Daily Profit Compass Oct 2

Tickers discussed: SPY QQQ IWM Strategy Review

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 – will return

Companion Video

A careful premarket look at the key levels on the indexes given the sell off after the President revealing his Covid infection.   Trading strategies are offered on how to handle today’s possibilities.

Tickers: SPY, QQQ, IWM

 

Earnings

News Flow

  • Pres. Trump and the First Lady test positive for Covid.
  • Quarantine and contact tracing protocols may imperil McConnell’s timeline for the Coney Barrett SCOTUS hearings and vote.
  • GS announces a round of layoffs as banking sector total reaches 70K
  • AAL / UAL  set to send 32K workers home as prospects for more Covid Relief funds wane.
  • The final Jobs Number prior to the election set to be released at 8.30am today.

Market Snapshots

From a technical standpoint, whenever a faster moving average crosses a slower moving average from above it is a bearish event. The converse is also true. A faster moving average crossing a slower one from below is bullish.  Entire “moving average crossover” trading systems are driven off of these crosses.

 

Industrial metals got whacked.

THis past weekend, I called out to watch $2.88 on copper. We are now at $2.86.   There are of course more support levels below but the point is that copper is rolling over and unless bulls step in quickly copper has further to fall. Not a great sign for global growth.  Watch FXC, SCCO, and the China large cap ETF FXI

FAAMG names account for ALL S&P 500 gains

October Surprise & Potential Strategies

Yesterday QQQ broke out of its trading range above $280 and was showing tech leadership.  After the revelations of the President having covid, premarket levels indicate now that prices for all the indexes are well below the high end of the trading range.  The question now is higher or lower today after the 9.30 open. Remember, all the premarket action is being driven by small traders. The big Wall Street trading houses are not in there. Once the market regular session opens we should get a pretty good read.   Do they sell it off or buy the dip?   The reaction should provide so insight as to what underlying sentiment may be.   For instance, if they sell it off further then possibly the end of quarter ramp was a bit fake.  If however they buy it up, and the market shrugs off bad news, that would be a positive sign that underlying sentiment.

Premarket all the travel -related stocks are being sold off hard. The FATMAAN names are off 2-3%.   Very hard to know at this point if this event is a catalyst for further selling or simply a one / two day blip which is bought.  I don’t think you necessarily rush out and sell into this.

Time frame and objectives are everything in these situations. For instance, if you have had your eye on a name and the market hands you a 10% off coupon and price falls to a support level, you could sell PUTS below on some thing you want to own anyways. ( willing to take assignment )  or sell Put Spreads to capture elevated premium.  OR  Sell call spreads if you think a names is going lower.

My recommendation is to simply make your decisions based on levels.   

  • For instance, is price holding support or losing it?   Did price lose support initially in morning trade but then rally back to recapture it in the afternoon?   Recapturing levels from below is a bullish move.
  • Do you see a big hammer form on the daily candle stick in the afternoon after heavy morning selling? That would signal buying pressure and interest.
  • Does price close on a Friday afternoon dead on the lows?  That is bearish and favors follow up selling on Monday.

INDEX CHARTS

Trade locations as of 6am Friday mornings.

SPY 2 Hour

SPY 30min

QQQ 2 Hour

QQQ 30 min

IWM 2 hour

IWM 30min

Pulling it all together – Strategy and Outlook

NOTE:  I will revise this section over the weekend based on how we close today. 

  • NQ Futures poised for a breakout.
    • QQQ is trading above $280 in the premarket. $280 is the top of the recent range.
    • A break above $280 opens the door to higher prices and a run back to the recent highs.
    • That said, SPY is still about $2 shy of its breakout. In a perfect world you’d like to see SPY confirm the QQQ breakout.
    • And what about IWM? Not even close.  Still $9 below the recent high of $160 and $20 off the high set 2 years ago in the summer of 2018.
  • Don’t dismiss higher vol regime
    • There is still stress under the surface and the market will be subject to rips and dips driven off the headlines.
  • The Lead in to Earnings Season is usually bullish
    • The kickoff to the next round of earnings is about 2-3 weeks out.
    • The run up to earnings is usually bullish.
    • We can look to take advantage with either broad market net long exposure and / or individual names that may run toward their date.
      • As is our normal plan, exit any stock prior to its earnings release to avoid getting wiped out on a negative surprise.
      • If you want to “play earnings” a much better way to do it is via an ETF.   For instance, you could use KRE Regional Bank ETF to gain exposure over the whole bank earnings season. If you were bullish get calls, and if you were bearish buy puts.  THe ETF should accurately reflect the earnings season as a whole.
  • What would bearish price action look like today?
    • QQQ breaking above $280, then falling back below
    • SPY being stuck in the mud and not participating in the upside push.
    • FATMAAN names losing their 60min uptrends and / or the key levels of support detailed  the video.
  • Set preconceived narratives aside.
    • Regardless what happens today or later on, adopting a cautious, tactical view while price was in “chop zone” was the right call
    • If price provides new info, listen to it. 
      • Price breaking out from a 3 week long $20 trading range is significant. 
      • If we see that, we should be transitioning our thinking toward objective, strategic long set ups.
      • If those long set ups fail and price returns to the trading range, our thinking will transition towards bearish. Once price breaks out, it should not re-enter the range or else the move was fake.

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One Response

  1. I sincerely appreciate your daily technical analysis. It is in easy to understand yet comprehensive enough to be of real value. You point out things I often overlook in doing analysis on my own. JDM

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