MomentumOptions.com Pre-Market Update for 5/14/2020
Bears Get 2nd-Straight Win
The market fell for the 2nd-straight session following comments from Fed Chairman Powell ahead of the opening bell and at the start of trading. Powell warned of extended economic weakness due to the coronavirus pandemic but did not mention new central bank support.
Wall Street seemed relieved by Powell’s continued indication that the Fed would not push interest rates below zero, but concerned that his call for fiscal stimulus would not be answered. The selloff pushed volatility to its highest level of the month and is signaling additional weakness if a key resistance level is cleared and held.
The Russell 2000 tumbled 3.3% with the intraday low reaching 1,212. Prior and upper support at 1,225-1,210 was breached but held with a close below the latter signaling additional weakness towards 1,200-1,185.
The Dow dropped 2.2% with the late session low tapping 23,067. Current and upper support at 23,250-23,000 failed to hold with a close below the latter and the 50-day moving average signaling a further pullback towards 22,750-22,500.
The S&P 500 sank 1.8% after trading to an afternoon low of 2,793. Upper support from the start of the month at 2,800-2,775 was tripped but held with a move below the latter getting 2,750-2,725 and the 50-day moving average back in focus.
The Nasdaq flopped 1.6% following the lunchtime pullback to 8,752. Near-term and upper support at 8,800-8,750 was breached but held with a close below the latter keeping downside risk towards 8,700-8,650 in play.
Energy was the weakest sector after tanking 4.4% while Financials and Industrials gave back 3% and 2.6%, respectively. There was no sector strength for the 2nd-straight session.
In economic news, MBA Mortgage Applications rose 0.3% last week after edging up 0.1% in the prior week. The index is up 70.3% year-over-year versus the 67.8% pace previously. All the strength was in the purchase index which climbed another 10.6%, nearly doubling the prior 5.8% increase. However, it’s contracting at a -9.5% year-over-year rate. Refinincings slid -3.3%, the 4th-straight weekly drop. The 12-month pace of expansion slowed to 200.9% year-over-year versus 209.7% previously. The 30-year fixed rate mortgage edged up to 3.43% after dropping to a record low of 3.40% previously.
Producer Price Index dove a record -1.3% in April and dropped -0.3% excluding food and energy. This follows March’s -0.2% headline slide and 0.2% core gain. The 12-month pace tumbled to a -1.2% year-over-year contraction rate versus 0.7% previously with the core slowing to 0.6% year-over-year from 1.4% in March. Goods prices fell -3.3% as energy plunged -19% on top of the prior -6.7% fall. Food prices were down -0.5% versus unchanged previously. Services prices declined to -0.2% from 0.2%. The headline drop is double the prior record of -0.6% with the record low on the core at -0.4% from February 2015.
Fed Chair Powell said the economic outlook is highly uncertain and subject to significant downside risks as additional policy measures may be needed to help shield the economy. He said the Fed will use its tools to the fullest until the recovery is underway, and stressed, though costly, more fiscal aid might be worth it.
Powell said the timing and pace of the recovery are dependent on various factors including how quickly and sustainably the virus can be brought under control, how long will it take for confidence to return, and the development of various therapies and vaccines. He added since those are currently unknowable, policies will need to be ready to address a range of possible outcomes.
Powell stated unemployment should peak over the next month or so, but added while it may decline sharply, it will likely remain above the pre-virus levels seen earlier this year. He said the Fed doesn’t play a roll in fiscal policy and he wouldn’t take a position on a particular bill. He noted there is a growing sense that the recovery may take a few more months than analysts would like. The U.S. will have to return to a sustainable fiscal policy, but now is not the time to prioritize.
Powell stressed the Committee is is not looking at negative rates, as the FOMC’s view on that hasn’t changed. He noted all on the Committee held that view, which doesn’t happen very often. The tools the Fed is using currently work, while the evidence of the effectiveness of negative rates is mixed. He added negative rates reduce the intermediation process and hurt bank profitability.
Meanwhile, Cleveland Fed Loretta Mester the economy could see some improvement in 2nd half of year. She said the Fed is always looking to their our tools to support the economy and negative interest rates are not part of active discussion. She then said “never say never” but there would be a lot of problems using negative interest rates.
Mester went on to say the Fed is not trying to stand in for the real economy and that the Fed and fiscal policy are trying to build a bridge over the period of a shutdown. She said when we get to the point to reopening the economy, we will be in a position to recover.
The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 2nd-straight session with the intraday high reaching $166.29. Prior and lower resistance at $166-$166.50 was cleared but held. A close above the latter would signal additional strength towards $167.50-$168.
Current support is at $165-$164.50 followed by $164 and the 50-day moving average.
The S&P 500 Volatility Index ($VIX) also closed higher for the 2nd-straight session after soaring to an afternoon peak of 37.42. Prior and lower resistance at 37-37.50 was breached but held. A close above the latter would signal additional upside risk towards 39.50-40.
More importantly, a close above the 40 level, or a move past the monthly high of 40.32, will likely induce a fresh wave of selling pressure in the market.
Rising support is at 35-34.50 followed by 33-32.50.
The S&P 400 Mid Cap Index ($MID) extended its losing streak to 3-straight sessions following the intraday plunge to 1,535. Near-term and upper support at 1,550-1,525 was breached but held by less than a point. A close below the latter and the 50-day moving average would be an ongoing bearish development with additional weakness towards 1,500-1,475.
Lowered resistance is at 1,575-1,600. Continued closes above the latter would be a more bullish signal for a retest towards 1,625-1,650.
RSI is in a downtrend with support at 45 holding. A close below this level would signal additional weakness towards 40 and the early April low. Resistance is at 50-55.
The Consumer Discretionary Select Spiders (XLY) also closed lower for the 3rd-straight session after bottoming at $111.35. Near-term and upper support at $112-$111.50 was breached but held. A close below the latter reopens downside risk towards $110.50-$110.
Lowered resistance at $113-$113.50 followed by $114.50-$115.
RSI is in a downtrend with key support at 50 holding. A move below this level would be an ongoing bearish signal with risk towards 45-40 and the latter representing the early April low. Resistance is at 55-60 and the latter representing the high for the month and late April.
I have updated our current trades so let’s go check the tape.
Momentum Options Play List
Closed Momentum Options Trades for 2020: 19-5 (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.
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.
Technology Select Spiders (XLK, $91.83, down $1.61)
XLK June 85 puts (XLK200619P00085000, $1.90, up $0.45)
Entry Price: $1.75 (5/13/2020)
Exit Target: $3.50
Stop Target: $1.00
Action: Yesterday’s low tapped $90.62 with prior and upper support at $90.50-$90 getting challenged but holding. A close above the latter would signaling additional selling pressure towards $88-$87.50. Resistance is at $92.50-$93 followed by $94-$94.50.
Western Union (WU, $18.32, down $0.55)
WU June 21 calls (WU200619C00021000, $0.15, down $0.10)
Entry Price: $0.50 (5/9/2020)
Exit Target: $1.00
Stop Target: None
Action: Shares tapped a low of $18.16 with prior and upper support at $18.25-$18 getting breached but holding. Lowered resistance is at $18.50-$18.75.
Limelight Networks (LLNW, $5.02, down $0.16)
LLNW June 5 calls (LLNW200619C00005000, $0.60, down $0.05)
Entry Price: $0.60 (5/6/2020)
Exit Target: $1.20
Stop Target: None
Action: Wednesday’s low reached $4.86 with prior upper support is at $4.90-$4.80 getting breached but holding. Lowered resistance is at $5.20-$5.30.