The Daily Profit Compass identifies the key levels and trading locations for the indexes with trading plans and timely commentary to keep you on the right side of the trade.
Market Observations, Technical Developments, Outlook, and Strategy
Market Recap: The indexes extended their rally and brought price to key resistance levels. As is so often the case, futures this morning have gapped over that resistance on news that China- US trade talks will resume in early October. The question now is if the market can consolidate the overnight gains and head higher.
Traders should take notice of the gap over resistance. It effectively denies a perfect entry for the bulls who were waiting for the breakout and at the same time denies shorts a good exit. It’s a common move where all eyes are on a key support or resistance level.
Possible Balance Area / Trading Range Outcomes
Take note of the possible out comes. Given the morning gap up and over resistance, it will be either Scenario 1: Gap n Go or Scenario 2: Look above and Fail. One is very bullish and one is very bearish. We should know soon.
Bonds. $TLT is trading at $145.75 in the premarket, down about $1.75 from yesterday’s close. There is support within the bull flag at / near $143. I’d be an interested buyer there. It would be a low-risk long at that level. In my opinion, this dip is going to get bought. Hopefully the market will offer a nice entry.
HYG vs TLT: Is it telling a story no one wants to hear?
$HYG is the hi-yield bond ETF. When risk appetite is increasing, the ratio between HYG ( risk ) and TLT ( safety ) moves higher. As you can see on the chart, the ratio was moving higher in 2018 until Q4 when the ratio rolled over. Despite the vicious equity rally out of the hole since January, the ratio has moved steadily lower signalling risk off. In August, the ratio collapsed. At the very least we can say the HYG / TLT ratio is not confirming a risk- on environment. Worth keeping an eye on this ratio.
Currency News: British Pound sees some strength as Boris Johnson’s plans get foiled. $USD and Yuan Stable.
Gold / Silver : GLD was up 0.62% while SLV continues it’s torrid pace up 2.5%. The safety trades continue to work despite equities making advances. I am long gold and silver miners
Gold continues its march to $150 where things will likely get tougher. Expect a healthy consolidation in or around $150. Ultimately I think price moves higher. Traders without a position should keep an eye on $150. A breakout above that level would be an objective place to either locate a long or add to an existing position.
Silver futures are down about 1% as equities rip. A consolidation just above $18.50 would be a healthy place for this advance to catch its breath before another move higher. It would also be a nice place for those not with a position to establish one. I think Silver is going higher. .
Oil— Oil blasted higher by 4% thus making Tuesday’s down move look like a false breakdown / bear trap. Price is now back within it’s consolidation triangle. Swing traders need to refocus attention to price moves above or below the triangle for the next entry. . I have the following levels as support. $54.80 / 54.15 / $53.50 / 52.90 / 50.90 ( from the 60m chart )
Hong Kong: Embattled executive Governor Carrie Lam signals she is ready to withdraw the controversial Chin a extradition law.
Strategy Update: Time to re-assess the market.
With price above resistance as I write this, there are only 2 possible outcomes. A breakout, consolidation and hold of the breakout which would be very bullish, or a look above and fail which is very bearish.
While my “master plan” for the trading range to resolve to the downside has been foiled thus far, I am going to be both patient and cautious as this breakout unfolds. I’m certainly not going to load the boat long by Friday because of a 2 point move. Here’s why. If the break out is legit and we are going on to new highs, there will be plenty of time to get aboard and make money. Resisting the FOMO. On the other hand, I want to be both prepared and flexible if the breakout proves to be a false one, which is one of the most bearish things that could happen.
What would give me more confidence that the breakout is for real would be a sell off of the safety trades. If these break it certainly would be a positive sign for equities. THere might even be a better trade shorting these instruments than going long equities. When / If Bonds and metals sell off they wont limp lower, they are going to drop like a rock. You should know it when you see it.
Risk off trades continue to work. Bonds / Metals / Bond proxies / $USD all continue to work. If they continue to work in the face of an equity rally I’d remain skeptical of the breakout.
Price is set to gap above both key resistance at $294, and an open gap from $294-$295. Key overhead resistance is $297.
Expect either some consolidation below $297 as the move gets digested. Price action may be choppy as shorts scramble to cover and the market re-adjusts. A back fill of the open gap to $294 should be a scenario to expect and a healthy thing for bulls as long as $294 holds. A move back into the trading range below $294 would be a very bearish technical event.
Swing Traders: Yes we broke out, but now the key is to consolidate the move above $294. It’s fine to nibble on some long exposure but dont feel you have to be fully loaded by Friday. There will be plenty of time to make money if the breakout is for real. If price breaks back below $294 be very afraid. A move above $297 favors a move to all -time highs.
SPY 60 min: Price is set to open around $296.50 as I write this. A quick back fill of the gap below to $294 with a hold there would be healthy and a positive for bulls. For a gap n go scenario, $297 is now key overhead resistance. If price moves back below $294 it would be a very bearish development. Note the bearish divergences on the indicators. Price making relative highs, but indicators at lower levels.
Price is set to open about $190.50 which is above yesterdays key resistance level of $189. As long as price holds $189 going forward, the breakout remains in tact. Moves back below $189 would be a very bearish event.
Swing Traders: Give the market some time to settle in. No need to load up 10minutes after the bell. A back test of $189 with a hold would be a positive development and a nice location for a long with a tight stop.
QQQ 60 min:
$189 will become key support after the open and $191 will be key overhead resistance. Expect chop as shorts cover and the market settles in.
A back test of $189 with a hold would be a positive technical event as would a gap n go with a move above $191. A price move back below $189 would be a very bearish technical event.
Unlike SPY and QQQ, IWM is set to open just below key resistance at $150. With $150 being the bull / bear pivot, IWM offers a very objective trade location right out of the gate.
Swing Traders: $150 is the bull / bear pivot. Bears can use $150 to shoot against to the short side, while a move above $150 would give bulls a good shot at an objective long against $150. It’s rare on a day like this where price would open in a perfect spot for an objective long or short entry. If you are itching for a trade, IWM offers the best trade location out of the gate.
IWM 60 min
As mentioned above, use $150 as your key level. A break above targets $152.50. If price can’t clear $150 in such a bullish environment it could be a big tell on the overall health of the market and validity of the breakout. At some point you’d think IWM would participate even if performance lags.
We covered our short trade exposure and will re-assess the market before determining our market bias going forward. Then we will scale in on new trades.
Open Trade Set ups – None
Triggered Trades –
CAR Sept 25P – closed for a small win
EWH Dec 21P – closed for a loss
$KRE Sept $48P at 1.48 – closed for a loss
XBI Sept 80p at 2.84 – closed for a loss
HOG Oct 30 P – closed for a loss
GDX Oct 30 C at $1.47
WPM Oct 30 C at $1.32
KL Sept 45 C
PAAS Oct 18C
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The charts are and levels are provided as well-informed guidelines. That said, please be aware that exogenous events like surprise tariffs or other events can easily move price through support / resistance zones.
Also, set you stops according to your own risk tolerance. The ones I have provided are to be used only as a guide. The most important aspect of your stop is to honor them. Some trades work, some don’t. Honoring your stop will ensure your loss on a failed trade will be minimal.
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