Tickers discussed: SPY QQQ IWM BA JD FB Strategy 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.
Theory blinds Observation
Academicians have an old saying “Theory blinds Observation”. If a researcher builds a grand thesis about this or that over a long period of time, probably years, they have a huge emotional investment in their theory being right. When it comes time to test the hypothesis, their investment in the theory blinds them to the observations made in the study. They see what they want to see and tend to dismiss observations that point to an “inconvenient truth”.
As technicians we need to guard against the same biases. Given the wide array of indicators, an analyst can always point to 2 or 3 indicators that validate a bull or bear thesis. That is why i think it is best to limit indicators to 2 or 3 that you trust and lean on them exclusively. In your pre-trade notes, write down what you expect to see to confirm you are WRONG. When you see that, KILL the TRADE. Also, as we’ve discussed, making public proclamations about your grand thesis makes that emotional buy-in even greater and often makes it harder to extract yourself from a bad trade. Theory blinds Observation is a great one liner for a post it note.
- Global Markets rally as they await a coordinated global response to the Corona Virus. G7 leaders and central bankers to hold emergency conference call at 7am today.
- Biden Boost: Klobuchar and Buttigieg back Biden ahead of Super Tuesday voting.
- OPEC to meet in Geneva to discuss production cuts as oil prices nose dive
- TMO buys QGEN
- Waymo raises $2.5B from outside investors for self-driving push
The Bounce – It gets harder now
We had a great big bounce yesterday as epic oversold conditions impulsively snapped back. Now the tough work begins. Many trapped longs overhead will make their appearance known as supply as price tries to make headway. All of those key support levels that were sliced through on the way down are now overhead resistance. The good news for bulls is that the oscillators are still at the low end of the range and thus still favor a move higher. Also PUT Buying remains at extremes so as is often the case, the market wont these johnny-come- lately shorts win. If the bulls can push VIX below 30 it will be a good sign.
Listen, I have learned the hard way that however stupid, insane, or misguided you may think Fed policy may be, they usually get what they want. So if they decide to flood the system with free money, they’ll probably succeed in jacking asset prices. Then we can start the Oct-Feb re-ramp all over again as vol drains from the market like dirty bath water. As they say, “anything it takes”. Volatility takes center stage as fear ebbs and flows across the headlines and markets try to decide what FED actions might be taken to quiet markets.
I am not embarrassed in the least to tell you I have no idea if we are going higher or lower from here. The Fed won round 1 with repo / QE liquidity; Corona won round 2 by erasing 100% of those gains. The battle remains Liquidity vs Corona. We will have to see how much money needs to be shoveled into the Corona hole to fill it up. So with all of that said, I remain cautious and am keeping positions light. I think when Wave 2 starts cresting, we’ll revisit lower prices.
- Cash is king; Trade small if at all.
- Be ready for swift 2-ways market action in the days to come.
- Super-stretched oscillators suggest a bounce, but watch for exhaustion at key resistance and fib retracement zones.
- Lean on support / resistance, candlestick reversal patterns, trend lines, and fib levels for your trading signals; many traditional TA indicators lose predictive power in this kind of environment
- 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.
Strategy Overview and Key Thoughts
- While many are banking on a V-recovery; I favor a rejection at one of the upcoming Fibs or resistance zones. I think a Wave 2 is coming. Perfectly happy to ride the initial burst higher, even to new highs if it can. Price will let us know if / when it is out of gas.
- 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. Look at the period after the Jan 2018 and Summer 2019 rug pulls; possibly even like Q4 2018 if credit markets lock up
- Reduce position sizing. With the added vol and out-sized moves you can make good money with smaller position sizes.
- Flip your mentality from offensive to defensive if you have not already done so.
- Unlike Dec 2018, the FED wont be able to flip flop so the chances of a steep V recovery are diminished somewhat. Lower interest rates wont cure corona or repair supply / demand destruction. THey will do everything they can including QE4 or 5 to save this, but it will be harder than in Dec 2018 / Jan 2019.
- I expect a bounce into key fib and OH resistance levels that will ultimately fail. The range of possibilities are huge so trading becomes day- to- day, hand-to-hand combat keying of support and resistance levels
- In this environment, fundamentals go out the window as the technicals come to the forefront. Valuation guesses are not going to get it done. Both “good” and “bad” companies will get sold equally hard with the market on further rug pulls.
- 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.
- Cash is king. A gun is worthless if you don’t have ammo. This is a time to protect your resources. Prevent losses first; Make money second.
Put / Call Extreme-o-meter
While not at deeply extreme levels, there has been out-sized put buying. This is supportive of a further bounce continuing.
Index Chart Review
To my eye, $310 seems to be a good bull / bear toggle for short-term traders. $312 and $318 are the next major targets overhead. Closes above $320 would favor a continuation up to and including a gap fill. Be very aware of a break back below the 200ema at $305.50. That would be a very bearish event and therefore makes for a nice stop on longs.
SPY 60 min
As long as price is either within or above the rising channel, bulls are fine. Breaks below the uptrend channel mark a reversal and 60m sell signal. THe overhead resistance zones and fib levels are clearly shown. Be ready for price reactions or outright reversal in or around these levels.
The resistance zone between $218 – $220 may be a tough nut to crack as in this area there is a very high volume/ price bar, fibs and the declining 50 ema to contend with. If price can clear the 50 ema then i think price makes it to $222.50
QQQ 60min chart
Same methodology as with SPY. As long as price is either above or within the rising channel the right move is to be long. Sell signals would be triggered on a break below the rising channel. A move back below the 60m pivot at $210 would be pretty bearish. Trail your stops up and be ready for reversals from the marked levels overhead.
Not a lot to stop price from finding $153.50 on the upside as volume / price resistance is pretty shallow. That said, if SPY / QQQ reverse first, IWM will likely follow to a certain degree. Although price may have a somewhat easier path to go higher, keep in mind IWM is the weakest index. Price is below all moving averages including the 200ema which SPY & QQQ have already recaptured.
Keeping it simple and visual, traders can be long above $150. Below and things get more iffy.
Alarm $298 / $300 for a potential short entry. Fib and overhead resistance confluence near $300 increase the odds that price rolls over.
Price has built out a pretty bear flag on $FB 60m chart. $196 looks like it may be tough to get through. Aggressive traders may like to try a short on the first signs of a rejection. More conservative traders can wait for a break below the bear flag for a short entry.
China e-commerce play $JD had a big 12% pop yesterday off the back of earnings sent price to a new high. A hold of $43 is bullish. Traders can be long as long as price is above $43. Place a stop just below.
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