Daily Profit Compass March 9

Tickers discussed: SPY QQQ IWM  Key levels for a bunch of names and ETF’s .  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.

Weekend Commentary  ( #ICYMI )

Where we stand  and where we may be heading

  • The strong jobs report on Friday let us know that at least heading into the Corona virus threat, the economy was on pretty solid footing.
  • That said, the world economy is very weak as demonstrated by China’s PMI plunging into the low 30’s and with Italy, Germany, and possibly France on the verge of recession.
    • Ditto for Japan, So. Korea, Hong Kong and other Asian countries  whose economies have ground to a near halt as corona fears and caseload explode.
    • Italy has gone full Wuhan, quarantining  16M people in various cities
  • The FOMC gave us a 50bps rate cut but the markets have already priced in another 25-50bps cut in 2 weeks. The FOMC is now on a 10 day blackout period ahead of the meeting so there will be no commentary from them. The market, by and large, are dictating FOMC actions
    • IMO the Fed is wasting valuable bullets here. Monetary policy wont fix what ails the economy; their conventional ammo is almost gone
    • Only targeted, timely, and coordinated fiscal policy response by countries across the globe will foam the runway and prevent a fiery crash
  • The epic bond moves are unprecedented and are pricing in a massive economic shock.  World record low yields across the entire curve for US and German Bonds
  • Why this time is different
    • This emerging crisis is not being driven by credit or financial excesses. It is from a virus for which there is no present cure.
    • The prescription is to contain the virus to arrest its spread, but that is the very thing that grinds economies to dust
      • So many conferences, events being cancelled and thousands of employees being told to work from home.
    • The slowdown is both on the supply side AND the demand side. That is very different from prior slowdowns
  • Commodities are pricing in a collapse of demand
    • The $CRB commodity index is attacking the All-time lows of 2016 and well below support that goes back to 1973
    • OPEC+ looks to be dead with Russia walking away from talks and no agreement to cut oil production; Oil off 8% on Friday alone.
      • Oil broke support at $42. $35 is now in the crosshairs; a break of $35 takes us to the 2016 lows near $25
      • Expect the weak shale producers to give up the ghost
      • Most vulnerable will be those who are highly levered, have low cash positions and have a wall of debt to roll near term ( which is a lot of them )
      • Those with strong balance sheets and cash positions who dont have much debt to roll should be able to weather the storm
      • Expect either consolidations and / or bankruptcies going forward as liquidity crunch digs in.
  • Credit Crunch
    • If a big demand shock is realized it will impact cyclical and consumer centric entities the worst.
    • Expect tons of credit downgrades to highly levered retail and other consumer / cyclical names
    • Lots of BBB debt will find its way to junk status over the next few months as consumer spending slows down impacting cash flows and increasing liquidity concerns with highly levered balance sheets.
  • Technicals are all that matter now
    • Fear will exacerbate moves
    • Fear has no regard for fundamentals; market moves are being technically driven
    • Traders with strong technical awareness and savvy will rise to the top
    • Those trying to make a fundamental long case for a company or market at this early stage have a strong likelihood of getting run over
    • We have seen thus far that traders are toggling risk on / risk off with no regard for specific names.

Strategy Overview ( Updated )

  • Hold fire and be patient on long term long positioning (dont buy the dip)   Dont worry, you wont miss out
    • Lack of visibility into earnings or further distress points to a more likely rounded bottom vs V-shaped spike higher.
    • THe mistake you can least afford to make is stepping in early and getting run over.
  • 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 bounces into key fib and OH resistance levels will ultimately fail. I am looking to fade such moves.
  • 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.
    • Those who are smart at such things can identify , then make a list of companies you want to own on the other side of this
    • Look for relative value plays where solid companies were sold down to unrealistic levels
    • Watch the cyclicals for signs of a bottom. When cruise lines, airlines etc stop going down could be an early signal of a turn coming.
  • 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.


Earnings for this week

News Flow

  • Saudi – Russia feud breaks out into a price war. Oil craters 20%
  • Futures across the globe see a sharp 4-9% sell off. US Futures tripped the circuit breaker at down 5% and are currently halted.
  • Bond Yields waterfall with the entire yield curve out to 30 years are under 1%
  • Italy goes full Wuhan with 16M people on lock down

Apocalypse Now Redux

2 weeks ago we had the Apocalypse, last week was the Eye of the Storm, now the apocalypse returns.  I did not plan on oil dropping 20% over night and neither did markets.

As I write this, US futures are locked after having dropped 5% in the overnight session.  All the major averages blew through first support and are now testing key support, even possibly slightly below it.

The key locations are SPY 285,  QQQ $194 and IWM $144. The rubber band is maxed out. If we immediately plunge off the open, it may very well break and hit more circuit breakers.  Be very very careful “shorting into the hole”.  We are at a trade location where we could have a vicious snap-back rally.  If you do get short, simply know the line in the sand when you’re wrong and get out. That may only take 30 sec in this kind of volatility. Be ready to flip bullish for a tactical trade on signs of a reversal.  Dont forget, from the moment we open, there is a massive OH gap to fill all the way to Friday’s close. Don’t put anything past these guys. We all know they can and will do whatever they want.  This is the perfect set up for a nasty reversal

Key Locations for SPDR Sectors and Individual Names 

Rather that post the index charts which are already blown out, I thought I’d post key locations of interest for a bunch of tickers along with a bit of commentary. These locations may be good buy locations if they hold or good sell locations if they don’t. What I am doing is re-loading the alarms at these locations to re-focus my attention if they trip. Market conditions and my current positioning will determine if the alarm is actionable.  I suggest you do the same. You can always ignore an alarm if you choose to do so.

ETF’s and other Names of interest.

$XHB – Sitting on the 200ema  Open path to $38.50 ; if broken $32

$ITB – Below $43, $39 comes up fast with little to no lateral technical support.

$KRE – We are already at the Dec 2018 low support near $43. A break below $42 opens the door to $32.  The market set up is a disaster scenario for banks.  Low interest rates / no loan demand / potential defaults on existing loans if things get ugly for a prolonged period of time.

$SMH  $125 is the weekly pivot point. That will likely be taken out on today’s open. Although are some minor levels in between , I think price can find $105 over time

$XRT $37 is a support level that has held for 6 years. Below however is a massive thin zone where price could quickly fall away. I am alarming $37 as a potential buy or sell location.

$AAPL  $255 was the most recent low and is where the 200ema resides. It will get tested again. Not much stopping price from finding $215 on a break of $255. Key spot.

$TGT – Price sitting at $105. Massive gap from $97 – $85 below and from $75 – $70 below that.  I’m alarming $97 for a potential gap entry.

$GOOGL – $1000 is your number. If it holds great buy; if it doesnt great sell.

$CAR  Alarm $22.50. A long way down if this level breaks

$EXPE  $85 is key support; has to hold

$FIVE  Massive $20 thin zone below $95.  Alarm $95 and be ready. Stock teetering just above

$DNKN $62.50 is key support

$WING Double top set up working. A break below $72.50 triggers the formation with a measured move target of $52.50


SPDR Sectors

$TM Price on the weekly is headed for a touch of its uptrend line near $125.  The global demand shock coupled with the spiking YEN are headwinds.   Alarm $125 for potential break below

$XLY  $112.50, $110, $106 are your downside targets.  90 was the Dec 2018 low.

$XLV  A break of 93 opens the door to $89, then $87

$XLU $62 is support. Anything above is ok for bulls; below gets iffy.  Defensive sector, may hold bids

$XLP $58 is support. Below is $55 as a first target. Defensive sector, may hold bids

$XLK  86.43 is the 40 week ema and $82 is the weekly pivot level.  Price has already broken trend and is on a weekly sell signal. For further confirmation a move below the 40 week ema would do it and also offer a nice line to shoot against

$XLI Below $71 and there is not a lot from stopping price from finding the Dec 2018 low of $61 over time

$XLF  Price is below the weekly pivot. Although there is a little support at $25, not a lot to keep price from finding $22 which was the Dec 2018 low.

$XLE There is a small ledge of support at $37.50. The 2009 low was $30

$XLC  $48 is key support. Above and bulls can fight back. Below and bears take control of the longer term tape.

$XLB $53 is the bull / bear toggle.

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