Daily Profit Compass January 21

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Tickers discussed:  SPY, QQQ, IWM, PRU PSX

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 Need to Control Outcomes

Our insatiable need to want to control outcomes not only spoils our enjoyment in “real life”, but it also spoils our “trading life”.  Its that feeling you get when you’ve done all the homework, studied the chart endlessly, and yet start losing the second you put on the trade.  But if you change your mindset to “embrace whatever happens” you begin to see events in a new light. A losing trade becomes an opportunity to test your process. A chance to prove to yourself that you really can respect a stop. A chance for you to fully embrace the randomness of markets and to understand your trade is no different than releasing a rat in a maze.  Embrace whatever happens.

Earnings Snapshot

Watch NFLX after the bell for a potential tone setting print for big-cap tech.

Headlines

  • 119 Billionaires meet in Davos to discuss the fate of the world; Trump said to make an appearance
  • Impeachment Trial begins in the Senate
  • China at the epicenter of a Corona virus outbreak flashes risk off for markets

Market Observations & Technical Developments

SARs Part 2?

We just can’t seem to shake China. No sooner than the ink drying on the trade deal, China is again front and center. Like SARs before it, China finds itself at the epicenter of a contagious Corona Virus.  Markets across Asia flashed risk -off  as fears spread. That risk-off sentiment has nominally spread to US Markets with futures off about 0.3%.  Compare that to Hong Kong which was off 3%.

While we sit at all-times highs, remember all the talking points we’ve been going over for weeks regarding potential market turning events. This is a perfect example of a black swan nobody saw coming.  Not calling a top or saying this is the event that will turn the market, just saying none of us were thinking the conona virus would be something to cause a sell off.  Keep that in mind going forward. You wont see it coming.

Weak Hands

I suspect there are a great number of weak-handed longs out there just itching to close out. Just a suspicion. I think whenever the event hits, there will be a stampede to the exits. This suspicion is nothing to trade on; just something to be mindful of.  For our group, I recommend simply to know your own exit points for the things you hold. Then respect those stops no matter if they all come in 15 minutes of one another or spaced out in time.  Keep ratcheting up stops and harvest profits along the way for as long as the market’s good graces are moving in our direction.

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;  World Economic Forum in Davos all week
  • 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.

  • RAISE stops to first support on the indexes.
  • Pre-earnings season is typically bullish; FED liquidity is bullish;
  • Op-Ex can often be pivot points for the market. Next week will be really important. If you are loaded to the gills long, make sure you at lease roll higher and / or lighten positioning.
  • 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 $329.50 unless you are ok with price filling gap and dropping to $328 – $324 range as a first move lower.  

Swing Traders on the daily time frame should keep the trendline on the low side of the rising channel in focus. Use any violation / break below that trend line as your hard, no-excuses exit point. A break below would trigger a sell signal on the daily time frame and favor lower prices.  

 $SPY 60min chart

Bear Set up:  A break of the rising trend line would trigger a short entry and favor a move to the top of the gap at  $329.45. A move below $329.45  favors a move to fill the gap to $328.19.

Bull Set up: Stay long above $329.45

$QQQ Daily

Swing Traders  Price is at the top of the channel. Typically you’d expect price to tag the top rail and react, but this market is so strong. it may simply blow through.  Use the rising 8ema as a functional trailing stop. If price falls below, a move to at least the low side of the channel would be favored.

 

QQQ 60 min

Bear Set up:  Use a break of the channel as a short entry around $222.50. A move to $221 would be favored. Any successive break below the marked supports would favor a move lower to the next level below.

Bull Set up: Stay long against the low side of the channel. Any break below the channel should trigger to exit your long.

$IWM  Daily 

Stay long against $168.43 unless you’re fine with a pull back to $167. Below $167 favors even lower prices. Price needs to punch through $170. Above $170 is an objective place to either add or establish a new long position.

 

$IWM 60 min

Bear Set up: $168.43 is the gap opening for a potential gap fill to $167. 37

Bull Set up: 

Stay long against $168.43 and look for $170 to be taken out with conviction..

 Trade Set ups and Charts

$PRU is making a move towards filling its gap. Worth watching for a potential back test of $95.50. I would be a buyer there. Aggressive traders could go long at present levels but the entry is less objective.

$PSX  2 weeks ago, this name was a short idea at around $110.  The target was 103 and has been achieved. If you are in the trade, I would close it and take profits, then watch for a break of support at 102.50. If you get that break, re-enter and look for $98 as a first target.  A nice trade that worked well.

 

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