Tickers discussed: SPY, QQQ, IWM, CIEN TLRY MAR COST 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 – Accept that you don’t know
The quote could have easily been from Trading Coach and Author, Mark Douglas. Once we capitulate to the idea of untangling a massive wad of yarn that is the market, we free ourselves up to focus on price and to let it lead us to the destination. Embracing the randomness of markets and training ourselves to think in terms of probabilities is at the core of Douglas’ teachings. As a reminder, I have one of Mark Douglass’ books on pdf that is there for the asking.
- Corona Virus induced travel ban in China balloons to 40 million people ( Bloomberg )
- EU – China and 15 other countries create a WTO – like pact to resolve trade disputes. Note the USA isnt part of it.
- An effort to crack down on e-commerce fakes, led by Peter Navarro, begins
- A big earnings beat by $INTC ripples through semi’s; the $SMH jumps
Market Observations & Technical Developments
The market continues to show amazing resiliency as the primary uptrend either steam rolls or ignores bad news. The last 2-3 months have been a great example of how “thinking too much” or “asking why” has either gotten you into trouble ( trying to call tops ) or held you back ( sitting in cash waiting to buy the dip ). Jesse Livermore’s advice, that I keep repeating, of following a “what the dickens does it matter?” approach has kept you in the trend. It is also a reminder that the market is not always ( maybe ever ) rational. It is driven by both emotion and complex inner workings so complicated we’d never figure out what’s going on. So whether it is a grand conspiracy, FED-induced super-bubble, irrational exuberance, or as simple as an improving macro landscape, the primary uptrend is super-strong. Don’t fight it. Be like a leaf floating on a swift river….let it take you to its destination.
Net New Highs are expanding
Martin Pring, long-time TA veteran, posted this chart. It shows in histogram the net new highs for various market segments. The green bars tally the new highs while the red bars tally new lows. While it’s interesting to look at all of 2019, focus if you will on the last 3 months. Notice the green bars growing bigger and bigger as new highs expand while the red bars almost disappear. The NASDAQ especially has had a massive expansion in new highs. It’s probably obvious, but I will say it anyway, this is strong bull market behavior.
Wall of Worry
- 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.
- Big Cap tech / FAAMG All report over next couple of weeks; These names dominate the cap-weighted indexes. Hiccups or disappointments will be felt.
- 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 3500 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. he 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;
- Set tight stops depending on your time frame; trim n trail. Liquidation and overnight risk remains elevated.
- 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.
- Even a 10% pull back at this point would still keep indexes bullish and above their 200ema’s
Yesterday’s perfect tag of $329.50 validates the level as important. You can use the level as a stop going forward ( depending on time frame and risk tolerance ). Prices below $329.50 price filling the gap and dropping to $328 – $324 range as a first move lower.
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 against $331. A move above $332 is an objective place to initiate or add to a long. If you got long at lower levels, move up your stop to $332 if price clears that level.
Swing Traders Price tagged $222.50 which is a level we identified long ago as important. The price action further validates the level. Stay long against it. Use the rising 8ema as a functional trailing stop as price moves higher.
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 222.50 and the low side of the channel.
The chart is bullish above $167.45. Breaks below would likely see more selling. A move below $167 is a place to lean short or step aside. Lower prices would be favored.
Bear Set up: Levels to either initiate or add to a short. 167.45, $167, 167.25, 166.50. Place stops just above your entry
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
Last night I did a half hour video covering a bunch of swing set ups. If you missed it, you can find it HERE
$CIEN I highlighted this chart last week. Continues to build out a bull pennant. A break above $43.25 gets it going. Measured move target way up there but first would have to take out the prior high.
$LYFT Broke above $48, now an active long. Still buy-able IMO. A move above $50 has room to run.
$COST Tight bull flag on the 60min chart. Get long on a break above $313.25. Aggressive traders can take it long now with a stop at the bottom of the box. Measured move target of $320 aligns well with the measured move target from the daily we covered last week at $325. Moves below $311 foil the set up.
$MAR With the travel ban in China expanding to 40million people the chances that the corona virus story if over is quite small. Probably gets worse before better. $MAR gets 7% of rev from China but the pall cast on Southeast Asia travel means more. Set an alarm at support. A move to the 200ema $10 lower is your first target.
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