Daily Profit Compass March 6

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Tickers discussed: SPY QQQ IWM  AAPL  FB  SMH  KRE XLY  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.

News Flow

  • A 2-3% “red tide” washes over Asia, Europe, and now, US Futures.  Brutal overnight Session rocks Asia 2-3%
  • US 10 yr bond yields plunge 20bps over night to 0.70%
  • VIX looks poised to test 50
  • JPM’s Dimon recovering from emergency heart operation
  • Oil is the cross-hairs as OPEC and Russia face off in Geneva.  No deal could pull the rug out by as much as $10 a barrel.

Technical Action

  • IWM set to open below $144 and the prior low of last week; a key support level going back over a year.
  • Door is open to retest the prior lows in SPY and QQQ if the indexes go into full on waterfall mode.
  • Today’s open will leave a huge overhead gap to fill down the road.
  • Technical oversold conditions are being stretched to the max. No way to tell if this results in a violent snap back rally or if the rubber band breaks and we waterfall.
  • Bad selling on Friday rarely ends on Friday. If we close near the lows, follow up selling Monday would be favored.
  • VIX at 50 is very difficult to hold and maintain.  Selling call spreads above out in time or OTM puts / put spreads  might be an idea to consider.
  • 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.
  • 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 ( updated )

  • No time to be a hero.  I’d suggest this isn’t the time to be a hero by trying to pick bottoms in your favorite stocks. We are in the teeth of a down move that will get worse before it gets better. What you want to see first is that your stock is no longer going down; then a base form, then begin to emerge. At a minimum, you want to see last week’s low tested and for it to hold.  If it breaks, the down move is likely only 1/2 over.
  • I expect the prior low to be back-tested 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

Price set to open at first support around $294.  A break below opens up the door to the prior low but it would take a waterfall event to get us there today.  If price falls below $294 traders can be short with a tight stop over head. Conversely, if we bounce, long against $294 works.  Overhead resistance is $300

SPY 60 min

Use $294 as your bull / bear toggle while understanding that $300 should be stiff overhead resistance and the path of least resistance is down.  If price impulsively rallies to $300 I’d be inclined to try and fade that move.  Notice the bear cross on the PPO. A check mark for the bears but not to the extent that the bulls couldnt reverse it.

 

QQQ Daily 

As I write this at 6am, price is toggling between 204 and 206. Makes sense, I have 206 as first support. Second support is the 200ema at $202. Below $202 and a back test of the prior low at $198 would almost be a forgone conclusion. If price recaptures $206 I think you can be long against it and hope for a bounce to $209.48.  As long as price is below $206, your first target is $202. I would expect $202 to hold today unless waterfall / panic selling kicks in.

 

QQQ 60min chart

The key levels are cited above. Probably the most important thing on the 60min chart is the PPO bear cross near the zero line. While whipsaws are always possible, a bear PPO cross at the zero line is an important and mostly reliable sell signal. .

 

IWM Weekly

I am showing the Weekly chart today because today’s close could not be more important. Notice all the tags of $144 over the past year. In the premarket we are trading below $144. If price closes below $144 it will trigger a long term sell signal on IWM.

So today it’s simple. Above $144 and bullish plans survive. Below $144 and at least on paper, Bears take control of the longer term tape.  So today focus exclusively on $144. As Corona rolls out across the US, there will be more domestic slowdowns which will impact IWM names.

Charts and Trade Ideas

$AAPL

Price is set to open below $285 which is the daily pivot. The downside targets at $270 then a back test of the prior low at the 200ema at $255.  Kill any short trade if $285 is recaptured.

$FB

Price is on the wrong side of the 200ema which is in itself a long term sell signal. Price set to open just below $182.50. As long as price stays below $182.50, the downside target is $172.50ish, then $162.50 – $160

$SMH

After a deep plunge last week, there was an equally impressive rip to back test the breakdown. Now price is rolling over. Below, I like the idea of being short against $135 and looking for a test of the 200ema at $127.50 , then to go on to $122.50. THe nice thing about SMH is that you can hold through earnings season. Do you think semi earnings will be better or worse than expected when they report?

$KRE

Low rates and a flat yield curve are bearish banks and they’ve been leading to the down side. $KRE is the regional bank ETF.  I am looking for the Dec lows to be tested.

$XLY Weekly

As Corona expands in the US ( even if it is just media driven frenzy ) the US consumer will pull back as behaviors change. This will impact XLY stocks. Near term, on XLY, if $115 breaks i am looking for $112.50, $110 and $105 as downside targets.  This ETF is weighted 23% to AMZN. So if you are bullish AMZN this isnt really the right trade for you. You’d be better off with XRT or individual names.

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