Daily Profit Compass Oct 8

Tickers discussed: SPY QQQ IWM  XLI  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 

Perfect advise for those seeking to trade well. Once you identify as either a bull or a bear, you’re well on your way to not seeing half the information that comes before you.  Picture yourself  as a scientist sitting high above the noise, looking down on the price action below with no particular bias as to what you may see.  Which way is the price river flowing?  Are there rocky, white water rapids ahead or smoother flows? Where are the vulnerabilities?  Is there an easier side of the river to be on?  If you query yourself with these visualizations as a backdrop, you’re much more apt to get it right than if you’re you’re observing as a bull or a bear.

Earnings

News Flow

  • VP Candidates trade punches but no knockout blows at the debate.
  • $MS to buy Eaton Vance for $7B in a bold move.
  • Manhattan Apartments get cheap.
  • IBM undertakes a massive re-structuring
  • Futures lift in overnight trade as the major indexes challenge key resistance.

Industrials poised to breakout. 

Industrials have been consolidating for 8-10 weeks between 76-80.  Now price is ready to break out.   Alarm $80 and get long on the breakout and look for a measured move to $84.  The nice thing about index ETF’s is that you can use them to to capture earnings season without the scary prospect of holding a single name through its earnings call.  So If for example, XLI breaks out, and if you are bullish industrials and expect a lot of upside surprises, you can extend the duration of your trade through the end of this earnings season.  THe only caveat is to understand that XLI is cap weighted.  You can go to State Street’s web site to get the breakdown of the components for all the SPDR Sector ETF’s

Companion Video

Yesterday, after the bell, I recapped the technical posture of  the indexes, FATMAAN names, along with gold / siver and other market movers.  The overnight session has not changed the technical picture as the market remains at key resistance. If you missed that video, listening to it this morning will bring you quickly up to date.  Find the video   HERE

INDEX CHARTS

SPY 2 Hour

SPY needs to convincingly move above $342 and hold it to finally put the wide trading range behind it and open the door to higher prices. To my eye, $344, the $347 would be first areas of potential resistance.  Be suspect on any breakout if QQQ does not confirm the move with it’s own breakout.

SPY 30min

Be aware of the bearish divergences that are present. Not a reason to sit on your hands completely, but  it is a yellow flag that the potential for a false breakout is elevated compared to when those divergences were not there.

QQQ 2 Hour

Price has a $2 gap to fill above along with resistance at $283.  Price was up here before, but the fact that SPY never confirmed proved to be important and the breakout failed. You want to see  QQQ make a bold move higher coupled with SPY making a comparable move above $342.

QQQ 30 min

IWM Daily

Adding the daily chart for IWM because I wanted to give you a wider perspective. A break above $160 opens the door for a run toward $167.50 which was the $2019 high.  For the all-time high, you’d have to go back into 2018 when the index was in the low $170’s.  Just tells you how long IWM has been lagging.   One nice factoid going along with IWM’s recent run is the broadening breadth for the market advance. It’s not just the Q’s.  We have all 3 major indexes at breakout levels.

IWM 2 hr

IWM 30min

Pulling it all together – Strategy and Outlook

All about follow through

  • SPY, QQQ and IWM are all just below resistance and looking to break out. 
    • A triple breakout has to be taken as bullish.
    • The bearish divergences on SPY / QQQ, are troubling but not enough to keep me completely sidelined.
    • It’s a big if, but if we get the breakouts, I want to add back risk exposure in a measured way.
    • Vol is still elevated at almost 28.  Piling in long with VIX at 28 isnt the same as it is if it were 12.
    • Dont discount the possibility of 2% down days coming from nowhere. Keep your risk at a comfortable level.  ADD some hedges if you want to extend your holdings because you’ll never be able to act quickly enough to save things in the teeth of an unexpected rug pull.
  • 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.
  • Watch FATMAAN names
    • Big Cap tech has been soggy. You wont see QQQ racing ahead unless these big names participate.
    • If a market rotation into cyclicals and value names continues, be open to the idea that tech may lag IWM during a “catch up ” phase.   Just a possibility.
    • Because of their sheer market cap, the direction of these names will shape the direction of the major indexes.
  • Final Thoughts
    • While inside these trading ranges, expect volatile, headline driven trading.
    • Watch IWM / cyclicals / industrials / restaurants / cruise lines / travel and hotel companies for follow through on last week’s early rotation into “back-to-normal” trade.

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