MomentumOptions.com Pre-Market Update for 7/27/2020

Bears Get Weekly Win

8:00am (EST) 

The market was weak throughout Friday’s session as tensions continue to rise with China, with the latest escalation being China ordering the U.S. to shut a consulate in retaliation for a similar move made in Texas. The lack of progress on another fiscal stimulus bill also weighed on sentiment as administration officials and GOP lawmakers want to cut but not outright eliminate enhanced federal unemployment benefits.

The losses sealed a lower week for the major indexes and the first in 4 weeks. Given the July rally, the weekly pullback eased heightened valuation levels and comes ahead of next week’s FOMC meeting. Despite the retreat, volatility remained somewhat calm after settling lower for the session.

The Russell 2000 sank 1.5% after testing an afternoon low of 1,466. Near-term and upper support at 1,475-1,460 was breached and failed to hold with a close below the latter indicating additional weakness towards 1,450-1,435 and the 200-day moving average.

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The Nasdaq fell 0.9% with the morning low tapping 10,217. Prior and upper support from earlier this month at 10,300-10,200 was clipped but held with a move below the latter suggesting a further retest towards 10,100-10,000.

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The Dow fell 0.7% following the intraday pullback to 26,402. Crucial and upper support at 26,500-26,250 failed to hold with a move below the latter and the 200-day moving average signaling additional weakness towards 26,000-25,750 and the 50-day moving average.

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The S&P 500 declined 0.6% after tagging an midday low of 3,200 to settle at the lower end of a current 8-session trading range. Upper support at 3,225-3,200 failed to hold with a close below the latter likely leading a further backtest towards 3,175-3,150.

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For the week, the Nasdaq lost 1.3% and the Dow ended 0.8% lower. The Russell 2000 was off 0.4% and the S&P 500 was down 0.3%.

Consumer Discretionary was the only sector that closed higher after adding 0.2%. Technology and Healthcare were the weakest sectors after giving back 1.2% and 1.1%, respectively.

Over the past 5 sessions, Energy (2.2%); Financials and Consumer Discretionary (1.3%) were the strongest sectors. Technology (-1.5%) and Communication Services (-1%) were the worst performing sectors.

In economic news, Flash Markit readings for July all improved to their best levels since January, reflecting the bounce from the April lows. Manufacturing climbed to 51.3, up from 49.8 in June, with the index back in expansionary territory after four months in contraction, and a record low of 36.1 in April. The services index increased to 49.6 from 47.9, continuing the recovery from May’s 37.5 reading, but remaining in contraction (below 50) for a 6th-straight month. Of note, the prices charged index increased to 55.7 from 53.1 and is the highest since October 2018, while input prices also surged to the highest since July 2013. The composite index rallied to 50 from 47.9 in June.

New Home Sales climbed another 13.8% to a 776,000 pace in June, topping forecasts of 700,000, following the 19.4% surge to 682,000 in May. Sales improved in all four regions. The months’ supply of homes dropped to 4.7 from 5.5, the smallest since July 2016. The low inventories saw the median sales price jump 6.1% to $329,200 after bouncing 1% to $310,200. On a 12-month basis, the median price is up 5.6% year-over-year versus -0.8% previously.

Baker-Hughes reported the U.S. rig count was down 2 rigs to 251 with oil rigs up 1 to 181, gas rigs down 3 to 68, and miscellaneous rigs unchanged at 2. The U.S. Rig Count is down 695 rigs from last year’s count of 946, with oil rigs lower by 595, gas rigs down 101, and miscellaneous rigs up 1 to 2. The U.S. Offshore Rig Count was unchanged at 12 and is down 13 year-over-year.

The iShares 20+ Year Treasury Bond ETF (TLT) was down for the first time in 5 sessions despite reaching an intraday peak of $169.92. Current and lower resistance at $170-$170.50 was challenged but held. A close above the latter would indicate additional strength towards $171.50-$172 with the April top at $172.15.

Support remains at $169-$168.50 with backup help at $167.50-$167.

RSI has leveled out with resistance at 70. A close above this level would suggest possible strength towards 75-80 and levels from March. Support is at 65-60.

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The S&P 500 Volatility Index ($VIX) spiked to a morning peak of 28.58 before closing down for the day. Mid-month and lower resistance at 28.50-29 was tripped but held. A close above 29.50-30 and the 50-day moving average would be a slightly bearish development for the market.

The fade to 25.53 afterwards and 6th-straight close below the 200-day moving average remains a bullish signal with upper support at 25.50-25 holding. 

RSI is showing signs of rolling over with key support at 40 and the monthly low. A close below 40 would signal additional weakness towards 35 and a level that has been holding since late April. Resistance is at 45-50.

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The Spider Small-Cap 600 ETF (SLY) had its 3-session winning streak snapped following the pullback to $60.42 ahead of the closing bell. Upper support at $60.50-$60 failed to hold. A close below the latter would suggest a false breakout with additional weakness towards $59-$58.50.

Lowered resistance is at $61-$61.50 with more important hurdles at $62 and the 200-day moving average.

RSI is back in a downtrend with upper support at 55-50 holding. A close below the latter would signal weakness towards 45-40 and mid-May levels. Resistance is at 60.

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The Dow Jones Transportation Average ($TRAN) extended its losing streak to 3-straight sessions after testing an intraday low of 9,706. Current and upper support at 9,700-9,600 was challenged but held. A close below the latter and the 200-day moving average would suggest additional weakness towards 9,500-9,400.

Short-term resistance is at 9,800-9,900. A close above the 10,000 and the monthly peak would indicate additional strength with upside potential towards 10,100-10,200 and early June levels.

RSI is in a downtrend after falling below key support at 60. Continued closes below this level keeps weakness towards 55-50 in focus. Resistance is at 65-70.

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

closed at 74.75% on Friday, down 11.65%. Upper support at 75%-72.5% was tripped and failed to hold. A close below the latter would signal a retest towards 70%-67.5% and slightly overbought levels from late June. Resistance is at 77.5%-80%.

The percentage of S&P 500 stocks trading above the 200-day moving average settled at 52.27%, down 1.39%. Current and upper support 52.5%-50% was breached and failed to hold. A close below the latter would signal additional weakness towards 47.5%-45% and levels from earlier this month. Resistance is at 55%-57.5%.

The Q2 earnings season is about a quarter of the way completed with results from 128 S&P 500 members, or 25.6%, having reported. Total Q2 earnings results already are down -41.9% from the same period last year on -7.1% lower revenues, with 74.2% beating EPS estimates and 64.1% topping revenue estimates.

For the Tech sector, Q2 results from 35% of the sector’s market capitalization in the S&P 500 index have announced. Total earnings for these Tech companies are down -5.2% on 1% higher revenues, with 93.3% beating EPS estimates and 66.7% exceeding revenue estimates.

The reporting cycle really ramps up this week, with more than 800 companies on deck to report results, including 185 S&P 500 members.

Also this week, the FOMC policymakers meet again on Tuesday and Wednesday with a midweek update in the afternoon. While there will be a lot to be discussed, Wall Street doesn’t expect any changes to the policy stance, QE, or forward guidance. The statement should be cautious and little changed from the June update where the Fed underscored it would continue to use its full range of tools to support the economy, while warning that there is considerable risk to the medium term. 

Most suspect Chair Powell will also take a cautious stance given the spike in coronavirus cases, some retrenchment in reopenings, the bounce in jobless claims, uncertainties over another fiscal package, domestic turmoil, and rising geopolitical risks. The market will look for further insight on yield curve targeting (YCT), and any surprises in Powell’s comments.

As far as market clues this week, Volatility will be the key indicator to watch along with near-term support levels to see if the bears will keep their current momentum.

Momentum Options Play List

Closed Momentum Options Trades for 2020: 24-8 (75%). 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.

Cisco Systems (CSCO, $46.40, down $1.01)

CSCO August 50 calls (CSCO200821C00050000, $0.45, down $0.20)

Entry Price: $0.65 (7/21/2020)

Exit Target: $1.30

Return: -29%

Stop Target: None

Action: Friday’s tumble to $46.11 failed to hold upper support is at $46.50-$46. Lowered resistance at $47-$47.50.

Shares are in a mini trading range and I still like the position as long as the 50-day moving average hold. Earning are due out on August 12th. 

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Viavi Solutions (VIAV, $13.34, down $0.30)

VIAV August 14 calls (VIAV200821C00014000, $0.50, down $0.10)

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

Exit Target: $1.20

Return: -18%

Stop Target: None

Action: Upper support at $13.25-$13 held on the pullback to $13.30. Resistance at $13.50-$13.75 and the 200-day moving average. Earnings are due out August 11th.

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