Tickers discussed: SPY QQQ IWM Strategy and Tactical Update
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.
Earnings
News Flow
- A global bounce is emerging after the worst sell-off since the GFC; Trump & Co floating payroll tax cut and other measures to stem Corona’s bite
- Saudi’s go max pain as they ramp oil output to over 12M BBL a day.
- Zombie US Shale Oil producers in the cross-hairs of a liquidity crisis as increased default rates and bankruptcies loom.
- Italy attempts to lock down the whole country
Technical Posture and Action
- In dramatic fashion, helped along by the Saudis, we back-tested the prior lows which was our grand plan.
- I am susceptible to confirmation bias like anybody else. Maybe that is why this from “perma bull” Tony Dwyer caught my eye.
- Basically he is say what I’ve been saying for a couple weeks. Bounce from oversold conditions that ultimately fails as “Wave 2” conona-affected PMI’s, earnings, and increased case load hits the tape.
- There are overhead gaps to fill. They are all marked on your charts below. These gaps will act as natural targets. No way to tell how long or how far the bounce may last, but Fib levels and the gaps levels will act as natural resistance levels.
- Big gap up will leave a gap below that will eventually need to be filled.
Strategy Overview and Key Thoughts ( updated )
- Starting to hear chatter about the shape of the bottom ( V, U, L shaped etc )
- Just stop it. Wasted energy trying to speculate shapes of things that havent even happened.
- If you think yesterday was “THE” bottom and that we are destined for a V-shaped recovery to new highs, build your self a call tree that spans over the next 6 months and space your calls $10-$15 apart and go all the way to SPX 3400. Then sit back and relax while you wait to cash them all in. It’s simple.
- Take advantage of the upswing.
- Lots of gaps out there that need to be filled. You can look at your favorite stocks and see them. Be long and watch them fill.
- Dont be fooled by the bounce. Nothing is fixed. The bounce is reactionary and technically driven. Be ready to fade it.
- Also, dont forget, the big bounce this morning will likely leave a massive open gap below. It will become a target to get filled when price rolls over and begins to go down.
- What to do if you’re trapped. If the sell-off caught you off guard and trapped you in longs you’d wish you sold, watch this bounce carefully and be ready to unload them at the top. Apply the adage that the best time to sell was 3 weeks ago, the second best time is now. I think we are going lower after this bounce. Dont get trapped a second time.
- Trading styles: Trading this market isn’t a walk in the park. If you’re trading this market and you don’t feel comfortable because active trading really isnt you’re thing, simply stop. THe most important aspect of trading is “know thyself”. You will lose a lot of money trying to trade against your nature.
- The Corona problem is in the hands of the medical professionals and luck. Rate cuts and spending packages are band-aids. Comforting but not curative.
- Be ready for Wave 2: Wave 2 is when we start seeing Corona’s impact on actual data points like earnings and guidance, PMI’s, GDP’s etc To date the numbers have been pre-corona and honestly were not that hot to begin with. China just posted its PMI at 35…ugly Wave 2 may be the catalyst for price to roll over after a healthy bounce.
Trading a Hi-Vol Tape: Tips for success
- Cash is king.
- Overnight risk is elevated in both directions.
- Be ready for swift 2-way trading during the day; Know your levels
- Hi-Vol markets are technically driven
- Narrow your focus to the liquid indexes, Sector ETFS, and a select number of stocks.
- The wild moves will demand focus and attention. If you stretch yourself thin, mistakes will multiply.
- Migrate from strategic to tactical thinking and trading. Near term, the days of sitting in positions for weeks and weeks is likely over.
- Expect added chop and volatility. A VIX greater than 30 is not “invest-able” it is a trading environment
- Reduce position sizing. With the added vol and out-sized moves you can make good money with smaller position sizes.
- Consider using spreads to mitigate the high cost of options.
- Consider selling call spreads instead of buying put spreads to express bearish outlook. Premiums will be elevated which is great for option sellers.
- Flip your mentality from offensive to defensive if you have not already done so.
- I expect bounces into key fib and OH resistance levels will ultimately fail. The range of possibilities are huge so trading becomes day- to- day, hand-to-hand combat keying off support and resistance levels
Index Chart Review
SPY Daily
We are up 4% in the pre-market. That will leave a big gap below. I think we should see at least a few days of positive action as the bounce plays out and oversold conditions are burned off. THe overhead gaps are your targets and they are well marked. As you possibly transition from a tactical bearish mode to a tactical bull mode, please keep your position size and exposure within reason, especially if you are holding overnight. It only takes one headline to wipe you out. Resistance levels shown on the chart.
SPY 60 min
Price put in a divergent low and is now higher. If the PPO executes a bull cross on the 60min it will go a long way to confirm an upswing is underway. If you get long and as the advance proceeds the gap levels make nice places to move up your stops.
QQQ Daily
Use the same methodology as SPY. Use the gap levles to key off of. They will be targets for the advance. As each level is taken out it becomes support and a nice place to ratchet up stops.
QQQ 60min chart
Here too, notice the divergent low and bullish divergence on RSI. While price was making a lower low, RSI was making a higher low.
If the 60min PPO puts in a bull cross it will be a confirming indication that an advance is underway and less susceptible to a pull back . THe key levels are marked on the chart.
IWM Daily
Completely different look as price gapped down below long standing support at $144. Unless price can recapture $144 by the end of the week, it will be on a longer term sell signal. I favor price getting to $144 and filling the gap but then rolling over. $144 would be an excellent location to anchor a longer term short targeting a move to the Dec 2018 low of $124.
$IWM 60min
A clear look at the set up. Traders can be long against $136.17 and look for $144. Even though its possible for price to move higher than $144, I do favor a rejection there. If that happens, it would be a perfect trade location for a long term short.
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