Daily Profit Compass March 11

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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.

Inspiration – From Van Gogh 1884

Earnings

As an FYI; I have not even been looking at earnings over the past few weeks. Any good or bad reports are getting swamped by the bigger picture. The same is true for my usual gap hunting. Every day is producing gaps so their significance is diminished.

News Flow

  • Trump promises an economic package; then is a no show
  • Banking leaders to meet w/ Trump today
  • Saudi’s up the ante; aims to pump 13M barrels a day
  • Biden’s lead widens over Sanders
  • ECB Chief Lagarde says Europe must act to avoid 2008-style blow
  • Bank of England cuts rates

No Show

After declaring that he’d announce bold fiscal stimulus measures Tuesday evening to combat Corona’s economic impact, President Trump was a big fat no show. Markets are reacting with another sea of red.  If there were ever a time the country and markets needed leadership, it is now. Frankly it’s not going that well. Miss-steps  and delays on the medical side, scattershot communications and frankly dumb statements by the President are not helping. Additionally, Congress is set to go on break and nobody is saying they will stay and get these packages passed. These comments are not political. The market and economy are burning while those in DC fiddle. Time for leaders to step up.

The market is trying to price in the downside of the corona virus. It is waiting to price in whatever fiscal stimulus package is put together to mitigate the damage. But time is short and patience is running thin.  The market is on the edge of breaking. We have NOT seen a panic sell off yet. To this point the sell off, while persistent, has been an orderly take down of risk. Monday’s move did not even seem to be chaotic. When you start seeing massive red bars cascading on one another, its a sign of panic and forced liquidation.  Up until this point, I have been trusting the over-cooked NYMO / NAMO oscillators to hold this thing together and to position for a bounce. I’m hesitant to pile in short because a fiscal package will come and has the potential to spark a “rip your face off” rally. We rallied 1000 points yesterday on the rumor a package was coming.

Technical Posture and Action

  • The big gap below price yesterday was filled. Now there is no technical justification to revisit the lows.
  • Price for SPY / QQQ moved into their overhead gaps but with futures indicating a significant down move, holding those gap entries maybe a challenge.
  • The NYMO / NAMO oscillators remain over sold but are spending much more time in these oversold conditions than they did for the Jan 2018 or Dec 2019 sell off.  Getting a solid read has been difficult .
  •  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.

Strategy Overview and Key Thoughts ( updated )

  • Still planning / praying / positioning for a bounce
    • Per my closing note yesterday, I carried home a very small long position in QQQ. Based on futures, those may be a zero but 1000 pt intraday rallies are now almost common. Maybe we’ll get lucky.
    • I can be as bearish as the most ardent bear, but I just cannot bring myself to be all in short at this juncture.
      • If I sense a sell off is underway I will load the boat in real time with short positioning and abandoned any existing longs.
    • Fiscal stimulus is coming. There will be a price spike. The time to re-deploy portfolio shorts, will be when that spike runs out of gas, not here at the lows.
  • 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

Price made its way into the gap. The analysis is pretty simple. Price either holds the gap support or it doesn’t. The key levels are marked in the annotations. If we appreciably drop below the gap it is bearish.  The overhead gaps are your targets and they are well marked. 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

We got the bull PPO cross we were looking for which is bullish. We also have bullish divergence working. That said, a good sign of a bear market is when bullish set ups stop working. Price may very well negate the bullish set up.

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 levels 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

Again, like SPY, this is a nice bull set up on paper. PPO bull cross, bull divergence, price in overhead gap.  All very nice developments for a solid bounce, but currently questionable give how futures look. Respect levels and stops.

 

 

IWM Daily

IWM lagged SPY / QQQ as price did not enter its overhead gap.  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. On the downside, if price breaks below yesterdays low, it is bearish and favors lower prices.

 

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