MomentumOptions.com Pre-Market Update for 9/9/2020

Bears Stay Aggressive as Nasdaq Closes Below 11K

8:00am (EST) 

The market was down for the 3rd-straight session with the selling pressure leading to a fresh round of lower lows. Economic news was light but better-than-expected and wasn’t a factor in a weak attempt to bounce off the morning lows. Oil closed at its lowest level in 3 months while volatility stayed rather calm considering the downside action – but remains at elevated levels. 

The Nasdaq plummeted 4.1% with the intraday low reaching 10,837. Current and upper support at 10,900-10,800 was breached and failed to hold on the close back below the 50-day moving average. A move below 10,800 would indicate additional weakness towards the 10,700-10,600 area.

The S&P 500 sank 2.8% after testing a 2nd half low of 3,329. Mid-August and upper support from at 3,350-3,325 failed to hold. A close below the latter would suggest a further pullback towards 3,300-3,275 and the 50-day moving average.

The Dow was down 2.3% with the late day low hitting 27,464 shortly after the opening bell. Prior and upper support from mid-August at 27,500-27,250 was breached but held by less than a point. A move below the latter and the 50-day moving average would signal a retest towards 27,000-26,750.

The Russell 2000 lost 2% with the morning low reaching 1,499. New and upper support at 1,515-1,500 was tripped and failed to hold on the close below the 50-day moving average. A drop below the latter would reopen downside risk towards 1,490-1,475.

Technology and Energy were the weakest sectors after tanking 4.5% and 3.6%, respectively. There was no sector strength.

In economic news, the NFIB Small Business Optimism Index bounced back 1.4% to 100.2 in August, versus forecasts for a print of 98.9, and follows July’s -1.8% drop to 98.8. Gains were broadbased, with 7 of the 10 components improving. Plans to hire continued to rally, with the percentage of firms planning such rising to 21% from 18%, and a 4th-straight increase. Also improving were expectations for job creation, higher selling prices, and plans to build inventories. However, the percentage of firms expecting a better economy declined and companies seeing increased capital spending was unchanged.

Consumer Credit rose $12.3 billion in July, versus forecast for a rise of $13.4 billion, and follows the $11.4 billion rebound in June. For Q2, credit dropped -$69 billion after a $15 billion increase in Q1. On the month, nonrevolving credit paced the increase, rising $12.5 billion in July after the $13.2 billion gain in June. Revolving credit remained very weak, falling for a 5th-straight month after declining another -$300 million following the -$1.8 billion slide in June.

The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 5th time in 6 sessions with the morning high reaching $165.26. Current and lower resistance at $165-$165.50 was breached but held with more important recovery levels at $166-$166.50 and the 50-day moving average.

Near-term support is at $163-$162.50. A close below the latter would suggest additional weakness towards $161-$160.50 with the late August low at $160.64.

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Volatility Index

The S&P 500 Volatility Index ($VIX) closed higher for the 3rd time in 4 sessions with the morning peak reaching 35.93. Current and lower resistance at 35.50-36 was breached but held. A close above 38-38.50 would signal further upside risk towards 40-45 with the June 15th high at 44.44.

Support remains at 30.50-30 with Tuesday’s low tapping 30.52.

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Market Analysis

The Russell 2000 ETF (IWM) extended its losing streak to 3-straight sessions after tagging an afternoon low of $149 while failing to hold its 50-day moving average. Prior and upper support from late July at $149.50-$149 was tripped but held. A close below the latter would suggest additional pullback potential towards $145.50-$145 and the 200-day moving average. 

Lowered resistance at $152-$152.50 followed by $154.50-$155.

RSI remains in a downtrend with key support at 40 holding. A close this level would suggest additional weakness towards 35-30 with the former holding since early April. Resistance is at 45-50.

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The major indexes reacted how we expected them to on Tuesday with the $VIX holding the 30 level. I talked about the lower lows coming into play and the possibility of the $VIX testing the 40-45 area. The lower Friday/ Tuesday close was a fresh sell signal as this is showing money is moving out of the market.

Although it wasn’t the beginning of the week, lower Friday/ Monday’s have been rare in recent months as money was moving i to the market, evidence of the higher highs and record closes. September is historically a bearish month and with the oversold conditions, the pullback was imminent and one we were prepared for. Predicting how severe any pullback can become is always more trickier than forecasting a trend change.

I mentioned continued closes below 30-28 for the $VIX might entice some new money while a run towards 40-45 will shake out the weaker hands. Until that happens, I’m a tad cautious on opening new trades.

In the meantime, I watching for an entry point for Gold and Advanced Micro Devices (AMD). Advanced Micro Devices (AMD, $78.69, down $3.22) fell another 4% after tapping an all-rime high of $94.28 a week ago. The double-digit pullback looks intriguing but the chart still shows risk towards $75. A close below this level would also signal a possible retest towards $72.50-$72 and the 50-day moving average. This area also represents the prior gap higher from late July.

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If shares do test the low $70’s, and hold, the AMD November 85 calls (AMD200918C00090000, $7.10, down $2.40) will become cheaper but still $15 out-of-the-money. The October call/ put options are cheaper, but I don’t like the fact they expire on the 15th. However, the AMD October 85 calls (AMD200918C00090000, $4.15, down $2.05) could be used by momentum traders so they are both worth watching on further weakness. 

As for Gold, it too, had a parabolic run from $1,800 to $2,100 from mid-July to early August before losing steam. A more detailed chart shows yesterday’s backtest to $179 and the 50-day moving average for the Spider Gold Shares (GLD, $181.29, down $0.35) held prior support levels throughout August. There is risk to $175 on a close below $179 while a move above $183.50 signaling a possible near-term bottom.

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I have updated our current position so let’s go check the action.

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, $13.22, down $0.49)

RMBS November 13 puts (RMBS201120P00013000, $0.95, up $0.10)

Entry Price: $0.90 (8/21/2020)

Exit Target: $1.80

Return: 7%

Stop Target: None

Action: Tuesday’s low tagged $13.14 with fresh and upper support at $13.25-$13 failing to hold. A close below the latter reopens downside action towards $12.75-$12.50. Lowered resistance is at $13.50-$13.75 followed by $14 and the 200-day moving average.

I mentioned when we opened this trade, I expected shares to test $11.50-$11 and prior support from late April. If tested, these options will easily double from our purchase price.

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