Daily Profit Compass January 16

Tickers discussed:  SPY, QQQ, IWM, ITB XHB XLF WDC

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

Earnings Snapshot

Pre-earning periods are typically bullish

Headlines

  • US- China sign Phase 1 Trade Deal
  • Futures suggest fresh highs
  • Earnings season continues to ramp
  • Articles of Impeachment delivered to the Senate; Trial to begin shortly
  • Putin begins to re-arrange the chess pieces so he can remain in power beyond 2024 when his term expires
  • Home construction ETF’s break out

Market Observations & Technical Developments

Done Deal

So after 2 years of fake tweets, false starts, rips n dips, the US and China finally sign the Phase 1 trade deal. It’s progress and it checks off another item on the Event Horizon that could potentially mark at least a short-term market top.  Yesterday saw choppy and sloppy price action both before and after the deal was signed where our sell-signal trip wire levels on SPY and QQQ were tested a couple times. Futures now suggest all that is behind us. We’ll need to see how trading goes when the big boys step on the field at 9.30am to confirm that.  Interesting that yesterday that Utilities led and both gold and treasuries posted decent advances. Very much a defensively led market. Additionally offensive sectors like Semi’s and financials were weak.  Next up on the Event Horizon is January Options expiration tomorrow. As we’ve discussed Op-ex often acts as market pivot points so we will see if next week brings any change of tone to the market.

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
  • Week of January 20:  Impeachment Trial to begin
  • 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 –  Bernie surges in Iowa; 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.   SPY 3300              Ring the Bell, pull the rug?

Bullish Counter-balances

  • 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.

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 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 sell signal confirmation. If you’ve been front running the sell signal, you’ve been losing. Trade small if at all. Bulls remain in control.

Strategy Update:   The daily time frame charts are still bullish; No major levels have been violated.  If you’ve got long positions, simply respect your stops and don’t be married to anything. If we get a decent pull back, you can re-buy at lower levels.

 Stay tactically Bullish.

  • Pre-earnings season is typically bullish; FED liquidity is bullish; Next week’s OP-ex is typically bullish
  • Clear lines to shoot against long are in place:  SPY $324  $QQQ $216  IWM $167 ( Daily timeframe levels; 60m sell signals are at higher levels )
  • Set tight stops depending on your time frame; trim n trail
  • Keep long exposure in balance with your risk tolerance.
  • 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.

$SPY Daily

Consider raising stops to $324.  Below $324 and a sell-signal on the daily would be triggered.  Below that level price will face a series of support tests starting at the rising 20ema at $322 and going lower from there. You are certainly welcome to hold through any corrective period but I dont think there is a reason to do that. You can buy back positions at lower levels after the corrective action is over.

Swing Traders. Keep $327 in focus. Above ok for bulls, below more iffy with a move to $325.50 favored. 

$SPY 60min chart

Bear Set up:  Prices below $327 would be a place to try a short, but be careful because bear set ups are failing. A move below $327 favor a move to $325.50

Bull Set up:

Stay long above $327. Its as simple as that. If prices break below look for support at $325.50 and then $324.50.

 

$QQQ Daily

Swing Traders  Although a sell signal would be initiated on the 60m chart at $219.70, on the daily chart, the bottom of the rising trend channel is most important for those trading the daily timeframe. That level is currently $216. This also aligns well with a 20ema test. Swing traders should consider raising stops to $215.50 if you’ve been long from lower levels.

 

QQQ 60 min

Bear Set up:  Breaks of $219.75 would trigger a 60m sell signal with a fast move to $218 favored.  Keep tight stops. The trend is up and bulls are in control.

Bull Set up: Stay long against $219.70 and look for fresh highs.

 

$IWM  Daily 

As long as $167 holds, bulls are in control and the door remains open for a move to the 2018 highs just above $170.

 

$IWM 60 min

Bear Set up: No clear set up to short other than a break of $163.80 into an unfilled gap. Price action between $164 and $167 has been very choppy and would likely prove frustrating.  If however both SPY and QQQ break down below their key support levels, then knock yourself out with an IWM short.

Bull Set up: 

Stay long against $167 and look for $170.  Below $167 gets more iffy. Below $166 and it would look like a false break out, especially if coupled with SPY / QQQ headin lower.

 Trade Set ups and Charts

$XHB / $ITB 

These were highlighted the other day with levels to alarm. Both broke out yesterday and have similar looks.  XHB contains $HD and $LOW while $ITB is strictly home builders.  I like both long against the breakout.  Just a personal preference which one you like. No need to do both.

 

$XLF

Financials were soggy yesterday. Price is up against resistance. Alarm $31 for a breakout and signal to get long. Below $30.50 would get more iffy for bulls sitting in long positions. Below $30.50 would favor more of a pull back

$WDC

Semi’s have hit a soft patch.  $WDC’s gap down yesterday caught my eye. If you look at the chart several things stand out. RSI dropping from overbought; PPO bear cross initiated at a very high level; Price is at the high end of its range; and there was a gap down in price following a doji candle at the top of a long run.  Set an alarm at $66. On a break below, take it short and look for $63 as a first target. Below $63, here comes $58

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