Daily Profit Compass March 12

Tickers discussed: SPY QQQ IWM  Major 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.

Ripe for a Rip – EPIC FAIL

  • Last night I put forth the thesis for a bounce; EPIC Fail.
  • I also commented that if SPX 2700 failed we would be in waterfall mode. That scenario played out.
  • I have learned that as long as I keep publishing trade ideas and market-centric ramblings I will be wrong a good part of the time.
  • What I got right is not staking a bunch of trading capital on the idea of a bounce.  I’m still in business and I will make money
  • We’ll get into the next levels to watch below

Corona gets real and hits home

Those involved in markets are well aware of Corona virus, especially when it comes to our money. For most people however, corona is just hitting their consciousness. Yesterday an explosion of corona headlines hit American consumers in the face.

  • Prime time address by President Trump
  • Tom Hanks and his wife have the corona virus
  • The NBA suspended it’s season after one of it’s players tested positive
  • NCAA March Madness Tournament will be played with no fans
  • Travel restrictions and cancellations
  • Countless large conventions and events being cancelled
  • School systems are now blanketing districts with readiness plans
  • Market Implications
    • Mom and Pop investors will be opening their IRA and investment account balances possibly for the first time. Most retail investors sell out at the lows, not buy them.
    • Lower for longer; this will be a massive economic dislocation
    • Potential bankruptcies, liquidity crises, bond downgrades, credit spread blowout.

Politics, Overconfidence and EGO mar US Corona Response

I have worked hard to keep politics out of my work and out of the trading room.  It gets in the way of trading and building strong personal relationships with fellow traders.  So the comments below are from the angle of how politics have impacted markets vs what political party is in charge.

  • The re-election season has amplified the President’s basic nature of looking at issues in purely political terms
  • When Corona began, the first instinct was to brush the problem aside and white-wash the potential epidemic
  • This caused delays in taking actions which would have slowed the spread of the virus
  • Confusing communications have muddled public understanding and preparedness
  • General government ineptitude caused delays getting test kits put together efficiently and distributed in quantity
  • Political divisions in Washington are either slowing or preventing bi-partisan response.
  • Trump’s Prime – time speech
    • In the trading room prior to the speech we were wondering if Trump would bring a bazooka or a BB gun.
      • BB Gun – no shock n Awe fiscal response
    • As the speech unfolded I was shocked at the lack of tone and action.
    • Calling Corona a “foreign virus”  is just wrong.  Health bugs don’t recognize borders; it is no one’s fault that this thing is sweeping the globe
    • 30 day Euro Travel ban instituted will hammer airlines; No economic fiscal response given to counter balance the economic drag
    • I don’t see how you do a prime-time speech with markets in free fall and not have massive fiscal bazooka rounds in your back pocket to unleash
      • Does it make sense to maintain tariffs on China’s products
    • The speech did more to stoke fears than to inspire confidence, unity, and action.
    • I was disappointed, not for the markets because I will make money either way, but for the country. In times of crisis leaders are there to lead and collectively are not stepping up. We deserve better.
    • The market is telling you what it thinks; LIMIT DOWN

News Flow

  • Trump speech falls flat.
  • Overnight Market circuit breakers hit; regular session braces for its circuit breakers
  • ECB response meeting this morning

Global Meltdown

Going to bullet point some ideas and thoughts for today and for going forward.

  • Attitude Adjustment
    • Touch base with your attitude and current mindset
    • It’s very easy to spiral out of control.  It could be that you were hung out to dry at the top and you’ve seen lots of paper gains evaporate. It could be that you had the whole “fake rally” nailed but fumbled the ball just before you would have made a lot of money on the downside.  Maybe you lost money at the top of the turn and lost more money trying to catch up on the downside. What’s done is done; you’ve got to let that go before you can be open to the opportunities ahead.
  • Huge Opportunities ahead
    • You can make a huge amount of money in a short period of time in high volatility markets
    • If you are primarily a long-only investor / trader, be patient. Marshal your cash and make a list of what you want to own. BE READY. This market will turn.
    • Massive bargains will be had, but your timing has to be right
    • More downside coming
      • Re-focus attention to the December 2018 lows.  IWM hit that level yesterday. Find that location on the stocks you follow as a benchmark location
      • If things so terribly wrong, at least some stocks will find the November 2016 breakout level.
      • Know your locations; Drop fib levels over your charts. They are great guides to potential pull back locations.
      • Fear is growing; not subsiding.  We’ll overshoot to the downside
      • Fed rate cuts will mean nothing; absolutely nothing
      • Watch credit. LQD / HYG / JNK / TLT  Credit dislocations coming
    • Shift in Consumer Behavior
      • Corona will shift consumer behavior even more than it already has.
      • Consumers will be pulling back across the board on spending as fear grips them
  • A global recession is now the base case
    • Global economies are hitting full stop
    • Like a nuclear reactor that goes cold, you simply don’t re-start it with a flip of the switch
    • It takes a long time to re-start a cold economy.
    • Forget about  V-shaped recovery fantasies. If it happens great, but dont plan on it
  • Refuse to lose
    • Don’t sulk or get down on yourself
    • Re-focus your mind and refuse to lose
    • Resolve yourself to emerge on the other side of this in good shape.
    • Attitude is a leading indicator for results

Strategy Overview and Key Thoughts ( updated )

  • Migrate to More downside being the base case.
  • Fade rallies; use higher prices to locate shorts at higher prices.
  • $NYMO full stretch and Fiscal Bazooka loom
    • Fiscal response will eventually happen
    • The laws of physics and market dynamics will eventually take over.
    • This is NOT a full on short Moment
    • Dont get caught in a full on bazooka short when fiscal stimulus and NYMO  hit.  Would have the potential for mortal damage
  • 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

Going big picture this morning so you can get a feel for potential downside targets

SPY Weekly

Price is sitting near $265 in the premarket.  The problem now is that $270 and $285 are now massive OH resistance levels. First support on the weekly chart is a zone between $250 – $253.


QQQ Weekly 

Price is sitting on first support at $185 which was the 2018 high. A break below would target the high volume / price support and 50% fib confluence at $165. Below that and its the Dec 2018 low of $145. .

IWM Weekly

If you’re a technician that appreciates symmetry and elegance, this is a disturbing chart with horrific implications.  Price executed a massive double top at $170. A close below $125 which was the December low of $125 triggers the double top technical formation. THis formation targets 25% additional downside which aligns perfectly with the 2016 low near $90. Lots of folks look to IWM as a leading indicator and measure of risk appetite.  If that is even 1/2 true, it has dire implications for both SPY / QQQ.  Before you laugh and dismiss the idea, if we drop into a deep global recession why would we think SPY / QQQ would remain up 50%? Be open to both better than expected outcomes and worse than expected outcomes.


$SPX Broadening top

The broadening top formation that most folks scoffed at when first circulated on social media by technicians is coming to life. The downside targets are ugly and are highlighted on the chart.

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