MomentumOptions.com Pre-Market Update for 7/2/2020

Nasdaq Sets Closing High, Small-Caps Sag

8:00am (EST) 

The market showed strength on Wednesday’s open as encouraging news on the coronavirus vaccine front lifted sentiment. A mixed bag of economic news kept the gains in check as Wall Street awaited the afternoon meeting minutes from the Fed.

There was nothing surprising in the Fed minutes as talk of yield curve control and forward guidance dominated the meeting. Chatter of another economic relief plan by President Trump ahead of the close did little to change the landscape with the major indexes settling mixed for the session.

The Nasdaq extended its winning streak to 3-straight after jumping 1% while testing a late day high of 10,197. Lower resistance at 10,100-10,200 was cleared and held with a move above the latter and the all-time high at 10,221 suggesting additional momentum towards 10,300-10,400.

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The S&P 500 was up 0.5% and was the only index that held positive territory throughout the day while topping out at 3,128. Near-term and lower resistance at 3,125-3,150 was breached but held with a close above the latter signaling strength towards 3,175-3,200.

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The Dow traded in a 306-point range before slipping 0.3% with the session low tapping 25,713. Short-term and upper support at 25,750-25,500 failed to hold with a drop below the latter likely leading to a further pullback towards 25,250-25,000 and the 50-day moving average.

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The Russell 2000 fell 1% following the intraday backtest to 1,423. Current and upper support at 1,425-1,410 was tripped but held held with a close below the latter signaling additional weakness towards 1,400-1,385.

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Real Estate paced sector strength after surging 2.7% while Communication Services and Utilities were higher by 2.5% and 2.4%, respectively. Energy was the weakest sector after stumbling 2.4% while Financials and Industrials were off 0.9% and 0.5%, respectively, to round out the losers.

In economic news, MBA Mortgage Applications slipped -1.8% after tumbling -8.7% in the prior week. The 12-month pace of applications dipped slightly to 45.4% year-over-year versus 48% previously. The refi index declined -2.2%, while purchase index was down -1.3%. The year-over-year rates also slowed to 74.4% and 15.2%, respectively, from 76.2% and 18.1%. The 30-year index mortgage rate fell to a new low at 3.29% from the prior clip of 3.3% set a couple of weeks ago. The 5-year ARM dipped to 3.04% from 3.09%.

Challenger Job-Cut Report announced layoffs fell 226,800 to 170,200 in June following May’s 274,000 plunge to 397,000. Job cuts totaled 1,238,400 in Q2, a record high. According to the report, the coronavirus was the reason for 1,011,400 of the job losses while market conditions accounted for 228,600. Most of the planned reductions were from the entertainment/leisure sector, including bars, restaurants, hotels, and amusement parks, which announced nearly 93,000 layoffs in June.

ADP Employment Report revealed Private Payroll rose 2,369,000 in June with May revised sharply higher to a 3,065,000 increase. Expectations were at 3,500,000. Jobs in the goods production sector increased 457,000 with construction jobs up 394,000. Service sector employment increased 1,912,000 with gains of 961,000 in leisure/hospitality, 283,000 in education/health, and 151,000 in professional/business services.

PMI Manufacturing Index for June checked in at 49.8 versus forecasts of 49.6.

Construction Spending declined -2.1% in May from a revised -3.5% April drop. Expectations were for an 0.8% advance. Weakness was fairly broad based with residential spending falling -3.9% from -5% and nonresidential spending sliding -0.9% from -2.5%. Private spending was lower by -3.3% in May after dropping -3.8% in April. Public spending was the only positive, rebounding 1.2% after April’s -2.7% decline.

ISM Non-Manufacturing Index for June jumped 9.5 points to 52.6, stronger than forecasts of 49, after rising 1.6 points to 43.1 in May. It’s the largest gain since August 1980 with the reading back over the 50-line for the first time since February. Gains were broadbased as producer sentiment improved from April’s disaster. The employment component zoomed 10 points to 42.1 from 32.1. New orders jumped 24.6 points to 56.4 from 31.8 previously. New export orders rose to 47.6 from 39.5 while imports improved to 48.8 from 41.3. Inventories were little changed at 50.5 from 50.4. Prices paid climbed to 51.3 from 40.8.

The Fed minutes revealed members had an in-depth discussion about capping bond yields and strengthening its guidance about where policy will be set in the future. The meeting noted that “the current stance of monetary policy remained appropriate” but said the Fed should strengthen the guidance it provides to markets. 

The minutes also noted a need for “highly accommodative monetary policy for some time” and said the conditions for that should be spelled out clearly. Fed members indicated that they would prefer future policy moves tied to inflation, while just a couple said they would rather unemployment be the guide.

In addition to the rate move, the committee also released its expectations for various data points. The median GDP projection for 2020 was a contraction of 6.5%, followed by a 5% increase in 2021 and 3.5% the following year.

Despite the comparatively bright outlook for 2020, officials noted that the fiscal help Congress provided for households, businesses and state and local govenrnments “might prove to be insufficient.”

San Francisco Fed Mary doesn’t believe a V-shaped recovery is taking place right now and hesitates calling the recent data as reflecting a recovery. She said consumer demand remains much weaker than before the pandemic and  the unemployment rate is likely to remain elevated even as workers return to jobs. 

Mary added the path of the virus will dictate the pace at which unemployment declines. She said if we can get the public health issues under control either through a really robust mitigation strategy or a vaccine, then we can reengage in economic activity really quickly and it could take just four years or five years.  

The iShares 20+ Year Treasury Bond ETF (TLT) extended its losing streak to 3-straight sessions following the morning pullback to $162.15. Near-term and upper support at $162.50-$162 was breached but held. A move below the latter would suggest additional downside risk towards $161-$160.50.

Lowered resistance is at $163.50 and the 50-day moving average followed by $164.50-$165.

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The S&P 500 Volatility Index ($VIX) was down for the 2nd-straight session after tagging a late day low of 28.20. Near-term and upper support from late May at 28.50-28 was cleared but held. A close below the latter would signal additional weakness towards 27-26.50.

Lowered resistance is at 29.50-30 followed by 31.50-32 and the 50-day moving average.

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The Spider Small-Cap 600 ETF (SLY) had its 2-session winning streak snapped following the midday fade to $58.01. New and upper support at $58-$57.50 was challenged but held. A close below the latter would suggest additional weakness towards $56.50-$56.

Lowered resistance is at $59-$59.50 with a close back above the $60 level being a more bullish development. 

RSI is showing signs of rolling over with upper support at 50-45 holding. A close below the latter and the monthly low would signal additional weakness towards 45-40. Resistance is at 55-60.

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The Consumer Discretionary Select Spiders (XLY) was up for the 3rd-straight session with the afternoon high hitting $129.53. Prior and lower resistance at $129.50-$130 was cleared but  held. A move above the latter would signal additional strength towards $131-$131.50 with the early June all-time peak at $133.30.

Current and rising support is at $128-$127.50 followed by $126.50-$126.

RSI remains in an uptrend with lower resistance at 55-60 getting cleared and holding. A close above the latter would suggest additional strength towards 65-70 highs. Support is at 50-45.

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The market is closed Friday so the next issue will come out Monday morning. In the meantime, I have updated our current trades so let’s go check the action.

Momentum Options Play List

Closed Momentum Options Trades for 2020: 22-7 (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.

Spider Gold Shares (GLD, $166.62, down $0.75)

GLD July 172 calls (GLD200717C00172000, $0.60, down $0.30)

Entry Price: $0.97 (6/26/2020)

Exit Target: $2.00

Return: -41%

Stop Target: None

Action: Yesterday’s backtest to $165.34 breached but held fresh and upper support at $165.50-$165. A close below the latter would likely lead to a further pullback towards $163.50-$163. Resistance is at $167-$167.50. 

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Momo (MOMO, $17.48, flat)

MOMO July 16.50 puts (MOMO200717P00016500, $0.60, flat)

Entry Price: $0.70 (6/26/2020)

Exit Target: $1.40

Return: -14%

Stop Target: None

Action: Wednesday’s low kissed $17.23 with upper support at $17.25-$17 getting breached but holding. Resistance remains at $17.75-$18.

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AT&T (T, $29.90, down $0.33)

T July 32 calls (T200717C00032000, $0.15, flat)

Entry Price: $0.67 (6/16/2020)

Exit Target: $1.35

Return: -78%

Stop Target: None

Action: Upper support at $30-$29.75 failed to hold on the fade to $29.85. Resistance is at $30.25-$30.50.

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Dropbox (DBX, $21.78, up $0.01)

DBX July 25 calls (DBX200717C00025000, $0.15, flat)

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

Exit Target: $1.10

Return: -72%

Stop Target: None

Action: Lower resistance at $22-$22.25 was challenged but easily held on Wednesday’s trip to $21.85. Support remains at $21.50-$21.25.

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