Daily Profit Compass March 4

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Tickers discussed: SPY QQQ IWM  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.

Earnings Calendar

Yesterday’s Highlights

  • The FOMC drops surprise 50 bps rate cut on the market, but as usual Jerome Powell did little to calm markets
  • The 10 year yield plunged to record lows at 0.90 % before backing off into the close. TLT blast off
  • The DOW plunged 786 pts and dented the V-recovery thesis
  • All sectors closed red with banks and tech bearing the worst of the selloff.
  • Gold spiked $44 as it regained safe haven status.
  • Repo demand spikes to $120B

Morning News

  • Biden re-invigorates his campaign by building on SC momentum and doing well in Super Tuesday voting; the media is giving him credit for this mornings pop in futures
  • OPEC planning on 1M bbl production cut to stabilize oil prices as corona blows a hole in demand
  • Hi-Yield spreads blow out.

Biden Bump

With Biden’s comeback underway after his resurgent showing in the Super Tuesday voting, the media has been quick to give him credit for the 2% bump in the futures this morning. That’s fine….whatever works. 

What you are really seeing is pure volatility.  While not a perfect representation of what is going on, the illustration shows how a shock impulse is dampened over time. At first the gyrations are high and wild, then as time passes, the volatility gets dampened or drained out.   10% drop last week, up 1200pts monday, down 3% yesterday, up 2% this morning. etc.  This is how a market figures things out.  Expect the gyrations to continue but with the amplitude of the spikes and dips to subside over time until the next shock hits.

If you have not figured it out yet, this is a 100% trading environment. You cant make investment decisions with the VIX at 40.  A simple example. AAPL.  It was $325 a couple of weeks ago. Friday it was $257. Today its $297.  Buying AAPL today is a trade, not an investment.  Could easily be $257 again this Friday.  This is the difference between  tactical thinking ( Trading ) vs Strategic thinking ( Investing ).   Nothing rational happens with the VIX at 40.

Amid the 50bps rate cut panic, the spike in repo operations to $120B yesterday hardly received even a simple acknowledgement.  That $120B is the highest since the program started and comes just weeks after Powell told us the program was winding down.  Something is rotting somewhere. We won’t know what that something is until it breaks, but that doesn’t mean we can’t smell it.  Don’t be surprised when the FED extends the repo program past April.

Technical Action

  • All three indexes pushed into resistance and key fib zones, then failed
  • The morning playbook nailed the scenario
  • Today, with futures up big, there will be a massive gap below.
    • I can almost 100% assure you this gap will get filled sooner than later.
    • Not to fill it means Corona was one n done; not likely
    • Watch price as it approaches yesterday’s high.  
      • There’s a high chance price gets rejected there.
      • If price breaks above yesterday’s high, it is bullish. You can get long and set a stop just below
  • When vol explodes, technical analysis shines. 
    • Sharpen your TA skills.   Even if you dont want to put real money at risk, open the paper platform and practice entries and exits.  These vol events dont happen everyday so if you can build your skills and confidence on paper, the next time a vol event occurs you can put a little real money to work.
    • I been doing this a long time and it is still hard. 
      • As an FYI, I was short yesterday when that rate cut hit and took a body blow on the $10 5min bar.  I worked hard the rest of the day, didnt give up, and took it well into the green at the close. It doesnt always turn out that way, but glad it did.

Strategy Overview and Key Thoughts

  • Despite being up 70 handles, I expect the prior low to be back-tested. Not today, but sooner rather than later. 
  • Cash is king; Trade small if at all; Overnight risk is elevated in both directions.
  • Be ready for swift 2-way trading during the day
  • If you’re trading, 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.
  • Flip your mentality from offensive to defensive if you have not already done so.
  • 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
  • The good news is out ( 50bps rate cut ). Until a fiscal policy response is developed, the Corona problem is  in the hands of the medical professionals and luck.
  • 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.

Index Chart Review

SPY Daily

THe chart annotations were done yesterday.  Use  $310 as your bull / bear toggle for short-term traders. There will be a massive gap below on the open. If price falls back into the gap you can get short and look toward a gap fill all the way back to last nights close almost $7 lower. 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

I’d be skeptical about buying this open. Be patient to see if price can take out $310 where you can get a line to shoot against. I’d be a seller unless price can prove it can go higher.  Otherwise I’d prefer to wait for a potential gap fill lower.


QQQ Daily 

Price is set to open around $214 which is in no man’s land. Price needs to take out the breakdown candle high and the 50ema to truly get traction. Key supports below are yesterdays close, $206, the 200ema, and the prior low. More inclined to be patient and not chase the open. Favor a gap fill at some point.

QQQ 60min chart

Not touching this thing long unless price takes out $218.25. If it does, that is a good place to get long w/ a tight stop. Anything short of that looks like a sell to me. Any move into the gap below on the open is also a sell.  Keep your head on a swivel. Could be a tricky opening. Be patient and find a solid reference point to shoot against either on the long or short side.


IWM Daily Chart

Bulls need a daily close above $151. Anything short of that is a sell. Above $151 traders can look to $156 as a target. Over the next week or so I’d be surprised if IWM did not back test $144. Let price lead you higher or lower.

$IWM 60 min

Anything below $152 intra day I will be looking to fade. Above $152, I’d get long with a tight stop just below.

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