MomentumOptions.com Pre-Market Update for 9/4/2020
Selloff Slaps Wall Street, Volatility Zooms/ Profit Alert(XLP)
The market was hit with heavy losses on Thursday following a slew of economic news and a heavy bout of profit taking following 2 weeks of strong gains. The selloff was the worst single-day selloff since June and July for the major indexes but was needed to work off extremely overbought conditions, especially in a number of Tech stocks.
The losses erased the weekly gains for the major indexes with volatility spiking to a multi-month high. The damage comes ahead of a long 3-day weekend following the conclusion of Friday’s close and all important jobs opening ahead of the opening bell.
The Nasdaq plummeted 5% to snap a 4-session winning streak with the 2nd half low tapping 11,361. Fresh and upper support at 11,400-11,300 was triggered but held. A move below the latter would indicate additional weakness towards the 11,150-11,000 area.
The S&P 500 sank 3.5% after testing an intraday low of 3,427. New and upper support at 3,450-3,425 was tripped but held. A close below the latter would signal additional pullback potential towards 3,400-3,375.
The Russell 2000 tumbled 3% while trading to an afternoon low of 1,538. Prior and upper support from early August at 1,550-1,535 failed to hold. A fall below the latter would reopen a further backtest towards 1,525-1,510.
The Dow tanked 2.8% with the morning low reaching 28,074. Upper support from mid-August at 28,250-28,000 was breached but held. A drop below the latter would suggest a further pullback towards 27,750-27,500.
Technology was the weakest sector with a loss of 5.7% while Communications Services and Consumer Discretionary fell 3.4% and 3.2%, respectively. There was no sector strength.
In economic news, Initial Jobless Claims dropped -130,000 to 881,000, versus forecasts of 977,000, and follows the -93,000 drop to 1,011,000 in the prior week. The 4-week moving average declined to 991,750 after dipping to 1,069,250 previously. On a not seasonally adjusted basis, claims were 7,600 higher at 833,400 after falling -64,000 to 825,800. Continuing claims tumbled -1,238,000 to 13,254,000 after declining -267,000 to 14,492,000 previously.
Challenger Job-Cut Report announced layoffs declined -146,800 to 115,800 in August after rising 92,400 to 262,600 in July. Announced layoffs are up 116.5% year-over-year. Transportation was the leading sector for job cuts in August amid weakness in travel and uncertainties over government intervention, according to the report. Entertainment/leisure reported the second highest number of announced layoffs. Announced hirings dropped -86,100 in August to 160,400.
Q2 productivity was revised higher to a 10.1% pace of growth versus 7.3% in the preliminary report, and -0.3% in Q1. Q2 unit labor costs were nudged down to a 9% growth rate from 12.2% initially and compares to Q1’s 9.6% rate of growth. Output was revised up to -37.1% from -38.9%, and was at a -6.4% rate of contraction in Q1. Q2 hours worked were revised to -42.9% from -43%, and were at a -6.1% clip in Q1. Compensation per hour was bumped down to a 20% growth rate in Q2 from the preliminary 20.4% print versus 9.2% growth in Q1.
U.S. trade deficit widened 18.9% to -$63.6 billion in July, larger than forecast for a print of -$58.5 billion, after narrowing -7.6% in June to -$53.5 billion. Exports increased another 8.1% to $168.1 billion after bouncing 9.6% to $155.5 billion in June. Imports climbed 10.9% to $231.7 billion following the 4.6% rebound to $208.9 billion previously. Excluding petroleum, the July deficit rose to -$65.7 billion from -$54.8 billion in June. The real goods deficit widened to -$90.5 billion versus -$80.3 billion in preciously.
PMI Composite Flash rose to 55 in the final read for August, up from the 54.8 preliminary reading. The employment component jumped to 55.6 from 51 previously and represents the strongest print since June 2014. The composite index dipped to 54.6 in the final version versus the 54.7 preliminary reading. The employment component improved from July and hit its best level since February 2019.
ISM Services Index fell 1.2 points to 56.9 in August, just below expectations of 57, after rising 1 point to 58.1 in July. The employment component jumped 5.8 points to 47.9 from 42.1. New orders dropped back -10.9 points to 56.8 from 67.7 previously. The change in inventories fell to 45.8 from 52 while inventory sentiment edged up to 52.5 from 50. New export orders rallied to 55.8 from 49.3, while imports rose to 50.8 from 46.3. Prices paid slid to 62.4 from 67.2.
The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 4th-straight session with the morning high reaching $167.24. Prior and lower resistance from late August at $167-$167.50 was breached but held on the close just below the 50-day moving average.
Current and rising support is at $165.50-$165 followed by $164-$163.50.
The S&P 500 Volatility Index ($VIX) was up for the 3rd time in 4 sessions after surging to a late day peak of 35.94. Prior and lower resistance from mid-June at 35.50-36 was breached but held. A close above the 37.50 level would suggest a retest towards 40-45.
Fresh support is at 33-32.50 followed by 30.50-30.
The Wilshire 5000 Composite Index ($WLSH) fell for just the 2nd time in 11 sessions with the afternoon low tagging 35,010. Fresh and upper support at 35,250-35,000 was breached but held. A close below the latter would signal additional weakness towards 34,750-34,500 and levels from mid-August.
Current and lowered resistance is at 35,500-35,750 followed by 36,000-36,250.
RSI is back in a downtrend with upper support at 55-50 holding. A close below the latter would signal a retest towards the 45 level and the low from late June. Resistance is at 60-65.
The Real Estate Select Sector Spider (XLRE) was down for the 3rd time in 4 sessions despite trading to an opening high of $37.20. Near-term and lower resistance at $37.25-$37.50 was cleared but held.
The fade to $36.11 with current and upper support at $36.25-$36 was breached but held. A close below the latter reopens downside risk towards $35.75-$35.50 and the 200-day and 50-day moving averages.
RSI is back,in a downtrend with upper support is at 55-50 failing to hold. There is risk towards 45-40 and levels from late June and mid-May on a close below the 50 level. Resistance is at 60.
I mentioned yesterday morning a selloff was due after watching the VIX like a hawk. I mentioned this is main focus of mine when it comes to trying to analysis where the market is heading. When the market was making higher highs this week and last, I mentioned the failure the VIX made in trying to crack the 20 level in late August. The longer-term chart below shows there would have been “gap down” potential towards 17.50-15 from the “gap higher” from 15 to over 20.
One way to play options on volatility is by the S&P 500 VIX Short-Term futures (VXX, $31.71, up $3.77). I was hoping for a much more orderly pullback yesterday with the VIX and the VXX holding the 30 level with the possibility of getting into call options ahead of the close. The $VIX chart below shows the break above the 200-day/ 50-day moving averages and the 30 level in more detail. The blue circles show support and resistance at 20 and 30 and crucial market clues (please excuse the finger paint, they were done on my iPad).
The pin action in the VXX calls starting picking up and I didn’t want to chase them higher. However, when strength returned into the final hour of trading, it signaled the damaged could carry over into Friday’s open.
The VXX September 30 calls (VXX200930C00030000, $3.75, up $1.40) opened at $2.37, traded down to $1.58, before zooming to a late day peak of $4.70. There is a chance they could trade towards $5-$6 if VXX trades up to 40-45 and the mid-June levels. Yesterday’s volume top 24,000 contracts so they are super liquid, meaning you can open them quickly.
I’m expecting these levels to possibly hold on continued weakness. If so, there is a possibility we can buy put options while looking for a fall back below the 30 level at some point.
The VXX September 35 calls (VXX200930C00035000, $2.35, up $0.95) will likely see some action today but they could pop higher, or lower, depending on this morning jobs, report.
While I won’t be trading the VXX today, there is a chance a New Trade could come into play, bullish or bearish. However, with a 3-day weekend coming up, we don’t have to force the action. If you don’t hear from me by 3:30pm (EST), have a great and safe holiday.
Momentum Options Play List
Closed Momentum Options Trades for 2020: 30-10 (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.
Rambus (RMBS, $13.78, down $0.58)
RMBS November 13 puts (RMBS201120P00013000, $0.85, up $0.20)
Entry Price: $0.90 (8/21/2020)
Exit Target: $1.80
Stop Target: None
Action: Prior and upper support is at $13.75-$13.50 was breached but held on the tumble to $13.66. Lowered resistance is at $14-$14.25 and the 200-day moving average.
Consumer Staples Select Spiders (XLP, $65.69, down $1.15)
XLP September 65 calls (XLP200918C00065000, $1.25, down $0.85)
Entry Price: $0.85 (8/17/2020)
Exit Target: $3 (closed half at $2.00 on 9/2)
Stop Target: $1.70 (Stop Limit)
Action: The options traded to a high of $2.60 but failed our Exit Target at $3 on the other half. The fade in the stock after setting another all-time high triggered the $1.70 Stop Limit with our average closing price at $1.85.
Despite the gloomy day, we locked-in our 10th triple-digit winner with a put option in our back pocket ahead of the weekend.