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Thursday, May 28, 2020

Market Action

U.S. markets were volatile on Thursday and closed lower following another round of disappointing, but better-than-expected, economic news and escalated tensions with China over a new security law concerning Hong Kong. National Economic Council Director Larry Kudlow said the Trump administration is looking at a lot of options for a next phase coronavirus bill also helped bullish sentiment after the open. He added the administration is considering deductions for restaurants and travel and weighing a potential back-to-work bonus.

The late day weakness came into play after President Trump announced that he plans to host a news conference on Friday about China and that he was going to sign an executive order that would clamp down on social media companies for so-called political bias.

The S&P 500 slipped 0.2% to snap a 3-session winning streak following the late day pullback to 3,023. Near-term and upper support at 3,025-3,000 was cracked but held with a close below the latter and the 200-day moving average being a slightly bearish signal for a retest towards 2,975-2,950.

The Nasdaq was down 0.4% despite tagging a new monthly high of 9,523 and prior levels from early February. The fade to 9,345 afterwards breached but held current and upper support at 9,350-9,300 with a close below the 9,200 level signaling a possible near-term top.

The Dow lost 0.6% following the afternoon tumble to 25,358. Upper support at 25,500-25,250 failed to hold with a close below the latter signaling additional downside risk towards 25,000-24,750.

The Russell 2000 fell for the 1st time in 6 sessions after sinking 2.5% with the low tapping 1,387 ahead of the closing bell. Fresh and upper support at 1,400-1,385 was breached but held with a close below the latter signaling additional weakness towards 1,380-1,365.

Utilities led sector strength after zooming 3% while Healthcare and Real Estate gained 1.3% and 1.2%, respectively. Energy and Financials sank 2.8% and 1.6%, respectively, to pace sector laggards.

Global Economy

European markets settled higher as optimism over businesses returning to work and a massive stimulus plan for the European Union outweighed concerns over rising U.S./ China tensions.

France’s CAC 40 soared 1.8% and the Stoxx 600 rose 1.6%. The Belgium20 was higher by 1.5% and UK's FTSE 100 gained 1.2%. Germany's DAX 30 advanced 1.1%.

Asian markets were mixed for the 2nd-straight session after China’s parliament approved directly imposing national security legislation on Hong Kong to tackle secession, subversion, terrorism and foreign interference.

Japan’s Nikkei rallied 2.3% and Australia’s S&P/ASX 200 jumped 1.3%. China's Shanghai climbed 0.3%. Hong Kong's Hang Seng fell 0.7% and South Korea’s Kospi slipped 0.1%.

U.S. Economy

Initial Jobless Claims contracted -323,000 to 2,123,000, versus expectations of 2,100,000, after tumbling -241,000 to 2,446,000 previously. The 4-week moving average fell to 2,608,000 from 3,044,000. Continuing claims dropped -3,860,000 to 21,052,000 following the 2,364,000 jump to 24,912,000 previously.

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Q1 GDP was revised to a -5% growth rate versus the -4.8% pace registered in the Advance report. It's the third weakest number on record. Consumption for the past quarter was bumped to -6.8% after sinking -7.6% in the Advance report, and versus the 1.8% clip in Q4. Business fixed investment dropped -7.9% and has declined for 4-straight quarters. Government spending was up 0.8%. Inventories subtracted -1.43% versus Q4's -0.98% decline. Net exports added 1.32% compared to Q4's 1.51% add. The chain price index inched up 1.4% from 1.3% in the Advance report, previously, while the core rate decelerated to 1.6% from 1.8%.

Durable Goods Orders dropped another -17.2% in April, versus forecasts for a a decline of -18.5%, and follows March's -15.3% pullback. Transportation orders collapsed -47.3% from the prior -43.1% tumble. Excluding transportation, orders were down -7.4% from -1.7% in March. Nondefense capital goods orders excluding aircraft dropped -5.8% from -1.1%. Durable shipments declined -17.7 % from March's -5.5% reading. Nondefense capital goods shipments ex-aircraft fell -5.4% from -1.2%. Inventories edged up 0.2% from the prior 0.6%. The inventory-shipment ratio spiked to 2.21 after jumping to 1.82.

Pending Home Sales fell -21.8% to 69 in April, the second biggest decline on record, after plummeting -20.8% to 88.2 in March. The index was as high as 111.4 in February, the best since 111.9 in February 2017. Compared to last year, the index is at a -34.6% year-over-year contraction rate, also a record low, versus -14.5% in March.

Kansas City Fed Manufacturing Index for May checked in at -19 versus forecasts of -22.

Market Sentiment

The iShares 20+ Year Treasury Bond ETF (TLT) extended its losing streak to 3-straight sessions after testing an intraday and fresh monthly low of $161.66. Prior and upper support from late March at $162-$161.50 was breached but held. A close below the latter would be an ongoing bearish signal with additional pullback potential towards $160.50-$160.

Lowered resistance is at $162.50-$163 followed by $164.50-$165 and the 50-day moving average.

Volatility Index

The S&P 500 Volatility Index ($VIX) snapped a 3-session slide after trading to a 2nd half high of 29.89. Lower resistance at 30-30.50 held. A close above the latter would be a slightly bearish development for the market with additional upside risk towards 32-32.50.

Current support at 26-25.50.

Market Analysis

The Spiders Dow Jones Industrial Average ETF (DIA) was down for the first time in 3 sessions despite tapping an intraday high of $257.94 and a fresh monthly peak. Lower resistance from early March at $257.50-$258 was cleared but held. Continued closes above the latter would signal additional upside towards $260-$260.50 and the 200-day moving average.

The backtest to $253.89 late in the day breached but held upper support at $254-$253. A close below the latter would signal ongoing weakness towards $252.50-$250.

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RSI weakened after clearing but failing to hold lower resistance at 65-70. Continued closes above the latter would signal additional strength towards 75 and the January/ December peak. Support is at 60-55.


The Industrials Select Sector Spider (XLI) had its 2-session winning streak snapped after testing an intraday high of $69.65. New and lower resistance is at $69.50-$70 was cleared but held. A close above the latter and prior support from early March would be a bullish development with additional upside towards $71.50-$72.

Current and upper support at $68.50-$68 held on the pullback to $67.97 ahead of the closing bell. A close below the $67.50 level reopens additional downside weakness towards $66.50-$66.

RSI has turned lower after making a run at key resistance from mid-January at 70. Continued closes above this level would signal upside strength towards 75 and the peak from last November. Crucial support is at 60 with a move below this level signaling weakness towards 55-50.

All the best,

Roger Scott