Tickers discussed: SPY, QQQ, IWM, BYND, CIEN, FB, DIS
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
Trader’s Couch – Will Return
Pre-earning periods are typically bullish
- Jobs Report at 8.30am w/ potential to move market
- $BA reveals more internal emails that are disturbing
- Fingers point to Iran on downing of 737 passenger jet
Market Observations & Technical Developments
If you’re a space traveler, you need to be keenly aware of lurking event horizons. These event horizons are near black holes that can suck you in. Once you’ve crossed an event horizon you can never escape; its game over.
As explorers of the Market, we too need to be aware of event horizons. We’ve got a string of upcoming events that could be prime excuses for a market sell off. While it’s doubtful any one of these events will be the “real reason” for the sell-off, it will be a convenient narrative.
Potential Market Top Event Horizon
- Today: Jobs Report – Consensus is 160,000 headline number. Regardless of number, gap n go or gap n crap market moving potential
- January 13 :Earnings Season ramp – Added pressure on earnings because multiples have expanded
- January 15: Phase 1 Trade Deal Ceremony – Soybean and Live Hog deal baked in; Sell the news?
- January 17: January Op-Ex – Op-Ex weeks are typically bullish. Op-Ex also often act like market pivot points
- January 28-29 FOMC Rate Decision – Rates are not going anywhere, but commentary or policy shift regarding REPO liquidity injections would be a game changer. Powell always has the potential for an unintended gaff.
- February 3: Iowa Caucuses – Politics will be a destabilizing factor in all of 2020. As the Polls and primary results unfold, markets will begin to price in candidates and their potential policy positions. Markets have Trump penciled in. If something happens to knock that narrative off kilter, it would be a convenient excuse to sell.
- Geo-Politics: Iran isn’t going away.
- Round Numbers: Markets love round numbers. NASDAQ 9000 check Dow 30,000 close. Ring the Bell, pull the rug?
- AAII Sentiment: Bearish sentiment is at a 6 week high. Markets usually peak on euphoria, not pessimism
- Village Idiot Gauge: Every village idiot knows we’re over-bought and extended. When the village idiots tell you to BUY, become concerned
- FED Liquidity: If the FOMC is hell-bent on blowing a SPX 4000 monster bubble, they have the money to do it.
- Too many spectators: Tons of cash remain on the sidelines; The Black hole needs to suck this money in before it implodes.
Like a space traveler who’s fallen into an event horizon, you won’t know it until it’s too late. Therefore, Remain vigilant. The recent vol expansion is a sign things are changing. Liquidation and overnight risk remains elevated. The trap door can open at anytime for any reason or no reason. Take risk down to a level you’re comfortable knowing that if another overnight episode occurs, no lasting, catastrophic damage will happen to either your account or your trading psychology. If you’ve been waiting for a market top, remain patient and wait for a tangible, objective sell signal like a trend break or support failure. If you’ve been front running the sell signal, you’ve been losing. Trade small if at all. Bulls remain in control.
Stay tactically Bullish.
- Pre-earnings season is typically bullish; FED liquidity is bullish; Next week’s OP-ex is typically bullish
- Set tight stops depending on your time frame; trim n trail
- Keep long exposure in balance with your risk tolerance.
- Routinely ratchet up stops. Harvest profits when you can.
- Keep some dry powder ready; to take advantage of any one n done pull backs.
- Be aware of the yellow flags; ( low volume climb, ultra low vol, poor market structure loaded with gaps; bearish divergences; collectively they simply mean to be careful.
- Nothing truly bad can happen unless SPY $301 fails or QQQ $194 fails. That said, those key support levels are getting farther and farther away.
A Fresh Perspective
This morning I want to give you a fresh look at the index’s through a 2-hour time frame lens. I’ve cleaned up the charts so you can hone in on key levels. I’ve also dropped in the Fib retracement zones for reference. Pay special attention to where they are. 38.2% fib retracements are garden -variety, everyday pull backs. Note those levels. Notice how far away they are. Also make note of the Iran attack spike lows made in the over-night session. That level isn’t going anywhere and stands as a natural technical target going forward.
$SPY 2 hour
Price riding the top rail of a rising channel. Notice the well – defined $4 trading range from $324 – $320. $324 aligns well with the lower channel line. To my eye, a break of trend and lateral support at $324 favors a move to $320. Below $320 likely opens the door for a back test of the recent over-night low of $317.50. Given we’re extended and lots of bears either dead or squeezed out, things could move fast to the downside with few natural buyers below.
$QQQ 2 hour
Another well-defined channel here that active / position / swing traders can use as a reference. There is a shelf of both lateral and uptrend support at $216. The dual levels of support at $216 should hold on a back test, but if it doesn’t a move to the overnight spike low of $211.41 A staggering factoid that many people fail to realize is that a 61.8% retracement or backtest of the breakout at $194 is NORMAL and the chart would remain BULLISH. If price flashed $194 traders would be jumping out windows. Just keep all that in perspective. A 25 point pull back in QQQ would still keep the chart bullish!!
$IWM 2 hour
Chart has a different look and feel compared to QQQ or SPY. Price is consolidating in a $3 range between $164 and $167. While traders are certainly welcome to try and trade the $3 range, the big move will be on either a break above or below the range. Above $167 targets the prior 2018 high around $172. A break below $163.8 puts price in a $1.50 gap. If $162.50 breaks, here comes the spike low at $161.64. A back-test of the breakout at $159.50 has nice symmetry with the 32.8 fib retracement level. A break below $159 sends it way down.
Trade Set ups and Charts
So far so good. Price moved into the gap AH last night. From a technical perspective, we dont want to see price move back below $89 which would look like a failed breakout. Aside from that risk, looking for $100+ gap fill.
Generational trade location? Price is just above its all-time high made in early 2018. Look at the beautiful cup and handle formed over the past 18months. The measured move target is 67% higher from here.
IMO you will not see a cleaner or tighter set up for a long term long entry. Get long against the prior all-time high with a stop below. Great trade location that you may be able to trade around for the next year if the bull continues. Dont think $300 cant happen. You’ve got at most $5 of risk vs. a massive upside opportunity. Regardless if you want to trade around a core long, buy LEAPS, or park common stock in an IRA, I love this set up.
We’ve seen these flags and pennants play out before. Look at $LK if you need a reminder. Alarm the flag and be ready to go when / if it breaks above. As always, alarm the low side as well just in case bull hopes n dreams fall apart.
This is gonna go one of two ways and whatever way it breaks I think you will see a relatively quick $20 move. Set your alarms and be ready. All time highs above, support a long way below.
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