MomentumOptions.com Pre-Market Update for 8/20/2020
Fed Minutes Zap Momentum
The market backed off its opening gains and fresh all-time highs on Wednesday to close mostly lower with the small-caps bucking the trend. A possible breakthrough in negotiations concerning a stimulus deal helped early momentum before the Fed minutes from July sapped enthusiasm.
Senate Republicans have put forward another economic stimulus bill to address the massive damage from the coronavirus pandemic and resulting lockdowns. However, the proposal does not include another round of $1,200 stimulus payments. Meanwhile, the Fed members cut their economic growth forecast for the remainder of the year while maintaining the target range for the federal funds rate at 0%-0.25%.
The Nasdaq had its 2-session winning streak snapped after giving back 0.6% with the intraday all-time reaching 11,257. The fade to 11,132 afterwards easily held current and upper support at 11,100-11,000. A close below the latter would signal a possible near-term top with additional weakness towards 10,900-10,800.
The S&P 500 was lower by 0.4% despite tagging a fresh record high of 3,399 ahead of the Fed news. The pullback to 3,369 afterwards breached and failed to hold upper support at 3,375-3,350. A move below the latter would signaling a further backtest towards 3,325-3,300.
The Dow extended its losing streak to 3-straight sessions after sliding 0.3% with the late day low reaching 27,647. Near-term and upper support at 27,750-27,650 failed to hold. A close below the latter would signal a further retest towards 27,600-27,500.
The Russell 2000 bucked the trend after edging up 0.2% with the midday high tapping 1,585. Current and lower resistance at 1,585-1,600 was breached but held. A close above the latter would be a bullish signal for additional strength towards 1,610-1,625.
Real Estate was the weakest sector after tanking 2.1% while Energy and Consumer Staples were lower 1.2% and 0.8%, respectively. There was no sector strength.
In economic news, MBA Mortgage Applications fell -3.3% versus the prior week’s 6.8% bounce. The weakness was a function of refis, which dropped -5.3%, nearly halving the 9.1% gain in early August. The purchase index edged up 0.8% after a 2% gain previously. The 12-month pace on the applications index slowed to 34.2% year-over-year from 37.1%, with the refi index at 38.3% versus 46.7%. The purchase index edged up slightly to a 38.3% pace from 21.8%. Refis were hurt by a rise in the 30-year mortgage rate to 3.13% from the record low 3.06% previously. The market was also hurt by FNMA’s adoption of an adverse market fee that will be applied to what GSEs have to pay up front to acquire a loan, and that fee is likely to be passed on to borrowers. Meanwhile, the 5-year ARM fell to 2.95% from 3%.
Quarter Services Survey figures that track activity for the service sector revealed a -9.2% Q2 year-over-year drop in the aggregate “selected services” measure that reflected an -8.9% drop from Q1.
The iShares 20+ Year Treasury Bond ETF (TLT) had its 2-session winning streak snapped despite trading to a morning high of $165.61. Current and lower resistance at $165.50-$166 was cleared but held. A close above the latter and the 50-day moving average would confirm a possible near-term bottom with additional hurdles at $167-$167.50.
Upper support at $163.50-$163 was breached but held on the drop to $163.30 afterwards. A close below the $162.50 level would be a renewed bearish signal with additional weakness towards $161.50-$161 and levels from mid-June.
The S&P 500 Volatility Index ($VIX) was up for the 2nd-straight session with the 2nd-half peak reaching 22.98. Current and lower resistance 22.50-23 failed to hold with wiggle room up to 24.50-25 on a close above the latter.
Support remains at 21.50-21 with the intraday low tagging 20.99. A close below the 20 level and the monthly low at 20.28 would be a more bullish signal for the market.
The Spider S&P 500 ETF (SPY) had its 3-session winning streak snapped despite testing an intraday and all-time high of $339.61. Uncharted territory and lower resistance at $339.50-$340 was cleared but held. A close above the latter would indicate additional strength towards the $341-$341.50 area.
Current support at $337-$336.50 was breached but held on the tumble to $336.62 ahead of the closing bell. A close below the latter would suggest additional weakness towards the $335.50-$335 area.
RSI is back in a slight downtrend after failing to hold key resistance at 70. Continued closes above this level would indicate additional strength towards 75 and the early June overbought peak. Support is at 65-60.
The Consumer Discretionary Select Spiders (XLY) was down for the 1st time in 3 sessions despite trading to a morning and fresh all-time high of $146.95. New and lower resistance at $146.50-$147 was breached but held. A move above the latter would suggest additional momentum towards $148.50-$149.
Current and upper support at $145.50-$145 was tripped but held on the late day backtest to $145.44. A close below the latter would reopen downside risk towards $143.50-$143.
RSI is rolling over after failing to clear and hold overbought resistance at 80. A close above this level would suggest additional strength towards 85-90 and levels from January 2018. Support is at 75-70.
I’m still waiting for the VIX to make a major move below 20 and a level that has been holding for much of the month. The chart shows the 50-day moving average on a collision course with the 200-day moving average and would form a death cross if it plays out. This technical pattern is typically a bearish signal for lower lows and why I still believe a drop towards 17.50-17 and levels from February remain in play.
The good news is this would be a very bullish signal for the market with energy enough to propel the Dow and Russell 2000 towards fresh all-time highs. They would join the S&P 500 and Nasdaq that remain in beast mode and blue-sky territory. The one clear sign to look for would be if the VIX suddenly spikes above the 25 level. This would be a clear indication of a return of volatility and when to lighten up on bullish positions.
The talking heads rarely talk about the $VIX but it remains a crystal ball on predicting how the market is behaving.
Momentum Options Play List
Closed Momentum Options Trades for 2020: 28-9 (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.
Consumer Staples Select Spiders (XLP, $64.27, down $0.51)
XLP September 65 calls (T200918C00065000, $0.70, down $0.25)
Entry Price: $0.85 (8/17/2020)
Exit Target: $1.70
Stop Target: None
Action: Current and upper support at $64.50-$64 was breached and failed to hold on the fade to $64.15. Resistance remains at $65-$65.50.
AT&T (T, $29.73, down $0.06)
T September 31 calls (T200918C00031000, $0.30, flat)
Entry Price: $0.50 (8/10/2020)
Exit Target: $1.00
Stop Target: None
Action: Shares tested a low of $29.68 with current and upper support at $29.75-$29.50 failing to hold. Resistance remains at $30-$30.25 at the 50-day moving average.