Elf Overdrive

Tickers discussed:  SPY, QQQ, IWM

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 –    Psychological Keys

In earlier writings and discussions I’ve used mice entering a maze to represent trades we put on.  ( Find the blog post HERE  )  Once the mouse is released, no scientist would be elated if the mouse turns to the left; nor would they be distraught if the mouse turned right.  They would simply document the findings, then synthesize the outcomes into a working thesis.  That’s how we as traders must approach each trade. After each trade is initiated we are simply observers of information flow.The outcomes we observe then become part of the input for our working thesis of the market.  For instance,  repeated failure of bearish set ups quite possibly would lead you to come to the conclusion that the market is not bearish. ( versus becoming angry that the market is not doing what you want it to )

This is what trading coach Mark Douglas is talking about; Traders having a stable mindset.  A mindset that isn’t jacked around by outcomes or market behavior.  View the market as an information stream and nothing more. ( there is nothing more ).  Just as the scientist would observe his information flow, so should you the trader observe it and do your best to interpret it.

If you work to achieve that mindset, you’ll no longer view trading as “battling markets” anymore than a scientist “battles mice”.  The struggle no longer exists.

Hopefully, if you’ve been familiar with my work for any length of time, you are following the bread crumbs left behind by Market Wizards and trading coaches like Mr. Douglas.  Everything you seek is right in front of you.

Headlines

• Saudi Arabia find 11 guilty in the murder of journalist Jamal Khashogghi.  Unsurprisingly no links to the Royal Family were uncovered.  5 receive death penalty.  Impeachment proceedings proceed but no one I know is paying attention. Seems like a politician / media thing.
• China cuts tariffs on a range of items
• TSLA takes a $1.4B loan for China plant Quad Witching options expiration and Re-balance today. Be prepared for added vol.
• Kalanick set to sell balance of UBER stake
• Santa’s Elves coming down the home stretch

Earnings Calendar –  No earnings this week.

Fear / Greed Index-

What a difference a year makes. Last year at this time the reading was 5, now its 91.

Market Observations, Technical Developments, Outlook,  and Strategy

Stay Bullish

With the FED poised to inject massive liquidity into the market over the next 2 weeks, and a lack of sell triggers, stay bullish through the end of the year. While still subject to a liquidation break from nowhere, the right move IMO is to continue to be long while raising stops and keeping long exposure on a tight leash.  If / when trend lines start breaking the market will tell us when to exit positions.

All Politics are local; so are the markets

National polls are great, but politicians understand that the voters in their district are the ones that decide if they get to keep their job. So too for the markets. It’s great to say we are in a bull market, but that view is nothing more than a broad characterization of a wide number of stocks, a national poll if you will.  If the stocks YOU are long are not acting right, YOUR portfolio / positions are NOT in a bull market.  If some / all of your positions are not acting right, get rid of them.  Find ones that are in gear with the market as you see it.

The sector summary is below. XLV, XLK, and XLC lead; XLF, XLRE, XLY lag

Holiday Week Trading

Elves  are in over-drive mode as they make the run to get everything done before Christmas. So too should you take this week to get everything done before Christmas. A great week to tidy up positions heading into the new year. May be some tax-loss selling but I dont think it will affect the market to any large degree.  Volumes will dwindle this week as many traders take the week off. Review your positions; follow the strategy. The most important thing you could probably do this week is to reflect on your year, then jot down some actionable ideas you can change in 2020 to improve your trading. If you get stuck I will have a blog post up soon with lots of ideas.

Strategy Update:  No Changes. Ratchet up stops; maintain a bullish bias ; Hunt for objective, low-risk trade locations on stocks where you can get in with a clear stop in place in case things don’t work exactly as planned.   Avoid full FOMO of buying everything in sight. Dont sacrifice set -up quality because of FOMO.  There is plenty of time to make money.

• Maintain bullish bias while keeping your head on a swivel.
• Set tight stops depending on your time frame; trim n trail
• Keep long exposure in balance with your risk tolerance.
• Keep some dry powder ready; to take advantage of any one n done pull backs.
• Be aware of the yellow flags; ( low volume climb, ultra low vol, poor market structure loaded with gaps ) collectively they simply mean to be careful.
• Nothing truly bad can happen unless SPY $301 fails or QQQ $194 fails. That said, those key support levels are getting farther and farther away.
• Nimble, active traders can hunt for momentum plays intra-day with the plan to close at the bell.

 Market Participant Positioning.  As we move forward, keep in mind that as we moved into thin air over the past couple weeks, it has been on low volume with most of the shorts either being dead or squeezed out.  Having shorts in the market provide a buffer on the way down as they cover to take profits.  With short exposure lower than normal, that buffer wont be there so faster downside moves can happen.  Additionally, there may be weak-handed longs out there that were happy to milk every last cent of the rally but may hit the exits quickly at the first sign of trouble.  These are not predictions, just a heads up that if sell-side activity ramps, prices may fall further and faster than what you’d normally expect.

$SPY Daily – Price above all ema’s which are bullishly stacked. As long as price remains above the bottom of the rising wedge, remain bullish.  If price drops below, watch the gap entry at $319.22. A price move into the gap favors a move $2 lower to fill the gap.

Swing Traders.   Stay long against the breakout at $319 just below the first gap. Getting extended as the 8ema is only at $317.50.  We’ll be coming back to the 8ema at some point so tactically you could exit short term longs and look to re-buy on pull back to either 8ema or 20ema.

$SPY 60min chart

Price achieved the $322 target ( SPY went ex-div Friday ). No sell signals until bottom of wedge breaks.

Bear Set up: A break below $320.37 favors a gap fill to $319.33.  This would be the first opportunity to  sell. Expect buyers to step in there.

Bull Set up: Getting long above $320 worked. Stay long against your entry.  level.

$QQQ Daily

Price achieved the $211 target but the path of least resistance remains higher. Move stops up to  $209.50 ( new level ).

Swing Traders  Longs are ok as long as price remains within the wedge above 209.50. A break below the wedge would trigger a sell signal.

QQQ 60 min

Bear Set up: There is a strong bid under the market and sell signals have been foiled so be careful shorting. A break of 211.27 gap entry is your first chance to short ; a break of 210.86 would be a place to add.

Bull Set up: Stay long while continuing to raise stops and rolling strikes higher. Book profits as you have them. Liquidation breaks remain possible and can come out of nowhere.

$IWM  Daily 

Short term traders can stay long against 165.60. Longer term can stay long against  $164.  The posture remains bullish and IWM may outperform SPY / QQQ on a catch up trade as price remains below the 2018 highs of $173ish. .

$IWM 60 min

Bear Set up: First sell signal is on a break of the 60min rising wedge around 166.

Bull Set up: 

Stay long within the rising wedge. Short term tactical traders who are long should probably step aside if the wedge breaks. The likelihood of a deeper pullback is more likely when price is below the wedge. If the gap fills to 162.73, that would be a location to either add to or start a new long position w/ a tight stop below.  Prices below $162.50 would favor a gap fill to $161 so any long positions should be exited and then look to buy back at lower prices at either $161 or $160.

************************ Trade Set ups and Charts ********************

Doing a separate blog post with a bunch of set ups.

Will post / forward when done this morning.