Daily Profit Compass May 29

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 interplay of time, patience, and EDGE

While the quote certainly applies to traders, another way of thinking about it maybe like this. If you know a particular set up within your system has EDGE ( known positive expected return ) then time and patience is your ally.  If you are patient to wait for that set up, then play it every single time you will collect that EDGE.  Said another way, If you were at a casino sitting at a slot machine, and by some quirk, you knew it paid out 55% of the time, you’d never leave.  The key to the whole thing of course is 1. knowing your EDGE and 2. Playing the same way every time.  If you randomly bet a lot on one trade and a little on the next one, your win rate will be the same, but your returns will not.

Earnings

 

 

News Flow

  • Trump set make policy statement on China / HK Trading status. Xi watches and considers his next chess move.
  • Covid running wild in Brazil as cases and death count spike
  • U.S. Renewables top coal for first time since late 1800’s when wood was the top fuel
  • Trump – TWTR tit for tat continues. Communication Decency Act of 1996 in the cross hairs.
  • Musk hauls down $775M bonus pay as $TSLA milestones are met.
  • Crude futures back off
  • Boston Marathon cancelled for first time since late 1897

Sector Summary

Energy,  Financials, Industrials, and other cyclicals see whipsaw as traders pull the rug on the rotation into beaten down names. Airlines and banks see big pull backs. Tons of bearish engulfing candles out there. Today’s action will be important from a technical perspective. If follow up selling hits these names, the big rotation would look like a head fake. If the key sectors rebound then we may be able to chalk yesterday up to a bad day in the office.

 

Graphics to think about

Under-the-Radar Yuan move to all-time lows something to monitor. Lot’s of China watchers are expecting a Yuan devaluation but the question is when. Maybe the plan is a gentle drip lower with the hope no one notices

Put – Call Ratio

Call buyers continue to push at extremes while bears are no where to be found. So far no ill effects have been seen.

$NYMO Spikes

While the $NAMO Oscillator which tracks the NASDAQ has remained in the middle of it’s range, $NYMO tracking the NYSE spiked to extremes. In my experience, caution is warranted when this indicator is above 60 at the high end of the range.

Jitters

Markets turned jittery yesterday afternoon as China tensions hit the market as President Trump announced that he will have a presser today to announce a policy decision tied to the new Security Law implemented in Hong Kong at Beijing’s direction. Way before the China news hit, traders had been fading the “dash for trash” rotation that had grabbed the headlines early in the week. It may turn out the sector rotation we’d seen early this week was nothing more than a positioning squeeze.  Time will tell, but there are a ton of big bearish engulfing candles out there on regional banks, airlines, restaurants, and other cyclical names that saw huge pops.

Couple of things for today.  Today is month end. There’s the potential for added vol as money managers may do some jockeying in positions to close the month. Also with the Trump policy announcement. First is the market reaction to the announcement, then there is the positioning ahead of the weekend with the potential to a China retaliation move over the weekend or on Monday. Those moves are above my pay grade but depending on what is said / done, you may see a soggy or risk off afternoon as traders decide how long they want to be over the weekend.

 Strategy and Tactics 

  • IWM – if the rotation was a positioning squeeze and now they are going to fade that early week move, IWM will feel it the most at the index level. The chart sets up bearish if price can’t hold $140. I offer a trade idea on the charts below. There are some nice binary levels on the chart with clear levels to shoot against. Take a look and see what you think.
  • To my eye, SPY $300 and QQQ $229 are the key short term levels to watch. Above and bulls have no immediate worries. Below things get more iffy.
  • For longer term traders, bulls still in control. No immediate worries but further downside will test uptrend lines / channel lows.  Seems like a time to pay a bit more attention.
  • Continue to watch FAAMG. Even if you dont trade them, sheer cap size will move QQQ and markets in general.
  • I still think Tactical shorts ok, but overall bias remains and should continue to be bullish.  A tactical short I am focused on is IWM.
  • Stay mentally flexible even though your heart may urge you to go “all in”
  • Keep ratcheting up stops if you have nice runners. Have a plan to get paid.

FAAMG Update & Trading Guidance

  • I will have a followup post to this one before the bell with updated looks.

Index Chart Review

SPY 2 hour

SPY 30 min.

QQQ 2 hour

QQQ 30 min

IWM 2 hour

IWM 30 min

 

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