MomentumOptions.com Pre-Market Update for 7/30/2020

Fed Stands Pat, Market Holds Gains

8:00am (EST) 

The market showed strength throughout the first half of action as Wall Street awaited the FOMC meeting minutes and comments from some of Tech’s top CEO’s on antitrust issues. The major indexes added to their gains following the FOMC afternoon update and a not surprisingly cautious tone on the impact of the coronavirus pandemic.

The Russell 2000 showed the most strength after rallying 2.2% with the session high reaching 1,501. Near-term and lower resistance at 1,500-1,515 was recovered with a move above the latter and the monthly peak at 1,507 suggesting a retest towards 1,525-1,540.

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The Nasdaq soared 1.4% after tapping an intraday high of 10,567. Current and lower resistance at 10,500-10,600 was cleared and held with a close above the latter indicating additional strength towards 10,700-10,800.

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The S&P 500 was higher by 1.2% following the late day trip to 3,264. Lower resistance at 3,250-3,275 was reclaimed with a pop above the latter signaling additional upside towards 3,300-3,325.

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The Dow added 0.6% with the afternoon peak reaching 26,602. Near-term and lower resistance at 26,500-26,750 was cleared and held with a move above the latter suggesting another run 27,000-27,250 with the July high at 27,071.

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Energy was the strongest sector after zooming 2.1% while Real Estate and Financials jumped 1.9%. There was no sector weakness.

In economic news, MBA Mortgage Applications dipped -0.8% after a 4.1% jump in the previous week. Most of the weakness was in the purchase component which dropped -1.5%, erasing much of the prior 1.8% jump. The refi index slid -0.4% after surging 5.3% and 11.9% in the prior two weeks. The headline market index is up 71.5% year-over-year versus the 70.5% clip previously. Refis are up 120.9% year-over-year, slipping slightly from 122.0% previously. Purchases were at a 21.1% year-over-year pace versus 19.4%. The 30-year mortgage rate was steady at 3.20%, up from the record 3.19% low from the previous week. The 5-year ARM rose to 3.08% from 2.89%.

June advance goods trade deficit narrowed to -$70.6 billion versus -$75.3 billion in May, which was the highest in over a year. Exports surged 13.9% to $102.6 billion, more than correcting from the surprisingly large -5.8% decline in May to $90.1 billion. Imports rose 4.8% to $173.2 billion after slipping -0.6% to $165.3 billion previously. June wholesale inventories declined -2% to $629.6 billion following the -1.2% drop to $642.2 billion. Retail inventories declined -2.6% to $588.2 billion from May’s -6.2% slide to $603.7 billion.

Pending Home Sales jumped 16.6% to 116.1 in June versus forecasts for a rise of 5.2%. The 12-month pace rebounded to 12.7% year-over-year versus -10.4% in May and -34.6% in April.

The FOMC left its policy band unchanged at 0%-0.25% and made a few changes to the policy statement versus June, but none surprising. The Fed reiterated the gist of the Beige Book, noting “economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year. Weaker demand and significantly lower oil prices are holding down consumer price inflation.” 

The minutes went on to say financial conditions have improved, in part helped by the measures to support the economy and the flow of credit. The ongoing pandemic “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.” The lower for longer stance will remain until policymakers are “confident” the economy has weathered the storm.  

Fed Chairman Powell repeated the view that there will be a need for additional fiscal support from lawmakers, although he said he does not want to give specific advice on unemployment benefits when asked about those topics. He stated the path forward for the economy remains “extraordinarily” uncertain as the number of coronavirus cases has risen sharply and he is seeing signs that the it’s weighing on the economy. 

Powell said though household spending has recouped about half its drop, some measures of consumer spending have moved down since late June. Meanwhile, business fixed investment has yet to show a recovery as the pandemic has left a significant imprint on inflation. He noted the FOMC resumed its work on its Framework Review at this meeting, and added he has nothing to update on that front but that the Fed hopes to conclude its review in the near future.

The Fed Chairman said there are various ways to further support the economy as analysts have the ability to do more, including more asset buying or via forward guidance. However, he said fiscal policy is essential as it can address things the Fed can’t do. Powell added the Fed’s job is to plan for the full range of things that might happen, but not really the upside case (for instance a vaccine is developed). 

Powell said there is great uncertainty associated with vaccines and the Fed is hoping for best in terms of a vaccine, but is planning for the worst. He added the pandemic is fundamentally a disinflationary shock and the Fed is still struggling with low price pressures.

The iShares 20+ Year Treasury Bond ETF (TLT) fell for the 3rd time in 4 sessions following the intraday pullback to $168.98. Upper support at $169-$168.50 was breached but held. A close below the latter would suggest additional weakness towards $167.50-$167.

Resistance is at $170.50-$171. A close above the latter would be a bullish signal for additional upside towards $172-$172.50 with the April peak at $172.15.

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The S&P 500 Volatility Index ($VIX) traded in the red throughout the session with the morning low hitting 23.73. Current and upper support at 24-23.50 was breached but held by a tenth-point. A close below the latter and the monthly low of 23.60 would be a very bullish development for the market with additional weakness towards 22.50-22 and levels from late February.

Lowered resistance is at 25-25.50 followed by 26.50-27 and the 200-day moving average.

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The iShares Russell 1000 (IWF) rebounded with the second half peak reaching $203.57. Near-term and lower resistance at $203.50-$204 was cleared but held. A move above the latter would suggest additional upside towards $205-$205.50 with the monthly and all-time peak at $206.33.

Rising support is at $202.50-$202 with backup help at $201-$200.50.

RSI is back in an uptrend with resistance at 60. A close above this level would signal additional strength towards 65-70. Support is at 55-50 with the latter holding since early April.

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The Spiders S&P Homebuilders ETF (XHB) showed strength for the 2nd time in 3 sessions with the intraday and all-time high tagging $50.21. Current and lower resistance at $50-$50.50 was cleared and held. A close above the latter would be an ongoing bullish signal for blue-sky upside towards $51.50-$52.

Fresh and slightly rising support is at $49-$48.50. A drop below the $47.50 level would signal a possible near-term top with backtest potential towards $47-$46.50.

RSI is in an uptrend with lower resistance at 70-75 getting challenged but holding. A move above the latter would suggest additional strength towards 80 and overbought territory from January. Support is at 65-60.

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Wednesday’s gains were a bullish signal following the previous session losses with a number of Tech companies reporting positive numbers after Wednesday’s close. Volatility was also timid and is approaching February levels before the outbreak of the coronavirus and is confirming another leg higher for the major indexes.

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.

iShares Emerging Markets (EEM, $44.15, up $0.70)

EEM September 45 calls (EEM200918C00045000, $1.05, up $0.25)

Entry Price: $0.82 (7/28/2020)

Exit Target: $1.65

Return: 25%

Stop Target: 80 cents

Action: Shares traded to a high of $44.27 with key resistance at $44 getting cleared and holding. Continued closes above this level would signal additional upside towards $45-$45.50. Support remains at $43.50-$43. 

Volume was heavy in these calls yesterday with over 8,000 contracts trading. This is a good indication traders are looking for higher highs in the stock over the near-term. I have listed a Stop Target at 80 cents but it is NOT a Limit Order. 

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Cisco Systems (CSCO, $46.71, up $0.43)

CSCO August 50 calls (CSCO200821C00050000, $0.40, up $0.05)

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

Exit Target: $1.30

Return: -39%

Stop Target: None

Action: Wednesday’s high tapped $46.88 with lower resistance at $46.50-$47 getting breached and holding. Support is at $46-$45.50.

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Viavi Solutions (VIAV, $13.61, up $0.30)

VIAV August 14 calls (VIAV200821C00014000, $0.55, up $0.05)

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

Exit Target: $1.20

Return: -9%

Stop Target: None

Action: Lower resistance at $13.50-$13.75 and the 200-day moving average were cleared and held on yesterday’s trip to $13.64. Support remains at $13.25-$13.

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