Tickers discussed: SPY, QQQ, IWM, PRU COST GTT BA LYFT
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 – Be who you are
What is good advice for living also happens to be good advice for trading. Adapt your trading to fit in and around who you are; don’t try to manipulate who you are around a trading process or style. Success comes when your trading style fits your personality hand in glove. It will feel right; there won’t be any mental friction or angst. If the way you are trading does not feel harmonious to the essential you, then it is likely to fail. The real you will always win out. For instance, if you are a “TYPE B” person you will likely feel out of place trying to day trade. Conversely if you are a TYPE A person, trading the weekly time frame may make your skin crawl while you wait for something to move. Adapt / Tweak trading styles to suit your needs. When you and your trading style harmoniously mesh together the magic happens.
- $BA breaks down and shock waves ripple through
- Conona Virus scare takes its toll
- Impeachment and Davos roll on
Market Observations & Technical Developments
Corona Virus Threat
The emerging corona virus threat began to take a toll on the usual suspects. Internet travel, China-based stocks, Airlines, Cruise lines, Macau gaming, Hotels all saw moderate to heavy declines. Airlines levered to the $BA 737 MAX got a double whammy as news flow revealed the MAX would likely not be certified to fly until Mid-2020.
Depending on how quickly the Virus can be contained, I would think its implications may cast a pall over the above sectors until more information is known. I’d expect it to get worse before it gets better as these things tend to grow geometrically from the epicenter. They will get it under control over time….no need to go doomsday on this. I dont think you need to be a hero on these knocked down names by going in to try and catch the bottom. What you can do is set up BRACKET trades by alarming the low and high side of the gap down and follow price on a move outside the range. Here are some tickers to look at for potential BRACKET trades: HTHT, MLCO, WYNN, LVS, YUMC, MGM, WB, SINA, AAL, LUV, TCOM, VAC, MAR, HLT, H.
Gold Miners and Treasuries perk up
$GDX and $TLT are really looking productive. $TLT is actually about to breakout. A move above $140 gives it running room. Neither TLT nor the Precious metals complex are buying the equity rally as they are holding their bids. Even if only as a hedge against your long book, I can think of worse things to do than initiate some starter positions in TLT and GDX. Look out to March if you’re going to use options. Give the trades time to work. If equities fade, you should see big green bars on both.
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?
- 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.
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.
Bear Set up: A break of the rising trend line near $331 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 $331
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.
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.
Junk day for IWM being down almost 1%. THe break above $170 last week now looks like a failed breakout. As you can see, price filled the first gap below. Now a move below $167 turns the chart more bearish and would favor a move to test the 20ema at $166. THe next leg lower below $166 would be the top of the gap at 163.80. The first step to turning the chart more constructive would be for price to reclaim $168.50
Bear Set up: A break of $167 opens door to $166, then 163.80.
Bull Set up: $167.50 is gap support. Not a bad place to try a long in a rising market. Set a stop just below. If price takes out $168.50, it would be a place to add to the position.
Trade Set ups and Charts
$PRU We got the pull back into support we were looking for. Traders can take it long against $95 and look for $99 as the gap fill target.
$LYFT I like LYFT long on a break above $48 with a first target at $52. I am in Feb 7 $48C with a small position.
$GTT I remain long in the name with Feb 15 Calls. Price building out a nice bull flag. Now all we need is a pop and run to the 200ema. Checking open interest, the big bulls are still sitting in Feb 15 and Feb 25C strikes.
$COST Big impulsive breakout to new highs. Buy any backtest of $305. Aggressive traders can buy it now with a stop half way up the breakout candle
$BA If you set your alarm on this one after the chart book review on Monday, you had a chance to grab it. It was quick but the trade is there. I am short and looking for $305 or lower.
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