Daily Profit Compass March 5

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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

  • Canadian Central Bank cuts 50bps
  • All major averages pop 3-4%
  • Healthcare surges as Bernie worries subside
  • Repo hits $100B again
  • US House of Rep. pass $8.3B Corona aid bill.

Morning News

  • Euro Markets and US Futures point to 1.5-2% down open
  • California declares state of emergency due to Corona
  • Global travel restrictions widen
  • Mortgage Re-fi Tsunami begins as applications swamp mortgage servicers and banks as rates plummet
  • Airline trade group says airlines will lose $63B – $113B in revenue due to Corona. Their estimate was $30B 10 days ago
  • China – Japan mutually decide to postpone Xi’s planned visit.
  • Nothing out of OPEC yet on curbing oil output.
  • Fed futures have another 25bps rate cut penciled in for 2 weeks for now at the FOMC meeting

Reversal of Fortune

Biden’s Bounce is quickly forgotten as futures are set to take back 1/2 of yesterday’s gain on the open. Despite the 4% surge on the Dow, the safe havens for the most part, held their bids. Gold was up fractionally and TLT lost only 1%. Additionally the VIX never lost 30 ( its 36 as I write this )  The FX market is also skeptical of the optimism as safe haven currencies held in.

Emergency Rate cuts have not been kind to the Stock Market

This widely circulated graphic shows the history of emergency rate cuts. The second graphic is courtesy of Goldman that shows the forward return profile of the market over different time frames post emergency rate cuts.  Not very inspiring.

The path of least resistance is lower

I maintain that the path of least resistance near term is lower.  The Corona virus is a healthcare issue. No amount of rate cuts nor the $8.3B spending package is going to stop the viruses advance or its impact on the economy.  The monetary actions will be a soothing balm on a patient that does not feel well.  Nice and well-intended for sure, but not a fix.  A vaccine is literally a year away.    In 1992 my business was literally wiped off the face of the earth by Hurricane Andrew. Yes, my bank worked with me to renegotiate payment terms. Yes, I was able to get a bridge loan to rebuild my inventory. All nice things, but I was still out of business for over a year with zero sales and zero income.  So while Corona promises not to cause physical harm to structures etc like Andrew, the swath will be wider and it will take time to heal.

Wave 2

Multi National companies are rushing to withdraw 2020 earnings guidance.  While earnings guidance plays absolutely no role in my trading process, for many on Wall Street it does.  I dont see why folks would pile into long-term positions having zero clue about the impact to earnings.  We went through all of 2019 with zero earnings growth.  Do you think with Corona earnings growth will be zero like last year or less?

Wave 2 will hit when all the earnings  and global PMI’s start rolling in that are reflective of Corona’s impact.   So aside from occasional bursts of vol-driven rips, I think the path of resistance is lower. I am not smart enough to discuss recession potential, but from a trading perspective we lost 10% in a week with no consolidation at all. The Dec 2018 V-recovery was completely different because it was a fiscal / monetary / credit problem that the Fed single-handedly fixed.  Nobody is fixing Corona. It will run it’s course and be what it will be.  I expect hi-vol to persist with some consolidation around current areas. Then we eventually work our way toward the Prior lows. At that time we will have to see if that level holds or if we go lower from there.  

One caveat:  If the Fed goes QE wild, anything could happen and at this point there is no telling what these guys might do.  I think their first step will be to go back to zero rates, then QE if necessary. 

Technical Action

  • Still tons of trapped longs at higher prices. I think advances will be met with ample OH supply as these people will feel thankful to get a second chance to get out.
  • Yesterday’s gap up now leaves an open gap below.  That gap will eventually get filled.
  • 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.

Strategy Overview and Key Thoughts

  • 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 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
  • 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.

Index Chart Review

SPY Daily

Keep it simple and visual. The 200 ema is a simple but very valid level to use as a bull / bear toggle.  As I have mentioned before and still stand by, you are kidding yourself  if you think you know where this is going with VIX at 36.   It will be going both higher AND lower !!  Unless you’ve got a crystal clear line on the chart where you know where you’re wrong, trying to swing longer term will be tough.  Trade small if at all.  So today there will be a massive gap above AND a decent gap below left over from yesterdays open. The gap down favors lower prices just as yesterdays gap higher favored higher prices during the day. Any move below the lower gap favors a run to the prior lows.

SPY 60 min

I plan to use the 200ema at 305.60 as my toggle point. Bearish below and bullish above. True support is $303.33 at the top of the gap. I would add short exposure on a break of that level and again add if $300.24 breaks. On the bullish side, price can go all the way to last nights close to fill the gap.

QQQ Daily 

Price set to open between 2 gaps. If price loses 211.34 it would be a place to add short exposure for a potential gap fill. Any move below 209.48 would also be a place to add short exposure. Any move above yesterdays high and the 50ema opens the door to higher prices. Expect lots of vol in between.

QQQ 60min chart

THe chart annotations are pretty clear. Use the lower gap as your key. If the bulls can hold $211.37 they will have held the damage to a minimum. Below 209.48 and bears will get emboldened.

 

IWM Daily Chart

With an open set to be around $149 price is kind of in no mans land on the daily.  Bulls need to clear $152 to get something sustainable going. Daily closes below $144 are a doomsday scenario with much lower prices favored.

 

$IWM 60 min

On the 5min chart, a nice base was built at $149 yesterday that held many many tests before going higher. If price breaks below $149 i plan to get short with a first target of 147.50, then $144.

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