Fading the Fear Factor

Tickers discussed:  SPY, QQQ, IWM, ELY

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 –    Trade like a 5th Grader

Today’s idea builds on this past weekend’s lesson. You can find HERE.

As we last discussed, Bill Ackman found trouble when he could not help himself from talking and being in the limelight. When he stopped, things got better. As Xinxin Ming suggests, the same goes for over thinking.  Once we stop closing ourselves off to fresh input, we will be able to see what we wish to know. We can learn from how kids think. They often provide useful insights because their brains are much more open to seeing the big picture because they are not layering in 10,000 variables.  Try this experiment. Set your average 5th grader down in front of your trade desk. Mark down support and resistance. Tell them to buy at support and sell at resistance. Give them no further guidance. Observe and take notes. I will make a bet they can do that better than you can. Why? They are not thinking about Iran, the Fed, the economy, the position size, interest rates, the money, your PnL draw down , your relationship problems, Trump Tweets, or the January effect.  They are seeing price in relation to a line and reacting. That is all.  See what I mean?   Talk less, think less, see more.

Earnings Snapshot

Pre-earning periods are typically bullish

Headlines

  • Global Markets calm as dire fears about Iran subside
  • The oil fade begins
  • TSLA China factory opens; SpaceX becomes the largest commercial satellite operator

Market Observations & Technical Developments

Fading the Fear Factor

When I ran a small business and a thorny issue arose with a client, we’d assemble the team to consider options and possible fallout. One of the first things we did was to identify the worst thing that could happen, then set it aside. In 25 years of business, I can’t recall an instance where the worst thing ever happened. Lot’s of times in fact, we flipped the script and turned a potential nightmare into a positive.

The market is doing the same thing; fading fear.  Nobody wants war and many will work to prevent it. If it does come to that, the market will deal with it at that time. On both Friday and Monday, the market had significant pre-market draw down, gobbled them up and advanced sharply.  That is a sign of resilience and strength. The bull trend is still in tact whether it be from Fed liquidity or investor optimism, it really does not matter.  Sure, we may put in a top today or tomorrow, but if we do, we will see that in the charts. When fear comes, lets do this:  Look at price in relation to the ema’s.  As long as the ema’s are bullishly stacked, the bull trend continues. When we see ema’s roll over we can react accordingly. Until then, let’s fade the fear.

Strategic Posture

Strategy Update:   The daily time frame charts are still bullish; No major levels have been violated.  If you’ve got long positions, simply respect your stops and don’t be married to anything. If we get a decent pull back, you can re-buy at lower levels.

 

  • Strategically bullish.  Fed balance sheet expansion should be bullish markets.
  • Pre-earnings season is typically bullish
  • 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.

Key Sectors

  • Energy –  Oil will probably back off but could spike at any moment depending on what Iran does and when. Be careful trying to short.  No touch for me. Fundamentals say lower; Iran risk ever-present.
  • Gold and Gold Miners:  Something terribly wrong with gold miners. Metal up $50-60 and GDX flat to slightly down. My stops have not been hit but certainly not seeing any positive price action.
  • SMH – Semi’s were soggy yesterday and did not behave bullishly. Canary in the coalmine sector; keep an eye on it regardless if you trade it or not.
  • Defense names will probably hold their bids and possibly drive higher.

$SPY Daily

Swing Traders. Prices above $322.50 are bullish. The next level of support is at $320.50 at the gap. If prices lose $320.50 then a move to $319 and a gap fill would be favored.

$SPY 60min chart

Bear Set up:  Prices below $322.50 would be a place to try a short, but be careful because bear set ups are failing. A move below $320.50 would be a more secure place to try on the gap entry.

Bull Set up:

Stay long above $322.50. Its as simple as that. If prices break below look for support at $320.50 and $319.

 

$QQQ Daily

Swing Traders Use the lower side of the channel on the daily chart as a toggle point for swing trading. A sell signal on the daily comes with a close below the trend channel. From the chart, that level is $211.50

QQQ 60 min

Bear Set up:  Prices below $214 favor moves to $211.50 at the channel low on the daily. A break of 211.50 sends price lower.

Bull Set up: Stay long against $214. Be more cautious if price breaks below that level.

$IWM  Daily 

The gap entry at $163.80 continues to hold. A move above $165.50 opens up room for price to run.

 

$IWM 60 min

Bear Set up: I’d wait for a break of $163.80 and try for a gap fill. While you could short from higher levels, I think you’d see a lot of chop. The gap fill trade is cleaner and has a higher likelihood of success.

Bull Set up: 

Getting long when 163.80 held was money yesterday. If you got long, congrats. You can add to your position above $165.50 and tighten up your stops.

 Trade Set ups and Charts

$ELY 

Nice breakout. Earnings are in 3 weeks. Can either take it long now with a tight stop for potential run into earnings or add it to a watchlist for post earnings reaction.

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