MomentumOptions.com Pre-Market Update for 6/1/2020

Bulls Get 2nd-Straight Monthly Win

8:00am (EST)

The market was choppy on Friday’s open as Wall Street awaited President Trump update concerning China’s new security law on Hong Kong. His press conference in the afternoon included some strong language, but did not make any indication that the U.S. would withdraw from its trade pact with China or impose financial sanctions. 

President Trump did suspend entry into the U.S. by some Chinese nationals, and said he would cut ties with the World Health Organization, over what he claimed was China’s total control of the heath agency. He also added the U.S. would study the differing accounting practice of Chinese companies listing on U.S. exchanges and start to end Hong Kong’s special trading status.

The major indexes bounced off their lows after the event to push positive territory before settling on both sides of the ledger. Despite the mixed finish, the market had a solid week and month with volatility remaining relatively calm heading into June.

The Nasdaq was up for the 4th time in 5 session after rallying 1.3% and testing a late day high of 9,505. Near-term and lower resistance at 9,450-9,500 was recovered with continued closes above the latter signaling additional strength towards 9,600-9,650.

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The S&P 500 rebounded 0.5% after trading in a 46-point range with the afternoon high reaching 3,049. Current and lower resistance at 3,025-3,050 was cleared and held with a move above the latter getting 3,075-3,100 back in focus.

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The Dow dipped 0.1% following the morning pullback to 25,031. Crucial and lower support at 25,250-25,000 was challenged but held with a close below the latter signaling additional weakness towards 24,750-24,500.

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The Russell 2000 was down for the 2nd-straight session after falling 0.5% while closing back below the 1,400 level with the midday low reaching 1,372. New and upper support at 1,380-1,365 was breached but held with a close below the latter signaling additional weakness towards 1,350-1,335.

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For the week, the Dow soared 3.8% while the S&P 500 and Russell 2000 gained 3%. The Nasdaq was up 1.8%. For the month, the Nasdaq zoomed 6.8% and the Russell 2000 rocketed 6.7% higher. The Dow advanced 4.3% and the S&P 500 was higher by 4.5% for May.

Technology and Healthcare led sector strength after rising 1.3% and 1.2%, respectively. Financials fell 1.1% to pace sector laggards. Over the past 5 sessions, Financials (6.8%) have been the strongest sector followed by Industrials and Real Estate (6%), and Utilities (5.7%). There has been no sector laggards.

In economic news, Personal Income surged 10.5% in April while consumption dove -13.6%. The original -2.0% decline in March income was bumped down to -2.2% following February’s 0.5% gain. March spending was revised up to -6.9% from -7.5%, after a 0.2% increase in February. Compensation was down -7.7% versus -3.2%, with wages and salaries falling -8% from -3.5%. Disposable income climbed 12.9% from -2.1% in March. The savings rate jumped a whopping 33% after March’s 12.7% jump. The PCE chain price index declined to -0.5% from -0.2% and the core rate was down -0.4% from -0.1%. On a 12-month basis, the headline inflation rate decelerated to 0.5% year-over-year from 1.3% while the ex-food and energy component slid to a 1% rate from 1.7%.

Wholesale Inventories rose 0.4% vs consensus of -1.5% for the month

Chicago PMI dropped another 3.1 points to 32.3 in May versus expectations for a reading of 40. The 3-month moving average fell to 38.5 from 44.1.

Advance Goods trade deficit widened to -$69.7 billion in April, from -$65 billion in March amid hefty declines in imports and exports. The April exports cratered a record -25.2% to $95.4 billion after falling to $127.5 billion previously. Imports dropped -14.3% to $165 billion last month following the tumble to $192.5 billion in March. The Advance inventory data showed wholesale inventories bouncing 0.4% to $651.5 B following March’s -1% decline to $648.9 billion. Retail inventors dropped -3.6% in April to $644.9 billion following the 1.2% increase to $669.3 billion previously.

Consumer Sentiment slipped to 72.3 in the final May print from the University of Michigan Survey, weaker than expectations of 74, and down from 73.7 in the preliminary May report. However, it was still a tad better than the 8-year low of 71.8 from April. The final current conditions index dipped to 82.3 from the 83 preliminary read, but above the 74.3 reading in April. The expectations component dropped to 65.9 versus May’s preliminary of 67.7, and 70.1 in April. The 12-month inflation gauge accelerated to 3.2% from the 3% preliminary and 2.1% prints in April. The 5-year index rose to 2.7% versus the 2.6% preliminary and 2.5% in April. 

Baker-Hughes reported the U.S. rig count was down 17 rigs to 301 with oil rigs off 15 to 222, gas rigs slipping 2 to 77, and miscellaneous rigs unchanged at 2. The U.S. Rig Count is down 683 rigs from last year’s count of 984, with oil rigs lower by 578, gas rigs off 107, and miscellaneous rigs up 2 to 2. The U.S. Offshore Rig Count was unchanged at 12 and down 11 year-over-year.

Fed Chair Powell repeated again that a negative rate strategy is not an appropriate tool for the Fed to employ. He said the evidence of whether negative rates help is mixed and pretty ambiguous. On the negative side, negative policy rate would crush bank margins and banks would lend less, so negative rates would interfere with credit intermediation. 

Powell said forward guidance and QE have become mainstream tools now and can still be used. He said a full recovery will depend on people being confident to go out and engage in a broad range of economic activities, and a second wave of virus would likely undermine that and lead to a weaker recovery. 

On inflation, Powell said risks are to the downside, not the upside, as people are cutting prices in many areas of the economy. And globally he said there has been a decline in prices. On the balance sheet, it can’t go to infinity Powell said, and he doesn’t see risks to inflation or financial stability from its large size. He doesn’t want the Fed to have an active role in managing the portfolio, and it seems likely the Fed will again hold their holdings to maturity. 

Cleveland Fed Loretta Mester said U.S. economic activity could pick up in the 3rd quarter as businesses begin to reopen, but she cautioned the recovery is likely to be slow as consumers and businesses take precautions to limit coronavirus infections.

Mester said activity could begin to emerge in the third quarter as the economy begins to reopen, but she said output and employment are not likely to return to levels seen at the start of the year

Mester also stated no decisions have been made on yield curve control. She didn’t think it would be used in the current relief measures, but did say it’s a tool worth thinking about. She also said the FOMC is closer to entering a more traditional phase of stimulus to support the recovery.

The iShares 20+ Year Treasury Bond ETF (TLT) snapped a 3-session slide after trading to a late day high of $164.09. Prior and lower resistance at $164-$164.50 was breached but held. A close above the latter would be a slightly bullish development for a retest towards $165-$165.50 and the 50-day moving average.

Current support is at $163-$162.50 with backup help at $162.50-$162.

RsI is back in an uptrend with key resistance at 50. A close above this level would signal additional strength towards 55-60 and the latter representing the March and April high. Support is at 45-40.

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The S&P 500 Volatility Index ($VIX) fell for the 4th time in 5 sessions after tagging a low of 27.29 ahead of the closing bell. Current and upper support at 27.50-27 was cleared but held by a smidge. A close below the latter would signal further weakness towards 26-25.50 with last week’s monthly low at 25.92.

Resistance remains at 30-30.50. A close above the latter and last Wednesday’s peak at 30.52 would be a bearish development with additional upside potential towards 32-32.50.

RSI has flatlined with resistance at 40-45 holding. A close above the latter and the May peak would signal additional strength towards 50-55. Support is in the 35 area and the low for May and last July.

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The Spider S&P 500 ETF (SPY) rebounded to close higher for the 4th time in 5 sessions after reaching an intraday peak of $304.96. Current and lower resistance at $304.50-$305 was breached but held. A close above the $307 level and last Thursday’s high of $306.84 would be a renewed bullish signal for additional strength towards $309.50-$310.

Support is at $302.50-$302 followed by $300-$299.50.

RSI has leveled out with key resistance at 65 holding. A move above this level would be a bullish signal for additional strength towards 70-75 and levels from January. Support is at 60-55.

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The iShares MSCI Emerging Markets Fund (EEM) has been in a 9-session trading range with Friday’s high tapping $37.80. Lower resistance at $37.75-$38 was cleared but held. Continued closes above the latter would be a bullish signal for a breakout towards $38.50-$39.

Current support is at $37.25-$37. A close back below the latter would be a slightly bearish signal with additional retest potential towards $36.50-$36.25.

RSI is in a slight uptrend with resistance at 60. Continued closes above this level would signal additional strength towards 65-70 and levels from mid-January. Support is at 55-50 with the latter holding since early April.

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

closed at 99.02% on Friday, up 2.91%, and a fresh all-time high. Overbought levels remain in play with fresh resistance at 97.5%-100% getting cleared and holding. A move above the latter would signal strength towards 102.5%-105%. Support is at 97.5%-95%. A close below the latter reopens downside risk towards 92.5%-90%.

The percentage of S&P 500 stocks trading above the 200-day moving average settled at 41.98%, unchanged. Current and lower resistance at 42.5%-45% was challenged but held. A close above the latter would signal additional strength towards 47.5%-50%. Support is at 40%-37.5%.

Futures were basically flat at midnight following a 6th night of protests and riots around the country. In times light these, the market becomes less important as we just need to pause, heel, and reflect. Hopefully, calmness returns in short order but we still need to watch and protect our portfolios. 

I have traded lightly in May, opening small positions with “cheaper” premiums. Given the tremendous profits to start the year, there has been no need to take unnecessary risks. The charts remain bullish so the market is predicting better times ahead. The charts still show the 50-day moving averages in strong uptrends and there remain a number of undervalued stocks.

I still like all of our current trades and we have nearly 3 weeks for all of them to play out. I will continue to look for fresh opportunities during these trying times so try to be a tad patient. On that note, we have updated our current trades so let’s go check the tape.

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, $9.07, down $0.02)

FCX June 10 calls (FCX200619C00010000, $0.25, flat)

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

Exit Target: $0.80

Return: -38%

Stop Target: None

Action: Upper support at $9-$8.90 was breached but held on the pullback to $8.90 on Friday. Lowered resistance is at $9.10-$9.20.

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Western Union (WU, $20.02, down $0.36)

WU June 21 calls (WU200619C00021000, $0.30, down $0.05)

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

Exit Target: $1.00 

Return: -40%

Stop Target: None

Action: Shares tested a low of $19.88 with upper support at $20-$29.75 getting tripped but holding. Resistance is at $20.25-$20.50.

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Limelight Networks (LLNW, $4.94, down $0.13)

LLNW June 5 calls (LLNW200619C00005000, $0.40, down $0.10)

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

Exit Target: $1.20 

Return: -33%

Stop Target: None

Action: Prior and upper support at $5-$4.90 was breached and failed to hold on Friday’s backtest to $4.87. A close below $4.75 would be a bearish development. Lowered resistance is at $5.10-$5.20.

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