MomentumOptions.com Pre-Market Update for 5/28/2020

Small-Caps Up 5-Straight Sessions

8:00am (EST)

The market traded on both sides of the ledger throughout Wednesday’s action before closing higher as rising geopolitical risks weighed on sentiment. The pro-democracy protests have intensified in Hong Kong as China seeks to expand its new security laws with the U.S. now threatening counter measures if the law goes into effect.

Small-caps and blue-chips led the major indexes higher while Technology made a nice comeback off the session bottom to join the parade. Meanwhile, volatility tagged a fresh monthly low after closing in the red for the 3rd-straight session.

The Russell 2000 extended its winning streak to 5-straight sessions after surging 3.1% with the 2nd half high reaching 1,438. New and lower resistance at 1,435-1,4350 was cleared and held with a move above the latter signaling additional momentum towards 1,460-1,475.

The Dow was up 2.2% after testing an intraday high of 25,551. Lower resistance from early March at 25,500-25,750 was recovered with a close above the latter being a bullish development for additional strength towards 26,000-26,275.

The S&P 500 advanced 1.5% to extend its winning streak to 3-straight while closing back above its 200-day moving average and on the session high of 3,036. Fresh and lower resistance at 3,025-3,050 was cleared and held with a move above the latter getting 3,075-3,100 in play.

The Nasdaq traded in a 270-point range before adding 0.8% while testing a late day high of 9,414. Current and lower resistance at 9,400-9,450 was recovered with a move above the latter signaling additional momentum towards 9,500-9,550.

Financials led sector strength for the 2nd-straight session after rallying 4.3% while Industrials and Real Estate added 3.3% and 2.1%, respectively. There were no sector laggards.

In economic news, MBA Mortgage Applications rebounded 2.7%, erasing the prior week’s -2.6% drop, while hitting its highest level since January. For the3rd-straight month all the strength was in the purchase index, which increased 8.6% after a prior gain of 6.4%. Refinancing dipped -0.2% after declining -6.3% previously. The mortgage market remains on solid footing compared to last year’s levels, with the applications index still 75% year-over-year firmer, with the refi index up 176.1% year-over-year and purchases up 8.7% year-over-year. The 30-year fixed rate mortgage rate is holding near record territory at 3.42%, just off the all-time low of 3.40% set earlier in the month. The 5-year ARM dropped to 3.08%.

U.S. chain store sales edged up 0.6% following the 1.3% jump previously. The 12-month sales pace was very weak with the pace of contraction at -17.1% year-over-year versus -16.5% in the previous week. According to the report, at the current sales pace, it would take until late December to fully recoup the losses from the shutdowns; and it would take until mid-January 2021 before the 12-month pace turned positive. Meanwhile, Johnson Redbook reported sales at -1.5% for the three weeks of May versus -2.6% previously. It noted some pick-up as shopping centers reopened and offered promotions. Demand was across a broad range of discretionary items, including outdoor furniture, electronics, cosmetics, toys, sporting goods, and seasonal apparel. There was good demand for seasonal items where the weather has turned warmer. For the month-to-date versus last year, the pace of contraction has slowed a little to -7.5% year-over-year versus -8.5%. May sales are forecast at -6.8% year-over-year, and -0.8% versus April. For the latest week, sales were at -5.5% year-over-year versus -9.5% previously.

Richmond Fed Manufacturing Index rose 26 points to -27 in May, better than expectations for a reading of -39, after crashing -55 points to -53 in April. Most of the components improved, suggesting the worst of the impact is over after unprecedented relief measures from the government and the Fed. Shipments jumped to -26 versus -70. The employment component nudged up to -16 from -21, though wages fell to -3 from 0. New order volume improved to -35 from -61. Prices paid posted a 1.05% rate from 1.48%, with prices received at 1.11% from 0.92%. The 6-month shipments index climbed to 10, back in expansionary territory from -7 previously, with improvement in the internals. The future employment gauge jumped to 1 from -14. New order volume rose to 12 from -14. The 6-month prices paid posted at 1.87% rate, versus 1.93% previously, with prices received at 1.77% from 1.04%.

The Fed’s Beige Book highlighted the crushing weakness in the economy due to the disruptions associated with the COVID-19. There were hopes that overall activity would pick-up as businesses reopened, but the outlook remained highly uncertain and most contacts were pessimistic about the potential pace of recovery. The report also said consumer spending fell further due to the mandated closures that were largely in place during the survey. 

The update also stated there were severe declines in leisure and hospitality, with very little tourism. Auto sales were substantially lower than last year, but several districts did note some improvement. There were also sharp declines in manufacturing in a majority of Districts, while production was notably weak in auto, aerospace, and energy-related plants. Additionally residential home sales plunged due partly to fewer new listings and to restrictions on home showings. 

Bankers reported strong demand for PPP loans, while commercial bankers said a large number of retail tenants had deferred or missed rent payments. Agricultural conditions worsened with several Districts reporting reduced production capacity at meat-processing plants due to closures and social distancing measures. Energy activity plummeted as firms announced oil well closures, which led to historically low levels of active drilling rigs.

The iShares 20+ Year Treasury Bond ETF (TLT) fell for the 2nd-straight session with the opening low tapping $162.59. Upper support at $163-$162.50 was breached but held. A close below the $162 level and the monthly low at $162.05 would be a bearish development with additional downside risk towards $160.50-$160.

Resistance remains at $164-$164.50 with more important hurdles at $165 and the 50-day moving average.

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The S&P 500 Volatility Index ($VIX) fell for the 3rd-straight session after tagging a fresh monthly low of 25.92 shortly after the opening bell. Prior and upper support at 26-25.50 was tripped but held. A close below 25 would be an ongoing bullish signal for the market.

The bounce to 30.53 afterwards breached resistance 30-30.50 but levels that held. A close above the latter would be a slightly bearish development with additional upside risk towards 32-32.50.

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The Spider Small-Cap 600 ETF (SLY) extended its winning streak to 5-straight sessions following the intraday trip to $59.76. Lower resistance at $59.50-$60 was recovered. A close above the latter and key support from early March would be an ongoing bullish signal for additional strength towards $61.50-$62.

Current support is at $59-$58.50 with backup help at $57.50-$57.

RSI remains in an uptrend with lower resistance at 65-70 getting cleared and holding and the latter representing the December and January peak. Support is at 60 with a move below this level signaling additional weakness towards 55-50.

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The Financial Select Sector Spiders (XLF) extended its winning streak to 2-straight sessions after trading to a morning high of $24.10. Early March and lower resistance at $24-$24.25 was cleared and held. A move above the latter would signal additional momentum towards $24.75-$25.

New support is at $23.75-$23.50 followed by $23-$22.75.

RSI is in an uptrend after clearing key resistance from February at 60. Continued closes above this level would signal additional strength towards 65-70 with the latter representing the December high. Support is at 55-50 if 60 fails to hold.

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I could have New Trades today so stay locked-and-loaded. In the meantime, let’s go check the current action.

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, $9.29, up $0.03)

FCX June 10 calls (FCX200619C00010000, $0.30, flat)

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

Exit Target: $0.80

Return: -25%

Stop Target: None

Action: Lower resistance at $9.40-$9.50 was breached but held with Wednesday’s high reaching $9.46. Support is at $9.10-$9.

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Western Union (WU, $20.29, up $0.47)

WU June 21 calls (WU200619C00021000, $0.35, up $0.10)

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

Exit Target: $1.00 

Return: -30%

Stop Target: None

Action: Shares soared to a high of $20.46 with mid-April and lower resistance at $20.25-$20.50 getting cleared and holding. Rising support is at $20-$19.75.

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Limelight Networks (LLNW, $5.46, down $0.08)

LLNW June 5 calls (LLNW200619C00005000, $0.70, flat)

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

Exit Target: $1.20 

Return: 17%

Stop Target: None

Action: Current support at $5.40-$5.30 and the 50-day moving average all held on the backtest to $5.28 yesterday. Resistance is at $5.50-$5.60.

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