MomentumOptions.com Pre-Market Update for 6/11/2020

Fed Update Weighs on Market 

8:00am (EST)

The market traded mostly lower to start Wednesday’s session as Wall Street awaited the latest Fed update on interest rates. Technology showed strength throughout the day with the other major indexes recovering off their opening lows after the Fed delivered a reiteration of its lower for longer posture, with no Fed members seeing rate hikes through 2022. 

The mixed close was led by the small-caps to the downside and Tech to the upside following comments from Fed Chairman Jerome Powell. Volatility hit its high point shortly after the open before settling flat for the session to keep the near-term bullish thesis intact.

The Nasdaq was up for the 4th-straight session after rallying 0.7% with the afternoon record high reaching 10,086. Current and lower resistance at 10,000-10,100 was cleared and held with a close above the latter keeping upside towards 10,250-10,350 in play.

The Russell 2000 tanked 2.6% with the morning low tapping 1,465. Prior and upper support at 1,475-1,460 was breached and failed to hold with a move below the latter signaling additional downside risk towards 1,450-1,435.

The Dow declined 1% with the opening bottom hitting 26,938. Near-term and upper support at 27,000-26,750 failed to hold with a close below the latter leading to a further retest towards 26,500-26,250.

The S&P 500 was lower by 0.5% with the intraday low reaching 3,181. Current and upper support at 3,200-3,175 was breached and failed to hold with a move below the latter signaling additional weakness towards 3,150-3,125.

Technology was the only sector that showed strength for the 2nd-straight session after soaring 1.7%. Energy led sector laggards after sinking 4.9% while Financials and Industrials tumbled 3.7% and 2.4%, respectively.

European markets closed lower for the 3rd-straight session following a report the European Central Bank is drawing up a scheme to cope with potentially hundreds of billions of euros in unpaid loans.

The Belgium20 dropped 1.3% and France’s CAC 40 fell 0.8%. Germany’s DAX 30 was lower by 0.7% and the Stoxx 600 was off 0.4%. UK’s FTSE 100 dipped 0.1%.

Asian markets settled mixed after China’s consumer inflation eased to a 14-month low, dragged down by moderating gains in pork and food costs.

China’s Shanghai fell 0.4% and Hong Kong’s Hang Seng slipped 7 points, or 0.03%. South Korea’s Kospi climbed 0.3% and Japan’s Nikkei added 0.2%. Australia’s S&P/ASX 200 edged up 0.1%

China’s producer price index fell 3.7% from a year earlier in May, versus forecasts for a 3.3% decline, and a 3.1% fall in April. Meanwhile, China’s consumer price index rose 2.4% from a year earlier, versus forecasts for a 2.7% rise, and a 3.3% increase in April.

MBA Mortgage Applications surged 9.3% last week following the -3.9% decline in the previous week. Strength resurfaced in refinancings where the index bounced 11.4% after dropping -8.6% previously. The purchase index rose 5.3%, the same as in the prior week. The 12-month rates slowed, however, with refis slipping to 80% year-over-year versus 137.1%, purchases dipping to 12.7% from 17.5%, and the market index dropping 46.4% year-over-year from 67.9%. Mortgage rates were mixed with the 30-year ticking up slightly to 3.38% from the fresh historic low of 3.37% and down from 4.12% a year ago. Rising rates may have spurred some activity in home purchases amid fears of missing out on record low mortgage rates. The 5-year ARM dipped to 3.01% from 3.05%, but is up from 2.9% a few weeks ago.

Consumer Price Index fell -0.1% in May, with the core rate down -0.1% as well. Those follow April declines of -0.8% and -0.4%, respectively which were some of the largest drops on record. It represented the 3rd-straight month of decline for both indicators. On a 12-month basis the headline index slipped to a 0.1% year-over-year rate, setting a fresh record low, versus a 0.3% clip previously, with the ex-food and energy component slowing to a 1.2% year-over-year pace from 1.4%. The weakness in the energy component eased with the headline component falling -1.8% from -10.1%, and gasoline down -3.5% last month versus -20.6% in April. Services costs were unchanged from -0.3%. Housing inflation edged up to 0.2% from unchanged, with owners’ equivalent rent rising 0.3% from 0.2%. Food/beverage prices were up 0.7%, half of the prior 1.4% print. Apparel prices slid -2.3%, versus April’s -4.7% drop. Transportation prices declined -1.8% from -5.9%, previously.

The FOMC left rates unchanged at 0%-0.25%, and reiterated the range will be maintained until the Committee is confident that the economy has weathered recent events. The policy statement was nearly word for word to that from April, although there was one change where the Fed acknowledged better financial conditions, stating “Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.” 

The Fed also repeated from April that the coronavirus will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. Meanwhile, the Fed said it will keep buying Treasuries and its projections suggest no rate hikes through 2022.

Fed Chair Powell began his conference call by largely reading the policy statement where he repeated the Fed has strongly used its tools and will continue to do whatever it takes to promote maximum employment and price stability goals. He noted the improvement in the May jobs report in part by some returning to work and with support from the government’s PPP. 

Powell cautioned that the unemployment rate remains historically high, however, and repeated a full recovery is not likely until people feel safe in getting back to their daily lives. He said long-term inflation expectations have held fairly steady and added once the crisis has passed, it will put its lending tools back into the tool box. 

Powell did note that the committee continued to discuss the different tools it might use including yield curve control and explicit forward guidance, but they are still open for discussion.

The iShares 20+ Year Treasury Bond ETF (TLT) extended its winning streak to 3-straight sessions with the late day peak reaching $160.90. Fresh and lower resistance at $160.50-$161 was recovered. A close above the latter would be an ongoing bullish signal for a retest towards $162-$162.50.

Rising support is at $160-$159.50 followed by $158-$157.50.

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The S&P 500 Volatility Index ($VIX) was unchanged despite spiking to an opening high of 29.01. Lower resistance at 29-29.50 was cleared but held. A close above the 30 level would signal additional strength towards 31-31.50.

The fade to 26.06 afterwards breached near-term and upper support at 26.50-26 but a level that held. A close below the latter would signal additional weakness towards 24.50-24 and the 200-day moving average.

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The Spider S&P 500 ETF (SPY) extended its losing streak to 2-straight sessions following the morning pullback to $318.22. Upper support at $318.50-$318 was breached but held. A close below the $317 level would be a bearish development and likely lead to a further backtest towards $315.50-$315.

Resistance is at $321-$321.50 followed by $323-$323.50 with last week’s peak at $323.41.

RSI is in a slight downtrend with key support at 70 failing to hold. Continued closes below this level would signal additional weakness towards 65-60. Resistance is at 75 and Monday’s high.

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The Spiders S&P Homebuilders ETF (XHB) was down for the 2-straight session with the intraday low tapping $43.98. Near-term and upper support at $44-$43.50 was breached but held. A close below the latter would signal additional weakness towards $42.50-$42.

Current resistance is at $45.50-$46. A close above the latter would be a more bullish signal for additional upside towards $46.50-$47 with the monthly high at $46.71.

RSI is in a downtrend after failing to hold upper support at 70-65. A move below the latter would signal additional weakness towards 60 and a level that has been holding since mid-May. Resistance is at 75 and the monthly high.

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Futures are showing a nasty open this morning so we will have to see if this is the beginning of a possible near-term top. I have updated our current trades so let’s go check the tape.

Momentum Options Play List

Closed Momentum Options Trades for 2020: 20-6 (77%). 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.

Dropbox (DBX, $21.98, up $0.05)

DBX July 25 calls (DBX200717C00025000, $0.30, flat)

Entry Price: $0.55 (6/4/2020)

Exit Target: $1.10

Return: -44%

Stop Target: None

Action: Lower resistance is at $22.25-$22.50 was cleared but held on Wednesday’s trip to $22.41. Support is at $21.75-$21.50.

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Tilray (TLRY, $9.69, down $0.44)

TLRY September 11 calls (TLRY200918C00011000, $1.00, down $0.25)

Entry Price: $1.00 (6/3/2020)

Exit Target: $2.00

Return: 0%

Stop Target: 50 cents

Action: Wednesday’s low reached $9.54 with upper support at $9.75-$9.50 getting breached and failing to hold. Lowered resistance is at $10-$10.25.

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Freeport McMoRan (FCX, $11.47, up $0.20)

FCX June 10 calls (FCX200619C00010000, $1.50, up $0.15)

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

Exit Target: $1.60 (closed half at $1.20 on 6/5/2020)

Return: 231%

Stop Target: $1.20 (Stop Limit)

Action: Shares tested a high of $11.50 with fresh and lower resistance at $11.50-$11.60 getting kissed but holding. Rising support is at $11.40-$11.30.

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Limelight Networks (LLNW, $5.27, down $0.22)

LLNW June 5 calls (LLNW200619C00005000, $0.55, down $0.05)

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

Exit Target: $1.20 

Return: -8%

Stop Target: None

Action: Upper support at $5.30-$5.20 was tripped and failed to hold on Wednesday’s pullback to $5.20. Lowered resistance at $5.40-$5.50.

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