Daily Profit Compass February 28

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Tickers discussed: SPY QQQ IWM Trading strategies and key levels

The Daily Profit Compass  provides the stock market analysis for the day. Key levels and trading locations for the indexes are provided, along with trading plans and timely commentary to keep you on the right side of the trade.

Apocalypse Now – The Horror

Many traders probably feel like Marlon Brando did on his Apocalypse Now death bed as the market wipes out multi-month gains in hours.

What we know

  • Downside Momentum is slicing through downside technical targets like they were not even there
  • The momentum fed selling is swamping garden variety oversold conditions
  • Many key sectors, including SPY itself, are below key technical levels and are now “on the wrong side” of the chart meaning they’ve flipped from bullish to bearish on a technical basis.
    • An adjustment to trader psychology and tactics will be necessary in order to be successful in the weeks and likely months ahead.
  • Pro-Money still seems to be off-sides.
    • In December 2018 the NAAIM survey had the median equity exposure at 18%; we are still currently at 74%.  Bottoms don’t happen with 74% exposure.
  • Historic Volatility spike makes option trading dangerous and care must be taken
  • Use key technical levels as reference points and markers, but dont blindly assume “this is overdone” or “support will hold here “.
  • This is a candle by candle market; treat it with respect and keep exposure light unless you know what you are doing.

Corona Specific

  • This is a psychological scare as much as it is a health scare
  • Any FED / fiscal policy response wont make people better but may be a soothing balm for markets, but no guarantees
  • Further cascade risk is elevated; In Q4 2018 we saw what happens when credit markets lock up. This has the potential to do the same.
  • Be ready for the Second Wave;  We and the markets have not even seen any economic numbers reflective of Corona’s impact. The coming “disaster prints” may usher in another wave of selling.
  • Normal people just saw 15% whacked off their 401K equity gains.  This will probably filter through to consumer behavior.
  • All bets are off if Corona meaningfully spreads across the US
  • Corona could impact the elections if everything falls apart over the Spring and Summer

Strategy and Key Thoughts

  • In the premarket, we are well off the lows but it means nothing other than a pre-market bounce
  • Mark the premarket low ahead of the open and use it as a reference point. Pre-market highs and lows are often re-tagged in the regular trading session.
  • Think about it. After experiencing this week, who is motivated to get long into another “Corona Weekend” ?
  • Bad selling usually does not end on a Friday. There is the potential for a true panic flush into the weekend
  • If we have truly epic selling today, there should be carry over selling on Monday. This would set up for an intra-day red to green reversal on either Monday or Tuesday. No absolutes, but a scenario to be aware of
  • Lots of technical damage on charts as many trend lines break. These will be hard to repair short term

The Oscillators are maxed out

The oversold readings eclipse the readings last seen in December 2018.  These “rubber bands” are fully stretched. They will either snap back in dramatic fashion, or break resulting in a true waterfall worse than what we’ve already seen . Dont fight NYMO is the rule, meaning dont carry a lot of overnight short exposure when $NYMO is signalling oversold.   

 

New Highs – New Lows

Quickly approaching levels where you’d expect to see a bounce. Keep in mind that “expect to bounce ” is not a trading plan.

Option Extreme-O-Meter

Extreme call buying ( bars above the red line ) has given way to extreme put buying ( bars below the green line ) While we have not yet seen the spike down to the levels seen in Dec 2018, we are at the levels seen at the June and October lows.

“Searching for a bottom” morphs into “waiting for one”

We’ve been saying for a while that Corona was going to get worse before it got better and as recently as last week were beating the drum to keep long exposure on a short least with tight stops. That’s hardly a victory lap but does accurately reflect our mindset.

Aside from being very well positioned for the initial leg down, I was fooled into letting my short positions go too soon, then found it difficult to regain good short positioning mid week.

Then, as you know, tried to go long, and got clipped. Thank god I did not stay married to that, respected stops and got out with scrapes and bruises rather than a hospital stay.

So I am no longer looking for a bottom as much as I am waiting for a durable bottom to form. Until then, I am in 100% tactical trading mode. If I see something compelling I may hold it over night, but it has to be special or the position will be ultra small and simply a place-holder.

Index Chart Review

SPY Weekly

Price lost the 40ema and is currently below the original breakout level of $300 – $301; both very bearish technical events. Additionally the Weekly PPO has put in a bear cross. Very significant on a weekly chart. THe weekly chart wont be official until the market closes today. A recapture of $301 would count as an epic save. We will have to wait and see. $301 is now resistance.  The next major level of support is $285.

 

SPY Daily

There is a small gap just above the next support at $290. I can see that gap getting filled today followed by a small reaction. If $290 does not hold, here comes $285. Broken support at $300/$301 and the 200ema are now Over head resistance points.

 

SPY 60 min

Price has respected the 60m downtrend line the whole way. Yesterday I tried to get cute and go long below it and was rejected.  Wait for a breakout and 60m closing candle above the downtrend line for a tactical long entry.

QQQ Weekly

Technically speaking QQQ is in better shape than SPY. Price still above the 40week ema and breakout level at $194. Those are your key reference levels for QQQ.  Above keeps bull hope alive, below and bears become even more emboldened.

QQQ Daily 

The 200ema at $201.50 is a key level to hold for bulls. Below and the original breakout level at $194 comes into play. The comparable level on SPY already broke yesterday. If QQQ can hold $194 then technically speaking the bulls remain alive.

 

QQQ 60min chart

The fib levels are meaningless unless and until a  bottom is hammered out. Use the 60min downtrend line as a reference. A breakout above would be a signal that a tradable bounce is forming. Taking long positions below it carry risk of rejection.

IWM Weekly Chart

Price miles below the 40week ema. Looks destined to find $144.

IWM Daily Chart

A break below $146 opens the door to $144 then $142. Whole different set up that SPY / QQQ as price is now back in a wide trading range.  If price breaks below the range, then the Dec 2018 lows become a real possibility.

 

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