Pre-Market Update for 8/3/2020

Bulls On 4-Month Winning Streak

8:00am (EST) 

The market rebounded in the afternoon on Friday to close mostly higher after trading lower throughout much of the session. Mixed earnings results from Tech and the Energy sectors, disappointing economic news, and a lack of progress toward another coronavius aid package weighed on sentiment. 

The late day bounce wrapped up a mixed week for the major indexes but an overall solid July and the 4th-straight month of gains. Volatility stayed slightly elevated throughout the session before closing lower and is still giving a bullish reading for the market over the near-term.

The Nasdaq jumped 1.5% after tapping a high of 10,747 just ahead of the closing bell. Current and lower resistance at 10,700-10,800 was recovered with a move above the latter and the all-time high at 10,839 indicating additional momentum towards 10,900-11,000.

The S&P 500 soared 0.8% with the late day high reaching 3,272. Near-term and lower resistance at 3,275-3,300 was challenged but held with a close above the latter suggesting strength towards 3,325-3,350.

The Dow added 0.4% following the 2nd half run to 26,440. Lower resistance at 26,500-26,750 easily held with a pop above the latter getting 27,000-27,250 and the July high at 27,071 back in focus.

The Russell 2000 sank 0.9% with the midday low tapping 1,457. Current and upper support at 1,465-1,450 was breached but held with a close below the latter and the 200-day moving average signaling a further pullback towards 1,440-1,425 and the 50-day moving average.

For the week, the Nasdaq surged 3.7% and the S&P 500 gained 1.7%. The Russell 2000 added 1% and the Dow lost 0.2%. For the month of July, the Nasdaq surged 6.8%: the S&P 500 gained 5.5%; the Russell 2000 was higher by 2.7%; and the Dow rose 2.3%.

Technology and Communication Services were the strongest sectors for the 2nd-straight session after advancing 2.5% and 1.4%, respectively. Healthcare and Energy were the weakest sectors after falling 0.6% and 0.5%, respectively.

Over the past 5 sessions, Technology (5%); Financials (4.2%) and Communication Services (2.3%) were the strongest sectors. Energy (-4%) and Materials (-1.8%) were the worst performing sectors. For the month, Utilities zoomed 7.8% while Energy sank 4.8% and was the only sector laggard.

In economic news, Q2 Employment Cost Index increased 0.5% versus the 0.8% gain in Q1. Wages and salaries rose 0.4% versus the 0.9% rise in Q1. Benefits climbed 0.8% from 0.4%. On a 12-month basis, compensation posted a 2.7% pace, slowing slightly from 2.8% year-over-year previously. Wages and salaries were up 2.9% year-over-year versus 3.1% while benefits rose at a 2.2% year-over-year clip from 2.1%.

Personal Income dropped -1.1% in June following the -4.4% decline in May. Spending surged another 5.6% following May’s 8.5% jump. Compensation rose 2.3% versus 2.5% previously. Wages and salaries climbed 2.2% after May’s 2.6% bounce. Disposable income declined -1.4% from -5.1% previously. The PCE chain price index climbed 0.4% versus 0.1%. The core rate edged up 0.2% after May’s 0.2% gain. On a 12-month basis, headline PCE posted an 0.8% year-over-year pace versus 0.5% while the core rate slowed to 0.9% year-over-year from 1%.

Chicago Manufacturing PMI surged 15.3 points to 51.9 in July, much stronger than expectations of 42.8, and follows June’s 4.3 point gain to 36.6. The index is continuing to recover from 3-straight monthly declines starting in March and culminating in May with a 38-year low of 32.3. The July reading is the highest going back to May 2019 at 52.8. The 3-month moving average climbed to 40.3 from 34.8.

Consumer Sentiment fell to 72.5 in the final July reading, versus forecasts for a print of 73.2, and the preliminary reading. The expectations component took the biggest hit, falling to 65.9 from 72.3 in June. The current conditions index dropped to 82.8 from 87.1. The 12-month inflation gauge posted a 3% pace, the same as June. The 5-year index came in at 2.6% versus 2.5% from June.

Baker-Hughes reported the U.S. Rig Count was unchanged from last week at 251 with oil rigs down one to 180, gas rigs up one to 69, and miscellaneous rigs unchanged at two. The U.S. Rig Count is down 691 rigs from last year’s count of 942, with oil rigs down 590, gas rigs down 102, and miscellaneous rigs up one to two. The U.S. Offshore Rig Count was unchanged at 12 and down 10 year-over-year.

The iShares 20+ Year Treasury Bond ETF (TLT) retreated after tapping an intraday low of $169.94. Prior support at $170.50-$170 was breached but levels that held. A close below the latter would signal a false breakout with additional downside risk towards $168.50-$168.

Resistance from mid-April remains at $171.50-$172. A close above the latter and the April peak at $172.15 would be a renewed bullish signal for additional upside towards $173-$173.50.

RSI has leveled out with resistance at 70 holding. A close above this level would suggest additional strength towards 75-80 and late February/ early March highs. Support is at 65-60.

The S&P 500 Volatility Index ($VIX) closed lower for the 2nd time in 3 sessions despite surging to an intraday high of 26.41. Current and lower resistance 26.50-27 and the 200-day moving average was challenged but held. A close above 28.50-29 and the 50-day moving average would be a bearish development for the market with last week’s peak reaching 28.29.

The late day fade to 23.55 and the July low breached upper support at 24-23.50 but a level that held. A close below the latter would be a more bullish signal for the market with downside risk towards 22.50-22 and levels from late February.

RsI has flatlined with support at 40-35 and the latter holding since mid-May. Resistance is at 45-50.

The Invesco QQQ Trust (QQQ) extended its winning streak to 3-straight sessions after tagging a high of $265.95. Near-term and lower resistance at $265.50-$266 was recovered. A close above the latter would signal additional strength towards $267.50-$268 with the July all-time peak at $269.79.

Rising support is at $265-$264.50 with backup help at $262.50-$260.

RSI is in an uptrend with lower resistance at 60-65 getting cleared and holding. A close above the latter would indicate additional strength towards 70-75 with the latter representing the early July top. Support is at 55-50.

The Spider S&P Retail ETF (XRT) fell for the 2nd-straight session despite trading to a fresh 52-week peak of $47.96. Longer-term and lower resistance from November 2018 at $48-$48.50 was challenged but held. A close above the latter would be a bullish signal for a breakout towards $49.50-$50.

Upper support at $47-$46.50 held on the fade to $46.72 afterwards. A close below the $46 level would signal a near-term top.

RSI is in a slight downtrend after failing to hold upper support at 65-60. A move below the latter would signal additional weakness towards 55-50 with the latter holding since early April. Resistance is at 70 and the July high.

The percentage of Nasdaq 100 stocks trading above the 50-day moving closed at 75.72% on Friday, down 0.97%. Upper support at 75%-72.5% was challenged but held. 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 52.17%, down 1.69%. 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 mid-July. Resistance is at 55%-57.5%.

The Q2 earnings season is roughly halfway complete with the revision trend notably improving over the past few weeks, with estimates for the current Q3 period and beyond continuing to go up. This is a notable shift in the post-pandemic earnings picture if it remains in place through the remainder of the ongoing Q2 earnings season.

Total earnings for 205 S&P 500 members that have reported Q2 results already are down -40.2% on -7.6% lower revenues, with 76.1% beating EPS estimates and 64.9% topping revenue estimates.

The opportunities from trading earnings elevates the risk/ reward scenario for an option or stock trade. Some of the price swings after these announcements have been jaw-dropping to say the least. Aside from that, other stocks are zooming and flopping from short-squeezes, coronavirus news, and sector rotation. 

We have a couple of trades over the next week or so that will fall into the earnings category. We are also watching the overseas markets for a breakout to new highs with our EEM position. 

We can also use QQQ, SPY, and XLK call and put options to play a possible breakout or breakdown this month. I have mentioned an extended market rally would occur throughout July and the market proved me right. I have also said the rally could extend into August but that I expect more volatility in the back half of the month. 

The charts I showed in today’s Daily have the Dow and Russell 2000 on track to form golden crosses. They would join the Nasdaq and S&P 500 in doing so and hopefully, continue to make higher highs. However, I also discussed the current trading ranges that have also been in play since mid-July so we need to remain slightly careful.

The longer the trading ranges, the bigger the breakout, or a breakdown, out of the range will be. Volatility is still signaling it wants to make lower lows and test the February levels before the market went to hell in a hand-basket. 

The bounce off the March lows and 4-month rebound has been amazing but it doesn’t necessarily mean higher highs are a given. The good news is we had a good July and so far, a tremendous 2020. There is no need to get to aggressive or take on more risk until a clear signal is given. We have 3 open trades that will still expect to double so let’s see how the next few weeks go with the earnings updates from VIAV and CSCO.

On that note, there could be a new trade today or tomorrow on some of this week’s earnings announcements as some of our favorite companies, and names we regularly trade, step up to the plate. 

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, $43.29, down $0.30)

EEM September 45 calls (EEM200918C00045000, $0.70, down $0.15)

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

Exit Target: $1.65

Return: -15%

Stop Target: 80 cents

Action: Friday’s low kissed $42.96 with upper support at $43-$42.50 getting breached but holding. Lowered resistance is at $$43.75-$44 with a close above the latter being a renewed bullish signal.

Cisco Systems (CSCO, $47.10, up $0.66)

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

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

Exit Target: $1.30

Return: -38%

Stop Target: None

Action: Lower resistance at $47-$47.50 was cleared and held on the rebound to $47.11 ahead of the close. Support is at $46.50-$46 and the 50-day moving average.

Viavi Solutions (VIAV, $13.83, up $0.09)

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: Fresh and lower resistance from late February at $13.75-$14 was cleared and held with the intraday high tapping $13.83. Rising support is at $13.50-$13.25 and the 200-day moving average. Earnings are due out August 11th.