MomentumOptions.com Pre-Market Update for 7/20/2020

Dow, S&P 500 Up 3-Straight Weeks, Tech Lags

8:00am (EST)

The market traded in tight ranges on Friday with the major averages settling mostly higher, excluding the blue-chips. The best housing market news in 4 years provided some momentum but was offset by a weakness in consumer sentiment.

Volume was light and typical during the summer doldrums with the action resulting in a mixed week for Wall Street. Tech was the laggard and will be more in focus over next few weeks as the heart of 2Q earnings takes shape. Meanwhile, volatility eased to its lowest level in over a month and is still signaling market upside after closing below a key level of support.

The Russell 2000 was up 0.4% after tapping a midday high of 1,482. Lower resistance at 1,485-1,500 was challenged but held for the 2nd time in 3 sessions. A close above the latter would signal additional strength towards 1,510-1,525 and levels from early June.

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The Nasdaq climbed 0.3% while testing an afternoon peak of 10,532. Near-term and lower resistance at 10,550-10,650 was challenged but held with a move above the latter suggesting a retest towards 10,800-10,900 and fresh all-time highs.

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The S&P 500 also added 0.3% following the intraday trip to 3,233, matching the early June high, with a 3-session trading range currently in play. Lower resistance at 3,225-3,250 was cleared but held by a quarter-point. A move above the latter would signal a retest towards 3,275-3,300 and prior levels from early February.

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The Dow was down for the 2nd-straight session after slipping 0.2% with the morning low reaching 26,619. Current and upper support at 26,500-26,250 was challenged but easily held. A close below the latter and the 200-day moving average would be a slightly bearish development for further weakness towards 26,000-25,750.

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For the week, the Russell 2000 surged 3.7%; the Dow jumped 2.3%; and the S&P 500 was up 1.3%. The Nasdaq fell 1.1%.

Utilities showed the most sector strength after jumping 2.3% while Real Estate and Healthcare rallied 1.4%. Energy and Financials were the weakest sectors after dropping 1.4% and 0.8%, respectively.

Over the past 5 sessions, Industrials (5.9%); Healthcare (5.5%); and Materials (5.1%) were the strongest sectors. Technology (-1.2%) and Communication Services (-0.5%) were the only sectors that lagged.

In economic news, Housing Starts climbed another 17.3% to a 1,186,000 pace in June, topping forecasts of 1,190,000, and follows the upwardly revived 8.2% rebound in May to 1,011,000. Building permits rose 2.1% to 1,241,000 in June, below forecasts for a print of 1,300,000, after a revised 14.1% surge to 1,216,000 in May. Single family starts jumped 17.2% to 831,000 versus the 4.4% May gain to 709,000. Multifamily starts surged 17.5% to 355,000 following the 18.4% bounce to 302,000 previously. 

Consumer Sentiment dropped 4.9 points to 73.2 in the preliminary July report, well below expectations for a print of 79, after increasing 5.8 points to 78.1 in June. Much of the weakness was in the July expectations index which dropped to 66.2 versus 72.3 preciously. The current conditions index slid to 84.2 from June’s 87.1 reading. The median 12-month inflation gauge edged higher to 3.1% in July versus 3% last month. The July 5-year index firmed to 2.7% versus 2.5% in June.

Baker-Hughes reported the U.S. rig count was down 5 rigs to 253 with oil rigs lower by 1 to 180, gas rigs declining 4 to 71, and miscellaneous rigs unchanged at 2. The U.S. Rig Count is down 701 rigs from last year’s count of 954, with oil rigs off 599, gas rigs down 103, and miscellaneous rigs up 1 to 2. The U.S. Offshore Rig Count was unchanged at 12 and down 14 year-over-year.

The iShares 20+ Year Treasury Bond ETF (TLT) remains in a 6-session trading range following the intraday pullback to $166.47. Current and upper support at $167-$166.50 was reclaimed. A close below the latter would signal another backtest towards $165.50-$165 and the low end of the current range.

Resistance remains at $167.50-$168. A close above the latter would be a bullish signal for a possible breakout with upside potential towards $169.50-$170. 

RSI is showing signs of rolling over with support at 55-50 and the latter representing the early June low. Resistance is at 60 and a level that has been holding since mid-March.

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The S&P 500 Volatility Index ($VIX) was down for the 3rd time in 4 sessions after testing an intraday low of 25.41. Prior and upper support at 25.50-25 was breached and held. A close below the latter would signal additional weakness towards 24-23.50 with the June low at 23.54.

Lowered resistance is at 26.50-27 and the 200-day moving average.

RSI is in a downtrend with upper support at 40-35 holding and the latter sticking since mid-May. Resistance is at 45-50.

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The iShares Russell 1000 (IWF) was up for the 3rd time in 4 sessions with the intraday high reaching $201.38. Near-term and lower resistance at $201-$201.50 was cleared but held. A move above the latter would suggest additional upside towards $203.50-$204 with the monthly and all-time peak at $206.33.

Support is at $199-$198.50. A close below the $197.50 level would signal additional weakness with retest potential towards the $195.50-$195 area.

RSI has has flatlined with support at 60. A close below this level would signal additional weakness towards 55-50. Resistance is at 65-70 with the latter representing the monthly top.

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The iShares MSCI Emerging Markets Fund (EEM) also showed strength for the 3rd time in 4 sessions with the midday high hitting $42.86. Lower resistance at $42.75-$43.25 was recovered. A close above the latter would be a more bullish signal for a retest towards $43.50-$44 with the monthly peak at $43.96.

Current support is at $42.50-$42. A close back below the latter would be a slightly bearish development with backtest potential towards $41.50-$41. A golden cross is in the process of forming with the 50-day moving average on track to clear the 200-day moving average. This is usually a bullish signal for higher highs.

RSI is in a slight uptrend with resistance at 65-70 and the latter holding since early June. Support is at 55-50 on a close back below the 60 level.

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

closed at 88.34% on Friday, up 0.97%. Current and lower resistance at 87.5%-90% was breached and held. A close above the latter would signal a retest towards 92.5%-95% and overbought levels from the beginning of the month. Support is at 85%-82.5%.

The percentage of S&P 500 stocks trading above the 200-day moving average settled at 51.48%, up 1.58%. Lower resistance at 50%-52.50% was recovered. A close below the latter would signal additional strength towards 55%-57.5% and levels from early June. Current support is at 47.50%-45%.

The Q2 earnings season is underway with 47 S&P 500 members, or nearly 10%, of the index’s total membership reporting numbers last week. The reporting cycle really gets much busier this week, with more than 300 companies announcing, including 82 S&P 500 members. Key sectors such as Tech, Finance, Transportation, and Industrials will be in the spotlight and will start providing a broader picture on how the quarter unfolded.

Total Q2 earnings for the 47 companies that reported are down -46% from the same period last year on -2% lower revenues, with 74.5% topping EPS forecasts and 68.1% beating revenue estimates.

For the Finance sector, which is heavily represented in the results at this stage, Q2 results from 36.8% of the sector’s total market capitalization in the S&P 500 index have been announced. Total earnings for these Finance companies are down -56.2% from the same period last year on 7.5% higher revenues, with 76.5% above EPS estimates and 70.6% besting revenue forecasts.

There were no major surprises in bank earnings, but that was likely a function of very low expectations as the market was already pricing in their loan-loss reserves and margins that continue to get squeezed by historically low interest rates. The market expected the big banks and brokers to show momentum in their capital markets and investment banking businesses. On that front, there were a number of notable upside surprises. 

There are still plenty of Finance earnings to come, but the focus will shift to the Technology sector over the next couple of weeks. Overall, Q2 earnings from the Tech sector are expected to be down -12.7% on -1% lower revenues. This would follow 3.8% earnings growth on 4% higher revenues in the preceding quarter. 

Growth is expected to resume next year, with full-year 2021 earnings for the S&P 500 index currently expected to be up 27% relative to 2020 estimates. However, as strong as next year’s growth estimate is estimated to be, total 2021 index earnings will still be below pre-coronavirus levels. In other words, S&P 500 earnings in 20201 are currently expected to be modestly below the 2019 level.

As for the bigger picture, S&P 500 earnings estimates for full-year 2020 have evolved since early January. Expectations were near 8% growth at the start of the year, now forecasts are at a decline of -24.3%.

All S&P 500 sectors are expected to have earnings declines in Q2, with the Tech sector’s earnings decline one of the lowest. The group has lifted the major indexes off their March lows and it will be interesting to see if Tech can sustain its momentum after the earnings picture gets clearer.

The one thing I’m watching (as usual) is the S&P 500 Volatility Index ($VIX). It is possible new lows come into play and would confirm another leg higher for the market with a possible rally lasting into next week. From there, I expect August to be a tad rocky.

On the flip side, if volatility pops back above the 30 level, it could be an indication of a sooner market pullback and retest towards the 200-day moving averages. The Dow and the Russell 2000 remain on track to form golden crosses with the 50-day moving average on pace to clear the 200-day moving average.

They would join the Nasdaq and S&P 500 if the current technical pattern plays out and would also confirm higher highs over the near-term. This week will likely be crucial for the bulls in keeping near-term momentum.

On that note, stay locked-and-loaded as I expect a pickup in New Trades and Profits Alerts, depending on the action.

Momentum Options Play List

Closed Momentum Options Trades for 2020: 23-8 (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.

Viavi Solutions (VIAV, $13.50, up $0.31)

VIAV August 14 calls (VIAV200821C00014000, $0.65, up $0.05)

Entry Price: $0.60 (7/13/2020)

Exit Target: $1.20

Return: 8%

Stop Target: None

Action: Lower resistance at $13.50-$13.75 and the 200-day moving average was recovered with Friday’s peak reaching $13.62. Fresh support is at $13.25-$13.

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Western Union (WU, $21.99, up $0.04)

WU August 22 calls (WU200821C00022000, $1.10, unchanged)

Entry Price: $0.70 (7/10/2020)

Exit Target: $1.40

Return: 57%

Stop Target: 90 cents (Stop Limit)

Action: Shares tapped a high of $22.10 with current and lower resistance at $22-$22.25 holding. Support is at $21.75-$21.50.

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