Tickers discussed: SPY, QQQ, IWM, BYND, OKTA, ICE, XHB, BIG
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 – The World’s most enduring feedback Mechanism
“The game taught me the game and did not spare the rod while doing so” Jesse Livermore
We tell the small child not to touch the hot cook top. They do so anyways. We tell our teens the pitfalls of drugs and alcohol. Most dabble regardless, some worse. It’s not much different for aspiring traders. Market Wizards, experienced traders, and mentors offer hard fought lessons and universal trading truths only to see them for the most part ignored. You see, most people will only learn a lesson after experiencing personal pain. Pain is the universal feedback mechanism. You can tell a new trader not to add to losers, but most will do it until they take a body blow worth remembering. It is a very interesting thing that many work so hard to avoid pain, but then purposely do the things that bring it upon themselves. Do yourself a favor. Do the best you can to learn from the masters. Take their word for it. The essence of trading doesn’t change. The path has been lit by others before you. If you follow it, you’ll find it much easier.
Earnings begin ramping this week. Because valuations have increased significantly, I expect misses to see out-sized punishment. It will be interesting to see if beats get rewarded. Guidance will also have a big bearing on post-earnings results. Be very aware of your holdings and their earnings dates.
- Chinese delegation ( minus Xi ) arrive to sign Phase 1 trade deal
- US drops Currency Manipulator designation for China
- Big Banks begin to report earnings
- VISA buys Plaid for $5.3B
- Walmart expands in-store robot army to scan shelves
Market Observations & Technical Developments
Operating inside the Bubble
Unless you’ve taken my advice to largely unplug yourself from financial media, you’ve been hearing lots “bubble talk”. Some advise going to cash because it’s “getting crazy” and “this isn’t sustainable”. Others twist themselves into pretzels trying to justify $AAPL doubling in a year. Fortunately we as chart technicians and traders don’t particularly need to pick a side or waste time getting into debates. We do however need to have a strategy to operate within the bubble framework.
As technicians we see the moves on our charts. We see price in relation to trend lines and moving averages. A universal law of rug pulls is that in order for a stock to lose a lot , it first has to lose a little. To go down, price has to lose the 8ema, break trend lines, and key support levels before they get cut by a third or by half. So within the bubble, hyper-vigilance watching our charts is paramount. The second law of bubble rug pulls is velocity. Stocks in bubbles that pop move fast. We saw that last week with 50 handle over night moves. People were bailed out with those big overnight dips being bought. Next time it may keep going. Addressing velocity requires a reduction of risk. Trading equity is the lifeblood of a trader so you can’t play like a riverboat gambler. Take down risk to a level where if we are off 100 handles on SPX that you’ll take it in stride. A point at which you’ll feel a sting but not a knockout blow. Lastly, the third law of bubbles is that you’ll never know how big the bubble will get nor will you see the end coming. The end will come out of the blue and quite possibly for no other “reason” than there are no more people left to buy. That is why the first two laws of bubbles are so important. How will you feel if you go to cash and we go to SPX 4200 by election day? How will you feel if you go “all in” and we lose 1200 DOW points this afternoon? Both are possible. Participate to the upside, protect the downside.
Potential Market Top Event Horizon
- January 13 :Earnings Season ramp – Added pressure on earnings because multiples have expanded; Misses will be brutally punished ( $FIVE for example )
- January 15: Phase 1 Trade Deal Ceremony – How come no one knows what is in this deal; Where is Xi?
- January 17: January Op-Ex – Op-Ex weeks are typically bullish. Op-Ex also often act like market pivot points
- Impeachment headlines coming
- January 28-29 FOMC Rate Decision – Rates stable; 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.
- 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. Lots and lots of bears; When your UBER driver give you a stock tip, be afraid
- 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.
Stay tactically Bullish.
- Pre-earnings season is typically bullish; FED liquidity is bullish; 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.
- Uncountable yellow flags ; low volume climb, volatility crush, poor market structure below loaded with gaps; bearish divergences all over the place; STAY VIGILENT
- A 10% pull back to back test the break out and the charts will remain BULLISH; that said, people will be jumping out of windows on a 10% pullback
NASDAQ – SPX Ratio – One place to look for trouble
From the chart below it is pretty clear. When the NASDAQ begins to under perform SPX, trouble soon follows. This chart is not granular enough to save you from an overnight plunge, but if relative performance rolls over in a controlled manner, it will get you out before your portfolio takes a huge draw down
$SPY 2 hour
Price riding the top rail of a rising channel. At $328 SPY completed it’s measured move target after emerging from a $4 wide trading range.
To my eye $324 is the first key level. If price stays above and within the channel then bulls remain in control. However, a break below $324 opens the door to $320. When / if $320 breaks, the snowball really begins.
Short term, active traders can jump down to the 60min chart for more granularity, but for others this 2 hr chart provides a clean look at the key levels and keep you out of big trouble. Final note on this. $324 would be an objective place to try a long. I expect dipsters will be there at least for a tradeable bounce. Below $324 is an objective short with a stop just above.
$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 $218. The dual levels of support at $218 should hold on a back test, but if it doesn’t a move to $216 would be favored. Write those 2 levels down on a sticky note. Although there are some minor support levels in-between, a break below $216 brings the overnight spike low of $211.41 into visibility. 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 to $162.50. 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 has moved into a big volume / price void making it possible for price to move quickly. Although insane to contemplate, a move to $140 is possible with little lateral resistance to contend with. A pull back to back test the breakout at $102.50ish is certainly possible as well. Earnings is not until week of January 27 so the pre-earnings run up still has 10 days to play out. LONG
Emerging breakout. Big cup n handle projects a moonshot target if it plays out. A long against $130 is a tight set up if you’re motivated to try a long. Earnings not till after Feb op-ex. Target the February chain for a swing long.
Tight set up for a long on a breakout above $95. Earnings Feb 6
Home Builder / renovation ETF. Emerging breakout from a long consolidation. The measured move target is $1.50 higher but could easily keep going after the long duration rest. Nice thing about ETF is no single stock risk and you can hold through earnings cycle. THis ETF includes $HD and $LOW. For a purer lokk at just homebuilders, $ITB is the way to go. Similar chart also breaking out.
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