Daily Profit Compass May 13

Tickers discussed: SPY QQQ IWM    Strategy & Tactics

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.

Trader’s Couch – The Road to Mastery

If I told you right now, with unwavering certainty, that it will take you 7 years from right now to attain consistent profitability in your trading would you consider that a bridge too far or shrug your shoulders and say that’s fine and go back to working your trading process? You see, a great many traders enter the field with the motivation being strictly making money. That’s fine, most of us do. The divergence comes when some develop a maniacal obsession, an unmistakable passion, and inner connection with the craft of trading. Those will be the winners because they refuse to lose. The burning desire within keeps their heads down and mind focused on their goal and refuse to let set backs derail them. The desire for money isn’t enough; never was and never will be. Re-examine your true motivations for being in this game. Decide the price you’re willing to pay; then go do it.

Earnings

 

News Flow

  • Powell to speak via remote webcast at 9am; expected to talk down idea of negative rates plus any market pump he can think of
  • LA county said to extend stay at home order 3 more months; into mid July
  • TWTR announces employees can work from home forever ( could be the start of a trend-setting move )
  • Fauci says kids returning to college in the fall ” a bridge too far ” …. CA State college campuses to close for Fall Semester
  • UBER said to balk at GRUB’s buyout demands
  • China plans to test all 11 million of Wuhan residents after Covid spike
  • OXY to offer voluntary job buyouts
  • House Dem’s unveil $3T Aid Bill with cash for States
  • After 10 years of futility, $LVS gives up on trying to get a gaming permit for Japan
  • $AAL gets biggest chunk of aid package aimed at airlines

Roil Returns

I have more to say today than usual, but instead of lengthy paragraphs, I want to try to do something different. I am going to bullet point my thoughts. Maybe they’ll be easier to read and digest. Let’s give it a try. Note….the order of the bullet points does not signify order of importance

  • You’ll in no doubt hear the “retest the lows” crowd come out of the woodwork today. Ignore them.  In order to retest the lows price needs to break the next level of support. One step at a time; we trade level to level and don’t need to make proclamations about the destination. This could be nothing more than a 50ema test, then we rip to new highs. Level to level. Carve that in your desktop.
  • If nothing more, technicals / chart reading give you objective things to look at and from which to make decisions. When you review the charts below on the indexes, they all followed the same script. Trend line break / key support level break / impulsive selling.  Yesterday was more dramatic than most but trend line breaks are indicative of the first move of a trend reversal. They usually  generate either a buy signal or a sell signal. Look for and take notice when you see it. Price usually does not react as violently as yesterday but it usually does react.
  • Risk Management. We’ve had a ton of bullish winners on our trade ideas / set ups over the past 2 weeks. I hope you got your fair share and today’s rug pull didn’t clip you too badly. Although some of you have likely been sick of me saying, manage risk, roll higher, raise stops, spread your position etc. But for those that actively did any / all of those suggestions, you were stopped out as either winners or fractional losers. Risk management means loss prevention and as we’ve discussed, loss prevention is way more important than capital gains. Continuously trailing stops prevents winners from becoming losers. ( ask me how I know; I’ve seen plenty of nice wins evaporate and it sucks. )  Yes I know….the last time you trailed a stop you got stopped out and then the stock reversed and went higher without you. Sorry, that’s trading. You can always jump back in when the danger disappears.
  • A day to take notice.  There was a change of character in the market today. That change may last 2 days or 2 months. It’s a time you clean up loose longs, reduce positions and exposure. You re-examine what is and what is not a core holding. Embrace flexible thinking and be open to the possibility that this “new bull market” is at least temporarily over.  Remember, you’re neither a bull nor a bear, you’re a leaf on a stream effortlessly flowing with price. You don’t care where price goes, you’re ready to make the turn if / when prices signals it. It may mean hunting short set ups instead of long ones. Hey, that was easy!!
  • Time frame is everything. A comment by me that AAPL lost its 60m trend line and to sell it is meaningless if you are NEVER selling AAPL or are trading the weekly time frame. If that is you, you can sell call premium as price goes lower. There is a strategy for everyone, you just need to know your time frame. If my commentary does not mess with your time frame on a particular stock or even on the indexes, ignore it.
  • Who is in control? Big picture, the bears made a powerful opening statement, but the trend on longer time frames is still up. One day does not change a trend just possibly start one. I have a feeling conditioned dipsters will let us know at some point they are alive and ready to buy. If you see shallow bounces, and a series of lower highs and lower lows, bears have the ball. If you see strong bounces, and especially if overhead levels are recaptured, bulls are likely re-asserting themselves.

Sector Summary

Broad based selling with defensives holding up better than the other sectors as you’d expect.

Put – Call Extreme-o-meter

Call buying has been creeping up over time during the recent run up. Only in the last 4 days did a call buying cluster occur at extreme levels, but certainly not at the obnoxious levels we had during the Oct – Feb Repo “dont call it QE” rally. Additionally the selling yesterday so late in the session, put buyers didn’t have a lot of time to react. I will be monitoring this closely, especially if selling persists. This indicator tends to call bottoms on extreme put buying better than calling tops.

Wave 2 DATA

5/13 Jerome Powell speaks at 9am in a rare pre-market pep talk. / PPI – FD, Oil inventories

5/14 Jobless Claims / 20 yr bond announcement

5/15  May Option Expiration /  Empire State MFG Survey / Industrial Production / Retail Sales / Business inventories

Strategy and Tactics 

Opened KRE Jun 34 P Staying tactical. Ready for a pending trend reversal if it comes. Too soon IMO to pile in short. Taking selected shots.

FAAMG Update & Trading Guidance

They pulled the rug and all the FAAMG names were hit. Given the big engulfing candle on QQQ I’d be exiting and let the dust settle. If you were diligent about raising stops you should be out or close to it with profitable trades across the board. If not, marginal losses. This is a great lesson on risk management. Rug pulls can happen at any time for any reason or no reason. Raising stops on winning trades is how you either keep a winning trade or keep losses to a minimum.

  • $FB – 60m trendline violated; Held $210 by a razors edge; anymore downside an I’d be out
  • $AAPL – Broke its 60min trend line; vulnerable for a back test of 300; consider exiting if you haven’t already if trading short time frames
  • $AMZN – $2375 was taken out which was our stop; you should be out
  • $MSFT – 60m TL violation; 182 stop will likely be taken out. Vulnerable to 180.  Exit with a profit in my view.
  • $GOOGL – Raised stop at 1380 taken out; you should be out and be profitable on a 1340 ish entry

Index Chart Review

Today I am including the daily charts in addition to the 2hr and 30min charts from which we usually work.  All the indexes printed sizable bearish engulfing candles which often become topping candles in hindsight. For confirmation of a bearish engulfing set up, you want to see followup selling the next day. If you get the followup selling, it tends to confirm the reversal, whereas a big green candle tends to negate it.

When trading shorter time frames, its always a good idea to know the key levels and EMA’s on the daily. Remember, the longer the time frame, the more important the indicators, levels, and EMA locations and their relationship to price.

SPY Daily

The breakdown came at a technically important spot that price has been wrestling with for the past 2 weeks; namely the 200ema and 61.8% fib level. Very common reversal point for a bear market rally. To my eye, the key level to watch is the confluence of the 20ema and 50 ema near $283. If price cant hold this level and closes below, it will be below all the moving averages. THat is one of the most bearish postures you can get. Bulls need to hold the line there if / when we test it. Below $283 favors more downside pain.

SPY 2 hr

Note; this in fact the 2hr chart. I just realized I covered the title block w/ my comments.  The big take- away here is the importance of trend lines. Trend line breaks both to the upside and downside often trigger big moves and / or trend changes. Yesterday I pointed out that a trend break coupled with a move below $290 favored more selling. The impulsive nature of the breakdown adds more validity to the breakdown. It wasn’t a wimpy candle that leaves you wondering. The size and impulsiveness of the candle favors follow up selling.

SPY 30 min.

Very instructive chart. Look at the candles after the trend break. 3 spinning top doji bars showing indecision. If you trusted the trendline break, you were getting short. That would have been a hard thing to do given the recent run. The next hint came on the big red igniting candle that took price to $291 and then was followed up with a flat bear flag. The break of $291 sealed the deal. There was no way to know they were gonna flush it, but you take the trade because price broke trend and first support failed. The fact that they flushed price was a bonus.

QQQ Daily

A big bearish engulfing candle here as well. As I say in the annotations, before we go QQQ hunting with a bazooka, notice that price has not even breached the 8ema and is above all the ema’s. Hard to go ballistic on the short side right here right now. The real test will come at $218 ish where I expect conditioned dipsters to step in for a defense of that level. If those guys get steam-rolled we will know the bear still has an appetite.

QQQ 2 hr 

This time frame aligns well with the idea that $218 / 217.50 is a key spot. That is where the uptrend line comes in should price fall quickly. Again, trend line break foretold trouble was near.

QQQ 30 min

When you’re charting and trading, recognize “igniting candles” when you see them. These are candles that jump out at you.  It could be a giant green candle in a stock that’s been in a downtrend. It’s a bar that dwarfs the recent bars and in the opposite direction. Here we had 2 big red bars at the top. Bulls managed to eat the first one, but not the second. Once again, the support level contained price until it didn’t. Once $226 broke, game over.

IWM Daily

Destination $125. Bulls should try to defend it, but a break below and the bears take over. Below $125 and price will be back below all its EMAs. Not where you want to be if you’re long or bullish. Let’s watch and see what happens at $125 if we tag it. Despite the recent rally where you could and hopefully did make some money, IWM has by far been the weakest index. If you’re itching to unload the bazooka, hit this one on a break below $125. No , not when price hits $124.98, when you see an impulsive candle take it out. Candles that limp through support / resistance are not to be trusted.

IWM 2 hr

Not a lot to add to the annotations. As with the others, the trend line break meant everything. The posture of the indicators is weak and favors further downside.

IWM 30 min

Do you see the igniting bar?  The first bar of the day. Biggest red bar in a while. Then the bulls bounced it to the 50% where a follow up igniting candle printed. Notice how well $130 did to contain price. Once $130 broke, game over.

 

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