 34.2 from 34.4. Average hourly earnings rose 0.4% versus the prior 0.3% gain. On a 12-month basis, earnings accelerated slightly to 3.1% year-over-year versus 3% clip. Private payrolls dropped -701,000 following February’s 275,000 increase, with employment in the goods-producing sector falling -54,000 from the prior 57,000 rise. Service sector jobs slumped -659,000 after rising 185,000 in February. Leisure/hospitality jobs plunged -459,000 from the prior 45,000 increase. Education/health care jobs were down -76,000 versus a 65,000 increase previously. Government jobs edged up 12,000 with 18,000 added to the Federal payroll.

PMI Markit services index was revised up to 39.8 in the final March print versus the 39.1 preliminary reading, down -9.6 points from the 49.4 reading in February. The new business index dropped to 40 from 50.2 previously and is also a new historic low. Additionally the prices charged index declined to a new low as well. The final composite reading was bumped up to 40.9 versus the 40.5 preliminary, but it’s off -8.7 points compared to February’s 49.6 print. The new orders index dropped to 40.9 from February’s 50.2 and is also a record low. Employment tumbled to its lowest since December 2009.

ISM Non-Manufacturing Index for March dropped -4.8 points to 52.5, holding up surprisingly well as estimates were at 43, after the 1.8 tick rise to 57.3 in February. However, the headline is deceptive and probably the last 50 handle we will see for a while, with weakness dominating the report and more to come. The strength was in supplier delivers, which rose 9.7 points to 62.1 from 52.4, but that’s not a good sign as businesses/people prepared for the shutdowns. Also, the backlog of orders rose to 55 from 53.2. The inventory change component dropped -12.4 points to 41.5 from 53.9, and the inventory sentiment index slid -11.5 points to 47.8 from 59.3. The employment component dropped -8.6 points to 47 from 55.6. New orders plunged -10.2 points to 52.9 from 63.1. New export orders declined to 45.9 from 55.6. The imports index fell to 40.2 from 52.6. Prices paid slipped 50 from 50.8.

Baker-Hughes Rig Count reported U.S. rig count was down 64 rigs from last week to 664, with oil rigs down 62 to 562, gas rigs down 2 to 100, and miscellaneous rigs unchanged at 2. The U.S. Rig Count is down 361 rigs from last year’s count of 1,025, with oil rigs down 269, gas rigs down 94, and miscellaneous rigs up 2 to 2. The U.S. Offshore Rig Count was unchanged at 18 and down 4 year-over-year.

The iShares 20+ Year Treasury Bond ETF (TLT) extended its winning streak to 3-straight sessions after trading to an intraday high of $170.33. Fresh and lower resistance at $170-$170.50 was cleared but held. A move above the latter would signal breakout potential towards $172.50-$175.

Rising support is at $167.50-$167 with backup help at $166.50-$166.

RSI has been flatlining near the 60 level since late March with upside potential towards 65-70 still in play. Support is at 55-50.

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The S&P 500 Volatility Index ($VIX) stayed deflated throughout Friday’s session after trading down to 46.74 just ahead of the closing bell. The close below the 50 level was a slightly big deal for the market with fresh support now at 45-40. The 50-day moving average remains in a strong uptrend and it will likely take many weeks to “flatten the curve” as volatility still remains at historic levels.

Near-term and lowered resistance is at 47.50-50 with fluff levels up to 55-60. A close above the 60 level would be alarming for the market and would likely induce another round of panic selling.

RSI has been in a steady downtrend since mid-March with new support now at 45-40 and the latter representing the January low. Keep in mind though, the 40 level has also been holding since mid-October. Resistance is at 50 with a close back above this level signaling strength towards 55-60.

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The Wilshire 5000 Composite Index ($WLSH) has been in a mini 3-session trading range with Friday’s low tapping 24,461. Current and lower support at 24,750-24,500 was stretched but held on the close below the former. A move below the 24,250 level would be a renewed a bearish signal with risk towards 23,750-23,500. 

The 50-day moving average has fallen below the 200-day moving average to form a death cross. This is typically a bearish technical development for lower lows.

Near-term resistance is at 25,000-25,250. A move above the 25,500 level would signal a break out of the current price range with retest potential towards 26,000-26,250 and late March highs.

RSI has flatlined with key resistance at 45. A close above this level would signal additional strength towards 50-55. Crucial support is at 40 with a close below this level keeping weakness open towards 35-30.

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The Utilities Select Spider (XLU) has also been in a 3-session trading range following the pullback to $51.39. Current and upper support at $51.50-$51 was breached but held. A close below the $50.50 level would be a renewed bearish development with backtest potential towards $49-$48.50.

The 50-day moving average remains on track to fall below the 200-day moving average.

Resistance remains at $53.50-$54. Continued closes above the latter would be a bullish signal for a run towards $55.50-$56.

RSI is back in a slight downtrend with key support at 40. A close below this level would signal additional weakness towards 35-30 with the latter holding since late March. Resistance is at 45-50.

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The percentage of Nasdaq 100 stocks trading above the 50-day moving 

closed at 8.73% on Friday, down 2.72%, and the session low. Upper support at 10%-7.5% was breached and failed to hold. A close below the latter reopens risk towards 5%-2.50% and late March lows. Lowered resistance is at 10%-12.5%.

The percentage of S&P 500 stocks trading above the 200-day moving average average settled at 8.13%, up 0.21%, with the session high just north of 9%. Resistance at 10%-12.50% was challenged but held with a move above the latter signaling a quick pop towards 15%-17.5%. Support is at 7.50%-5%.

With the 1Q earnings season just around the corner, estimates have been coming down sharply as analysts start coming to terms with the coronavirus pandemic’s earnings impact. While the bulk of the estimate cuts are concentrated in Q2 and Q3, all four quarters of 2020 are now expected to suffer earnings declines relative to their respective year-earlier periods.

For 2020 Q1, total S&P 500 earnings are now expected to decline -6.6% from the same period last year. This is down from close to 4% growth expected in early January. This is a bigger decline than we have seen in the comparable periods in recent quarters.

Q1 earnings are expected to be below the year-earlier level for a majority of the sectors, with double-digit declines at Autos (-63.4% earnings decline), Aerospace (-34.4%), Energy (-40.4%), Basic Materials (-29.1%), Transportation (-33.9%), Industrial Products (-18.0%), Conglomerates (-12.1%), Consumer Discretionary (-14.7%) and Retail (-10.1%).

Sectors with positive earnings growth in Q1 include Technology (0.6% earnings growth), Construction (6.5%), Business Services (5.6%), Medical (2%), Utilities (1.5%) and Consumer Staples (0.5%).

Estimates for Q2 and Q3 are still falling, with Q2 earnings now expected to decline -12.9% and an -11.8% decline in Q3. Sectors suffering the brunt of estimate cuts in Q2 include Autos (-63.3%, Energy (-60.3%), Transportation (-55.6%), Aerospace (-32.2%) and Consumer Discretionary (-24.5%). 

Given the uncertain public health backdrop that is driving these estimates cuts, it is reasonable to expect still deeper cuts to estimates in the days and weeks ahead, particularly as companies report Q1 results and share their outlook for underlying business conditions during these unusual times.

For full-year 2020, total earnings for the S&P 500 index are currently expected to be down -4.4% on 0.1% higher revenues. This is down from close to 8% at the start of the year. For reference, S&P 500 earnings declined -19.1% in 2008 and -3.4% in 2009, though that was admittedly a different type of downturn.

For the small-cap S&P 600 index, total Q1 earnings are now expected to be down -18.6% from the same period last year on -1.4% lower revenues. This would follow 1.8% earnings growth in the preceding period. The Q1 earnings growth picture would be even weaker had it not been for the strong growth in the Finance sector

Analysts haven’t made a lot of changes to estimates for next year, currently showing a strong double-digit growth pace. However, it is hard to have a lot of confidence in these expectations in the current backdrop of macroeconomic uncertainty, with the U.S. and global economic growth taking a severe hit from the pandemic. A lot is riding on how the outbreak evolves in the coming weeks, which will determine the extent of the economic hit and the eventual turnaround.

In the best-case scenario, the bulk of the economic impact is confined to Q2, with growth trend stabilizing in Q3 and accelerating toward the end of the year. Driving this view is the expectation is that the outbreak peaks in the late-April/early-May timeframe and starts subsiding thereafter.

We will see if these expectations pan out, but the coming 1Q earnings season will be unusual in many ways that will likely produce a number of large price swings. 

I mentioned a close in the VIX below the 50 level ahead of the weekend would be a slightly bullish signal heading into this week. Futures were up on Sunday night and if we can get a higher open, I have a few trades on my Watch List that could trigger. I like Exxon Mobil (XOM, $39.21, down $1.19) if shares can clear $42.25, or fall below $37.50.

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If Virgin Galactic (SPCE, $12.19, down $0.77) can clear $13.75, or falls below $12, there could be a bullish/ bearish play to take advantage of based on the move. 

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If I take action, I will email a New Trade Alert along with a Text Alert.

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, $5.51, down $0.14)

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 tapped a low of of $5.21 with prior and lower support at $5.50-$5.25 getting stretched but holding on the close above the former. Resistance remains at $5.75-$6.

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