MomentumOptions.com Pre-Market Update for 4/20/2020

Bulls Get 2nd-Straight Weekly Win

8:00am (EST)

The market ended the week on a high note following President Trump’s guidelines to get the economy restarted and how states can reopen the U.S. economy in 3 phases. Although there is no direct timetable assigned to the guidelines, the first phase would allow movie theaters, restaurants, sports venues, places of worship, gyms and other venues to reopen with social distancing guidelines in place.

An upbeat report on a possible treatment for the coronavirus also lifted sentiment after the University of Chicago Medicine researchers reported rapid recoveries in 125 patients suffering from coronavirus. The major indexes closed near their session highs while cementing a 2nd-straight week of gains, excluding the small-caps.

The Russell 2000 surged 4.3% after tapping a late day high of 1,231. Prior and lower support at 1,220-1,235 was cleared and held with a close above the latter signaling a retest towards the 1,250 level and the monthly high at 1,251.88.

The Dow jumped 3% with the late day peak reaching 24,264. Near-term and lower resistance at 24,250-24,500 was cleared but held by 8 points with a close above the latter and the 50-day moving average signaling additional strength towards 24,750-25,000.

The S&P 500 soared 2.7% following the push to 2,879 ahead of the closing bell. Lower resistance at 2,850-2,875 and the 50-day moving average were recovered with continued closes above the latter signaling momentum towards 2,900-2,925.

The Nasdaq was up for the 6th time in 7 sessions after adding 1.4% while trading to a session high of 8,670 and closing above the 50/200-day moving averages for the 2nd-straight session. Late February and lower resistance at 8,650-8,700 was tripped and held with a move above the latter getting 8,750-8,800 back in focus. 

For the week, the Nasdaq rallied 6.1% and the S&P 500 rose 3%. The Dow was higher by 2.2% while the Russell 2000 fell 1.4%.

Energy was the strongest sector after zooming 10.6% while Financials and Industrials were up 5.3% and 4.7%, respectively. There were no sector weakness.

Over the past 5 sessions, Healthcare (6.3%), Consumer Discretionary (5.9%), Technology (4.8%) and Consumer Staples (4.1%) were the best performing sectors. Financials (-4.2%), Real Estate (-2.8%) and Materials (-2.3%) were the weakest sectors.

In economic news, Leading Indicators index dropped -6.7% to 104.2 in March, a new historic drop, after sliding -0.2% to 111.7 in February. The March decline is nearly double the prior -3.4% record set in October 2008. Six of the 10 components made negative contributions, led by jobless claims (-5.53%), stock prices (-0.83%), and the average workweek (-0.2%). The interest rate spread (0.03%), nondefense capital goods orders ex-aircraft (0.02%), and consumer goods orders (0.01%) made small positive contributions. The leading credit index was unchanged.

Baker-Hughes reported the U.S. rig count was down 73 rigs from last week to 529, with oil rigs declining 66 to 438, gas rigs lower by 7 to 89, and miscellaneous rigs unchanged at 2. The U.S. Rig Count is down 483 rigs from last year’s count of 1,012, with oil rigs down 387, gas rigs down 98, and miscellaneous rigs up 2 to 2. The U.S. Offshore Rig Count is down 1 rig from last week to 17 and down 6 year-over-year. 

St. Louis Fed Bullard said Q2 is a write off and upcoming data is going to be so bad and unique, that there is a case to ignore the numbers. He ensured the Fed is willing to do much more, if necessary, consistent with the Fed’s all in stance it took on last month.

Bullard also said the federal government should take steps to create a pop-up industry that will create a tidal wave of coronavirus test kits to battle the epidemic. He added that with a little help from the government, coronavirus tests would soon be available at every corner drug store and would ease fears, allow companies to reopen, and rush care for those who need it.

To get the hundreds of millions of test-kits produced, Bullard said the government should agree to cover all the costs of production and allow the firms to keep all the profits.

New York Fed John Williams said he sees some parts of the economy coming back online but doubts growth will return to normal this year. He said construction should be among the first to return and be able to bounce back a little bit more quickly than maybe some of the other sectors.

Williams said the economic pain will continue for some time, as analysts are seeing some horrible data and got some tough days ahead. He said he can’t come to any firm conclusions on when the crisis will end And that there are some risks that the recovery takes longer than expected. 

Cleveland Fed Loretta Mester acknowledged the economic data is very ugly, but not unexpected, and she is not that surprised in the actual numbers. She added the question is can the Fed put in policies to get us through this pandemic shutdown period so that when the economy reopens, people will have the wherewithal to come back on. 

The Fed’s been trying to reduce collateral damage so that the economy can be in the best possible shape it can be in when it restarts, Mester said. She warned though, not to take data on a recovery at face value as there will be a jump when you start from a zero base. 

Mester also said it will take time to get workers back and supply chains running, not to mention demand picking up. She added the Fed is using its tools as best it can to get the economy through the pandemic while trying to make sure there is not permanent damage to the economy.

The iShares 20+ Year Treasury Bond ETF (TLT) fell for the first time in 3 sessions following the pullback to $167.27. Current support at $167.50-$167 was breached but held. A close below the $166.75 level would signal a possible near-term top with backtest potential towards $165-$163.50.

Lowered resistance is at $169.50-$170. A close above the $171 level would be an renewed bullish signal for additional upside towards $172-$172.50.

RSI is back in a downtrend with support at 55-50 and the latter holding since mid-March. Resistance is at 60 and a level that has been holding for about a month.

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The S&P 500 Volatility Index ($VIX) was down for the 6th time in 7 sessions after trading to an intraday low of 37.63. Upper support at 38-37.50 was breached but held. A move below the latter would signal a retest towards 36.50-36 with the late March low at 36.24. Continued closes below the 35 level would confirm another leg higher for the market.

Lowered resistance is at 39.50-40 followed by 42-42.50 and the 50-day moving average.

RSI is in a slight downtrend with key support at 40 and the monthly low holding. The 40 level has also been holding since July 2019 with weakness towards 35-32 if recovered and held.

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The Invesco QQQ Trust (QQQ) was up for the 6th-time in 7 sessions after soaring to an afternoon high of $216.51. Early March and lower resistance at $216.50-$217 was cleared but held. Continued closes above the $217.50 level would be an ongoing bullish signal with retest potential towards the $220 area.

Current support is at $215-$214.50 with additional help at $212.50-$212. A close below the $210 level would signal a possible near-term peak. 

RSI is back in an uptrend after clearing key resistance at 60. Continued closes above this level would signal additional strength towards 65-70 and early February levels. Support is at 55-50 on a move back below 60.

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The Dow Jones Transportation Average ($TRAN) snapped a 2-session slide after tapping an intraday high of 8,287. Lower resistance from the prior week at 8,300-8,400 was cleared but held. Continued closes above the 8,500 level would be a more bullish signal of a near-term bottom with momentum towards 7,700-7,800 and the 50-day moving average.

Near-term support is at 8,200-8,100. A close below the 8,000 level would be a renewed bearish development with additional pullback potential towards 7,800-7,700.

RSI has been flatlining for a couple of weeks with key resistance at 52.50 holding. Continued closes above this level would signal additional momentum towards 55-60. Support is at 45-40. 

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

closed at 63.10% on Friday, up 14.56%, with the session high tapping 64.25%. Lower resistance at 62.5%-65% was cleared and held. A close above the latter would signal strength towards 67.5%-70% and the latter representing mid-February support. Current support is at the 60% level.

The percentage of S&P 500 stocks trading above the 200-day moving average average settled on the session high at 24.55%, up 3.37%. Key resistance at 25% was challenged but held with a move above this level signaling a retest towards 27.5%-30%. Support is at 22.5%-20%.

The 1Q earnings season got off to a rough start after the Financial sector gave Wall Street a sense of the earnings damage suffered as a result of the coronavirus pandemic. The full impact will not show up until Q2 as sharply falling estimates for the current quarter and full-year 2020 have started to roll in.

For the Finance sector, Q1 results from 28.8% of the sector’s total market capitalization in the S&P 500 index have been announced. Total earnings are down -56.3% from the same period last year on -1.2% lower revenues, with only half of the sector companies beating EPS and revenue estimates.

The Finance sector’s Q1 results are notably weaker than the market has seen from the group in other recent periods and reflects banks’ cyclical exposure to deterioration in credit conditions that is showing up in growing provisions for loan losses.

For Q1 as a whole, total S&P 500 earnings is now expected to decline -13.9% from the same period last year. This is down from close to 4% growth expected in early January and a bigger decline than the comparable periods in recent quarters.

For the Finance sector, Q1 earnings are now expected to be down -24.3% from the same period last year, with declines in that vicinity expected to continue in the following two quarters as well.

Overall, Q1 earnings are expected to be below the year-earlier level for a majority of sectors, with double-digit declines in Autos (-71.9% earnings decline), Transportation (-60.2%), Energy (-47.6%), Aerospace (-41.3%), Basic Materials (-32.8%), Finance (-24.3%), Consumer Discretionary (-22.6%), Industrial Products (-21.2%), Conglomerates (-16.9%) and Retail (-14.1%).

Sectors with positive earnings growth in Q1 include Construction (12.1%), Business Services (4.5%), Utilities (2%), Medical (1.9%), and Consumer Staples (0.7%).

Estimates for Q2 and Q3 are still falling, with Q2 earnings now expected to decline -24.4% and an -11.8% decline in Q3. Sectors suffering the brunt of estimate cuts in Q2 include Energy (-106.1% decline in earnings), Autos (-134.1%), Transportation (-97.2%), and Consumer Discretionary (-46.5%). Other sectors with big year-over-year earnings declines include: Aerospace (-39%), Industrial Products (-35.4%), Conglomerates (-34.2%) and Basic Materials (-29.1%).

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 -13.2% on -2.9% lower revenues. This is down from close to 8% growth expected at the start of the year. Looking back, S&P 500 earnings declined -19.1% in 2008 and -3.4% in 2009, though that was admittedly a different type of downturn.

As far as the small-cap S&P 600 index, total Q1 earnings are now expected to be down -29.7% from the same period last year on -2.6% lower revenues. This would follow 2.3% earnings growth in the preceding period.

I have some important thoughts on LLNW this morning. The company sells content delivery network services to the leading over-the-top video companies, like Apple and Disney, and consumers like this content a lot. OTT video is now over half of Limelight’s revenue and growing above corporate levels. Netflix was a prior customer before building its own content delivery network. 

I think shares can make a run towards $8 on an earnings beat so I may leg into another longer-term call option. The company could become a buyout candidate with shares pushing $10 by yearend.

Momentum Options Play List

Closed Momentum Options Trades for 2020: 15-4 (79%). 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.

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AT&T (T, $31.23, up $1.07)

T June 32 calls (T200619C00032000, $1.40, up $0.30)

Entry Price: $1.25 (4/14/2020)

Exit Target: $2.50

Return: 12%

Stop Target: 65 cents

Action: Friday’s weekly high reached $31.25 with mid-March and lower resistance at $31.25-$31.50 getting tagged but holding. New support is at $31-$30.75.

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Dropbox (DBX, $19.18, up $0.44)

DBX May 20 calls (DBX200515C00020000, $1.00, up $0.15)

Entry Price: $1.05 (4/6/2020)

Exit Target: $2.10

Return: -5%

Stop Target: None

Action: Lower resistance at $19.25-$19.50 was cleared and held with a close above the latter and the 200-day moving average signaling a possible breakout towards the $20 level. Rising support is at $18.75-$18.50 and the 50-day moving average.

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Limelight Networks (LLNW, $5.96, down $0.94)

LLNW June 5 calls (LLNW200619C00005000, $1.60, down $0.60)

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

Exit Target: $3

Return: 220%

Stop Target: $1.50 (Stop Limit)

Action: Shares plunged to a low of $5.95 with fresh and upper support at $6-$5.75 getting breached and failing to hold. Lowered resistance is at $6.25-$6.50.

The company is expected to announce earning at the end of the month and there has been heavy action in the LLNW June calls recently. Volume in the LLNW June 6 and June 8 calls topped 10,000 and 5,000 contracts on Friday.

If the Stop Limit at $1.50 trips on further weakness, we will likely and quickly reestablish a position as I believe the company is going to announce terrific numbers.

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