MomentumOptions.com Pre-Market Update for 5/3/2021

Market Pulls Back on Final Trading Day for April

8:00am (EST)

The stock market struggled on Friday and the last trading day of April as profit taking going into the weekend and month end weighed on sentiment. However, the four major indexes posted strong gains for the month with the S&P 500 leading the way after jumping 5.2% while the Nasdaq rose 5%.

The Dow was up 2.5% and the Russell 2000 added 2.1% in April. Despite the good news, one concern remains volatility which edged higher for the second-straight session but held a key level of resistance. More on this in my closing comments.

The Russell 2000 was the weakest link after testing a low of 2,259 while closing at 2,266 (-1.3%). Prior and upper support at 2,275-2,250 was breached and failed to hold. A close below the latter and the 50-day moving average would indicate additional weakness towards 2,225-2,200. Below is a chart of the IWM.

The Nasdaq tapped an intraday low of 13,941 while ending at 13,962 (-0.9%). Near-term and upper support at 14,000-13,850 failed to hold. A move below the latter would likely lead to a retest towards 13,750-13,600.

The S&P 500 settled at 4,181 (-0.7%) after trading to an afternoon low of 4,174. Near-term and upper support at 4,175-4,150 was tripped and failed to hold. A drop below the latter would signal a further fade towards 4,125-4,100.

The Dow finished at 33,874 (-0.5%) with the first half low reaching 33,784. Current and upper support at 34,000-33,750 was breached and failed to hold. A close below the latter would suggest weakness towards 33,250-33,000.

Market Movers

Shares of Twitter (TWTR) tumbled 15% after the company posted solid first-quarter results but provided a lower than expected second-quarter revenue outlook. Twitter did say, however, average monetizable daily active users grew to 199 million for the quarter, up from 166 million in the same period a year ago.

Volatility Index

The iPath S&P Vix Short-Term Futures (NYSE: VIX) was up for the second-straight session with the intraday high hitting 19.25. Near-term and lower resistance at 19-19.50 was breached but held. A close above the latter would suggest strength towards 20-20.50 and the 50-day moving average.

Support is at 17-16.50 followed by 16-15.50.

Market Analysis

The Invesco QQQ Trust (Nasdaq: QQQ) was down for the third time in four sessions after touching a low of $337.99. Current and upper support at $338-$337.50 was breached but held. A close below the latter level would indicate additional weakness towards $335-$334.50.

Resistance is at $340-$340.50 with last week’s all-time peak at $342.80.

RSI (relative strength indicator) is back in a downtrend with upper support at 55-50 holding. A close below the latter would signal additional weakness towards 45-40 and levels from early March. Resistance is at 60.

Sector

The iShares PHLX Semiconductor ETF (Nasdaq: SOXX) was also lower for the third time in four sessions following the intraday pullback to $421.01. Near-term and upper support at $421.50-$421 and the 50-day moving average were breached but levels that held. A close below the latter would signal a further slide towards the $417-$416.50 area.

Resistance is at $425.50-$426 followed by $430-$430.50.

RSI is in a downtrend with upper support at 45-40 holding. A close below the latter would suggest additional weakness towards 35 and the early March low. Resistance is at 50-55.

Market Outlook

It remains to be seen if Wall Street will follow the old adage to “sell in May and go away”. From the mid-1960’s to the mid-1980’s, the S&P fell 15 out of 20 Mays. However, from the mid-1980’s thru 1997, the S&P 500 was up 13-straight Mays. Moreover, the past two decades has been more bullish than bearish.

One factor that could weigh on a bullish May is the fact tax season was moved from April into this month and typically can be a bearish catalyst. With that said, instead of adages, it is more reliable to use technical analysis when trying to figure out the bigger picture.

The most important, in my opinion, will be volatility and the Monday/ Friday closes. To start with, the last time the VIX traded above the 20 level was the last day in March, or 21 trading days. The April peak reached 19.90 and it has been 23 trading days since the VIX officially closed above the 20 level. If the index clears and holds the 50-day moving average this week (currently at 20.30), there is a good chance the market could see continued weakness, with upside risk towards 23.50-24 and the 200-day moving average.

This would provide a possible opportunity to use put options over the next few weeks to play lower lows in certain stocks and the major indexes. If the VIX can recover the 16.50 level, then a return to record highs could be back in the mix.

As far as Monday/ Friday closes, the last time the S&P 500 closed lower on both days was back in late February. Typically, when you see back-to-back lower closes on these days, it signals money is moving out of the market. Up Friday and Monday’s tend to signal money is still flowing into the market with mixed closes being neutral.

With all of this being said, if we get a lower close today, and a VIX close above 20, we should have some new trades to get into. However, a higher close for the major indexes along with a lower VIX might provide an opportunity to possible get long with call options. We also need to be careful with possible trading ranges developing.

Specifically, a drop below 33,500 on the Dow and a close below 4,100 on the S&P 500 would be clear signals a retest towards the 50-day moving averages is forthcoming. As for the Nasdaq, a move below 13,750 would signal the same outcome.

My Watch List is loaded with both bullish and bearish trades so we just need to be a tad patient to confirm this week’s action before getting into new positions.

Momentum Options Play List

Closed Momentum Options Trades for 2021: 17-5 (77%). 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.

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