MomentumOptions.com Pre-Market Update for 5/20/2020

Late Selling Pressure Sends Market Lower   

8:00am (EST)

The market was choppy to start Tuesday’s session after President Trump threatened to permanently cut off funding to the World Health Organization and revoke U.S. membership if the group doesn’t curb what he called its pro-China bias. Testimony from Fed Chairman Powell and Treasury Secretary Steve Mnuchin before the Senate’s Committee on Banking, Housing, and Urban Affairs also weighed on sentiment.

The final hour selloff and lower close snapped 3-session winning streaks for the major indexes. Volatility traded in a tight range before settling higher while giving a slightly bearish signal on the close back above key resistance. 

The Russell 2000 was down 2% after settling on the session low of 1,307. Prior and upper support at 1,315-1,300 was breached and failed to hold with a close below the latter signaling additional weakness towards 1,290-1,275.

The Dow declined 1.6% with the late session low tapping 24,202. Current and upper support at 24,250-24,000 was tripped and failed to hold with a close below the latter signaling a further pullback towards 23,750-23,500.

The S&P 500 dropped 1.1% after closing on the session low of 2,922. Upper support at 2,925-2,900 failed to hold with a move below the latter likely leading to a further pullback towards 2,875-2,850.  

The Nasdaq gave back 0.5% following the late day pullback to 9,183. Near-term and upper support at 9,200-9,150 was breached and failed to hold with a close below the latter keeping downside risk towards 9,050-9,000 in play.

Energy was the weakest sectors after sinking 2.8% while Financials and Real Estate lost 2.4% and 1.9%, respectively. There was no sector strength.

In economic news, Housing Starts dropped -30.2% in April to 891,000, after falling -18.6% to 1,276,000 in March, with expectations at 968,000. Starts are down -19.2% year-over-year with April pace of starts the lowest since February 2015. Single family starts tumbled -25.4% and multifamily starts plunged -40.5% after March declines of -15.8% and -24%, respectively. Building permits declined -20.8% to 1,074,000 versus the -7% slid in March to 1,356,000.

U.S. chain store sales declined -2.6% in the first two weeks of May through the 16th, extending the slide from -1.5% in the first week. Month-to-date, sales are down -8.5% year-over-year, versus -7.5% for early May. For the week of May 16th, sales dropped -9.5% year-over-year versus -7.5% for the prior week. Though the month-to-date May data wasn’t as weak as April where sales for the month tumbled -12.6%, the report noted retailers say traffic and sales have been slow to come back after reopenings, preferring on-line shopping and curbside pick-up amid safety concerns.

Fed Chairman Powell’s testimony noted the unprecedented impacts of the coronavirus and the mitigation measures that have caused sharp declines in output and employment. He didn’t discuss anything new, but reiterated that the Fed’s response to this extraordinary period has been guided by the Fed’s mandate to promote maximum employment and stable prices for the American people, along with the Fed’s responsibilities to promote stability of the financial system. 

Powell said the Fed is committed to using its full range of tools to support the economy in this challenging time even as analysts recognize that these actions are only a part of a broader public-sector response. He said Congress’s passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was critical in enabling the Federal Reserve and the Treasury Department to establish many of the lending programs which he went on to discuss.

Treasury Secretary Mnuchin didn’t indicate any further additions to the borrowing schedule in his testimony. He said there wasn’t enough demand to support the introduction of a 50-year or 100-year bond. The current plan is to fund the current massive deficit via issuing a lot of bills, and to then shift borrowing to longer dated maturities and hence take advantage of low interest rates.

The iShares 20+ Year Treasury Bond ETF (TLT) traded in a tight range with the intraday high reaching $163.70. Lower resistance at $163.50-$164 was cleared and held. A close above the $164.50 level and the 50-day moving average would be a more bullish signal of a near-term bottom.

Current support is at $163-$162.50. A close below the $162 level would signal additional weakness towards $160.50-$160.

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The S&P 500 Volatility Index ($VIX) was up for the first time in 3 sessions despite testing an intraday low of 28.37. Current and upper support at 28.50-28 was breached but held. A close below the latter would likely signal a retest towards 26-25.50 with the former representing the monthly low.

Upper resistance at 30-30.50 failed to hold on the late day bounce to 30.54 with backup help at 31-31.50 now in play.

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The iShares Russell 1000 (IWF) fell for the first time in 4 sessions despite trading to an afternoon and monthly high of $180.66. Key resistance from early January at $180 was cleared but held. Continued closes above this level would be a bullish signal for a retest towards $182-$182.50.

The fade and close at $178.07 afterwards breached upper support at $178.50-$178 and a level that failed to hold. A close back below the latter would signal additional weakness towards $176.50-$176. 

RSI has leveled after resistance at 65 held. Continued closes above this level would signal additional strength towards 70-75 with the latter representing the mid-February high. Support is at 60-55.

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The Spider S&P Retail ETF (XRT) had its 3-session winning streak snapped following the late day pullback to $37.95. Current and upper support at $38-$37.75 was breached but held. A close below the latter would signal a possible near-term top with additional downside risk towards $37.25-$37.

Resistance is at $38.50-$38.75. A close above the $39 level would be a bullish signal for a run towards $40-$40.25 and the 200-day moving average.

RSI is showing signs of rolling over after failing key resistance at 65. A close above this level would signal additional strength towards 70 and the October 2019 peak. Support is at 55-50 if 60 fails to hold.

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The final hour selling pressure came after a report cast doubt on Moderna’s (MRNA) coronavirus vaccine candidate. The good news is futures were up at midnight and were signaling a higher open.

Momentum Options Play List

Closed Momentum Options Trades for 2020: 19-6 (76%). 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.

Freeport McMoRan (FCX, $9.14, down $0.04)

FCX June 10 calls (FCX200619C00010000, $0.35, flat)

Entry Price: $0.40 (5/19/2020)

Exit Target: $0.80

Return: -13%

Stop Target: None

Action: Shares tested a high of $9.29 before fading into the close with lower resistance at $9.30-$9.40 getting challenged but holding. A close above $9.50 and the late April high at $9.48 should lead to a breakout towards $10 and the 200-day moving average. Support is at $9.10-$9.

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Western Union (WU, $18.76, down $0.64)

WU June 21 calls (WU200619C00021000, $0.15, down $0.10)

Entry Price: $0.50 (5/9/2020)

Exit Target: $1.00 

Return: -70%

Stop Target: None

Action: Shares tapped a low of $18.70 with prior and upper support at $18.75-$18.50 getting tripped but holding. Lowered resistance is at $19-$19.25.

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Limelight Networks (LLNW, $5.21, down $0.08)

LLNW June 5 calls (LLNW200619C00005000, $0.60, unchanged)

Entry Price: $0.60 (5/6/2020)

Exit Target: $1.20 

Return: 0%

Stop Target: None

Action: Shares closed on the session low of $5.21 with upper support at $5.20-$5.10 holding. Resistance remains at $5.30-$5.40.

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