Daily Profit Compass March 13

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 –   None of us know ( and never will )

While our good friend Jason is likely speaking in general terms about life ( or possibly referring to the Corona Virus ), he also nails the Trader and their interaction within markets. All of us desperately want to know what’s going to happen. We research fundamentals. We draw thin lines on charts and if the fit isn’t so hot we make the line thicker. The thick trend line makes us feel safe and secure knowing price will bounce there. How’d those trend lines work for you over the last 3 weeks?  Mine have not done so well.  We get infuriated if we lose and get doubly pissed off if our trading buddy wins big without doing half the preparation that you did. As Jason says, “we try to game out life’s uncertainties”.  Cramer had it right in 2008 when he screamed “THEY KNOW NOTHING“.  Neither do we Jim.

Here is what I want you to do. Embrace randomness. Embrace uncertainty. Embrace volatility. Embrace the idea that once you hit the send button on your trade, you have absolutely no idea what is going to happen. No different than letting a rat into a maze it’s never been in before. You can do all the cheer-leading you want, you can’t make the rat turn left or right at the intersection. I need you to fully capitulate to the idea that you”know something”

It isn’t easy, but if you can give up on the idea of knowing, many new paths and insights open up.  Tranquility and quiet confidence bubble up while frustration dissipates. You’ll be able to live life more abundantly because you’ll view life’s detours as interesting opportunities rather than some major downer because your plan blew up.  In trading, you’ll no longer be screaming at your monitor or the markets.  You’ll no longer have an emotional attachment to trades; you’ll learn from both the winners and the losers.  You’ll realize a trade is just a trade. G ive it a try, let me know how it works.

Earnings

News Flow

  • The FED’s $1.5T repo program falls flat; market is pricing in a 100bp rate cut at the next meeting.
  • Rumors circulating that Pelosi and the White House have a fiscal plan ready to approve and possibly anounced later today.
  • Asian markets were blood red overnight with losses ranging from  3.7% in HK to 9.25% in Japan.
  • Other sports leagues follow the NBA’s lead in shutting down their seasons. NHL and MLB, cancelling swaths of their seasons. Formula 1 cancelled its first race of the season with more likely to follow. $DIS shutting Disneyland in CA. Next up Disney Orlando?
  • No relief seen or anticipated in Saudi – Russia oil standoff.  From marquis names like XOM, BP, and CVX, to the tiniest of shale producers, are getting whacked hard. 30-50% this week!
  • The Pentagon asks for 120 days to re-assess the JEDI contract. $AMZN is suing the Defense Dept for the wrongful award of the $10B contract to MSFT

 

Friday the 13th

Although a big rally is underway, Friday’s in general have not been very kind to markets in 2020. The last 2 Fridays we saw deep sell offs before “Corona Weekend”  but then steep advances during the last hour of trade. No idea what will happen today but I can tell you I am ready for the weekend. The extreme vol is taking a psychological and physical toll on me, and most likely many other traders. Scrambling around, constantly getting peppered with sell alarms initiated god knows when all while keeping tabs on the wild intraday swings and trying to trade them, Just tired, need a weekend to recharge.

Dont underestimate the potential power of this emerging rally. It will run hot n fast but burn itself out but will look very convincing in the meantime. Either hop aboard at an objective trade location or get out of the way. Dont try to fight it …you will lose. ( ask me how i know )

 

Technical Posture and Action

  • Most stocks, indexes and ETFs are oversold
  • Today might be the start of a “rip your face off” bear market rally. We will have to see if the overnight rally in futures can be build upon in the regular session.
  • If the rally picks up steam, how should I play it?
    • Time frame and trading / investing style makes a difference
    • If you’re comfortable as an active trader, I would jump aboard a rally and ride it higher . I’d also be ready for a reversal to occur at anytime
    • If your a swing trader who got short at higher levels and are not worried about time, stay short.
    • If you a true investor would wants to buy extreme value, then sit on them for years I think its too early to accumulate shares. I think we take another leg down before everything is fixed and on the upswing.
    • sre deeply oversoldbig gap below price yesterday was filled. Now there is no technical justification to revisit the lows.
  • If we do rally and you want in, be sure you’re at an objective trade location. The market is too volatile to buy while price is in “no man’s land )

The 3 sections below are presented for the benefit of new subscribers  and visitors.

If you’ve been following along for a while you’ll have reviewed the material already. Feel free to skip to the charts.

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Thoughts for Moving Ahead (  Re-post for Newcomers )

  • Attitude Adjustment
    • Touch base with your attitude and current mindset
    • It’s very easy to spiral out of control with negativity.  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 and use 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 on 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 )

  • From here forward plan to fade all rallies 
    • We are in a bear market; adjust your mindset
    • Bear market rallies by their very nature are vicious and very convincing
      • Feel free to ride them to their conclusion, but know all along they will fail
      • Use the rallies to locate / re-deploy shorts at higher prices.
  • About those shorts
    • When I short I always do so by being long puts or put spreads or by selling call spreads to express a bearish view
    • I have NEVER shorted common shares. You are welcome to do so, but that is not what I do.
    • Another option for those uncomfortable with options, there are many many liquid 2x and 3x bear ETFs for everything under the sun
    • If you are not comfortable being bearish, this is a great time to learn. Try buying a bearish ETF and play around with it.
    • You will possibly appreciate bearish positioning by realizing in the last 3 weeks we’ve wiped out well over a year’s worth of gains
  • $NYMO at historic lows and a Fiscal Bazooka looms
    • Fiscal response will eventually happen
    • The laws of physics and market dynamics will eventually take over.
    • This is NOT a full on short Moment; short with care and dont get over committed with capital
    • 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  ( re-post for newcomers )

  • 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 level.

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Index Chart Review

SPY Daily

$250 is a key level to capture. A break above can spark a rally to 270++ Above $270 would make $285 the next big hurdle.  If price were to break above $250 but then have price get rejected overhead and break back below $250 it would be very bearish and a good place to get short.

SPY 60 min

THe annotations on the chart give granularity to the levels. Given the depth of the oversold condition dont under estimate the power of a bear market rally. They call them rip your face off rallies for a reason. Get aboard or get out of the way when you see them forming.

QQQ Daily 

Price is at $186 in the premarket and would be a good spot to get long. THe upside target is 194 which i expect would be tough resistance.

All the support levels you were interested in on the downside are resistance levels overhead.

 

QQQ 60min chart

If price gets thru 194 the grand prize is a gap fill to 208 and possibly even 211 to take out the second gap. THe V-bottom crowd will going wild if we made it that far in rapid fashion.

 

IWM Daily

IWM has a tough road ahead. It is plumbing price not seen since 2016.  Bad news if IWM is truly a leading indicator and measure of risk appetite.  $112.50 is your bull / bear pivot point. You can be long above and short below. On the upside $144 should be a wall THe downside targets are marked. I think this finds 90 over time but with sick rallies in between.

 

$IWM 60min

The annotations on the chart spell it out and the levels are pretty clear. In the premarket price is at $117. If it pops 117.50 it would be a good place to locate a long and look overhead for upside.

Breaks back below 112.50 would be very bearish.

 

 

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