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

VIX Spikes Above 20

8:00am (EST)

The stock market was mostly lower on Tuesday following comments from Treasury Secretary Janet Yellen who said interest rates might need to rise in order to prevent an economic overheating during the recovery out of the pandemic. Her comments caught Wall Street off-guard as rising rates would weigh on valuations of growth companies, while an easing of monetary policy could stall the market’s recent run towards record highs.

Tech underperformed after posting its worst day in over a month while the blue-chips rebounded to close slightly higher. Meanwhile, volatility spiked to its highest level since late March before holding a key level of resistance.

The Nasdaq tapped an intraday low of 13,485 while ending at 13,633 (-1.9%). Prior and upper support from early March at 13,500-13,350 and the 50-day moving average were breached but levels that held. A move below the latter would likely lead to additional weakness towards 13,250-13,100.

The Russell 2000 tested an opening low of 2,225 while closing at 2,248 (-1.3%). Mid-April and upper support at 2,250-2,225 was tripped and failed to hold. A close below the latter and the 50-day moving average would indicate additional weakness towards 2,200-2,175. Below is a chart of the IWM.

The S&P 500 settled at 4,164 (-0.7%) after trading a morning low of 4,128. Prior and upper support at 4,150-4,125 was breached but held. A drop below the latter would signal a further slide towards 4,100-4,075.

The Dow remains in a 12-session trading range after finishing at 34,133 (+0.1%) with the first half low reaching 33,765. Current and upper support at 34,000-33,750 was breached but held. A close below the latter would suggest weakness towards 33,250-33,000.

Market Movers

SmileDirectClub (SDC) sank 19% after reporting a cyberattack that happened last month which disrupted operations and hurt sales for the quarter. The company reported better-than-expected first quarter results, but provided weaker guidance for the current quarter.

Volatility Index

The Volatility Index (VIX) was up for the third time in four sessions after spiking to a high of 21.85. Prior and lower resistance from late March at 21.50-22 was breached but held. A close below the latter would signal upside risk towards 23.50-24 and the 200-day moving average.

Support is at 19-18.50 followed by 17.50-17.

Market Analysis

The Spider Small-Cap 600 ETF (NYSE: SLY) was down for the second time in three sessions following the intraday pullback to $95.10. Near-term and upper support at $95.50-$95 was breached but held. A close below the latter and the 50-day moving average would suggest additional weakness towards $93-$92.50.

Resistance is at $97-$97.50 followed by $99.50-$100 with the all-time peak from mid-March at $99.71.

RSI (relative strength indicator) is back in a slight downtrend with upper support at 55-50 failing to hold. A move below the latter would suggest additional downside risk towards 45-40. Resistance is at 60.

Sector

The Energy Select Sector SPDR Fund (NYSE: XLE) was up for the second-straight session and seventh of the past eight with the intraday high tapping $51.23. Current and lower resistance at $51-$51.50 was cleared but failed to hold. A close above the latter would suggest another run towards $53.50-$54

Support is at $50-$49.50 and the 50-day moving average.

RSI has flatlined with key resistance at 60 holding. A close below this level would indicate additional strength towards 65-70. Support is at 55-50.

Market Outlook

I mentioned on Monday the VIX needed to hold the 20 level and its 50-day moving average to keep the near-term bullish thesis intact. These levels were stretched on Tuesday but held.

I also listed key support levels that needed to hold this week for the Dow (33,500), S&P 500 (4,100), and Nasdaq (13,750) to avoid a deeper selloff. The latter failed to hold and represents a slightly bearish development heading into today’s action.

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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Utilities Select Sector SPDR Fund (XLU, $66.46, down $0.25)

XLU June 69 calls (XLU210618C00069000, $0.50, down $0.05)

Entry Price: $0.65 (5/3/2021)
Exit Target: $1.30
Return: -22%
Stop Target: None

Action: Shares tapped an intraday low of $66.01 with upper support at $66.50-$66 failing to hold. Resistance is at $67-$67.50.