Geo-Politics Explode

Tickers discussed:  SPY, QQQ, IWM, XOP, GDX

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

Headlines

  • Markets go RISK OFF as Iran promises revenge after top Iranian General killed by US Air Raid.
  • Oil up nearly 4% / Gold up 1.5% / SPX down 1-1.25% / Euro Markets less affected
  • Calendar Quirk:
    • ISM MFG and Construction Spending 10am
    • Nat Gas inventory 10am / Oil Inventory 10.30am
    • FOMC Minutes at 2pm
    • 4 FOMC Members hit the speaking circuit today
  • China Index breaks out and a slew of Chinese ADR’s blast off

Fear / Greed Index

This will come off a bit today, but still nearly pegged. Like every other sentiment gauge it won’t matter until it does.  Just another reminder however to be diligent about ratcheting up your stops on your longs. The party will eventually end and that time is when your stop-loss line is hit.

 

Market Strategy and Technical Developments

Geo-Politics Explode

Overnight, the US announced that it had killed Iran’s top General of the elite Quds Force within the  Revolutionary Guard in an air raid in Iraq. Unlike the political structure here in the US, within Iran this General would be the rough equivalent of a Vice President. Iran has vowed retaliation.

Markets here have gone risk off as gold sits at a 5mo high up almost $25 and oil popping 4%.

Game Plan – What to focus on today

  • Gain Composure:  Days like today will test your composure, especially if you’re way off-sides and holding a ton of longs.  Take a few deep breaths and do your best to separate yourself from the emotions of the moment.  Make some pre-market notes and write them down. Use that as your playbook for today and refer to it often.  If you simply lean on “gut reactions” you’ll likely regret some moves.
  • Market Posture:  As we’ve been discussing, the market has been very extended and ripe for a rug pull. Until today, those cautionary tones have been ignored by most market participants. We won’t know until hindsight allows it if this was the event that sparks a correction or a one n done that gets gobbled up next week.  Instead of guessing, all we can do is to focus on technical levels. 
  • First Things First:  Your first obligation is to manage the positions you have on vs. looking how to make a killing on the move.  We’ve been talking about ratcheting up stops for weeks.  When the market opens, hold off on bailing out in the first 15 seconds.  Let the market settle in a little bit before assessing your positions and stops.  If after the market settles in, your stops are hit, my advice is to honor them and exit your positions. If this event is a one and done, you can buy back your positions at lower prices once the coast is clear. If this event is the beginning of a deeper correction, you’ll feel good you honored your process.
  • Market Structure:  We know the market technical structure is either weak or non-existent. Gaps upon gaps upon still more gaps have made Swiss cheese of the market structure.  These gaps will act as natural downside targets. Know where they are. Write down the levels on a note pad or have the lower time frame charts handy. When and if each level breaks, you will immediately know the next technical target.
  • Focus on the Index charts:  Unless you’re a whiz kid, focus on a handful of charts if you plan on trying to trade today’s price action.  Jumping all over the map will dilute your focus and probably will result in more mistakes. I like focusing on SPY / QQQ / IWM because I have pinpoint levels on them and they are super liquid.  You can focus on whatever charts you are most comfortable with.
  • Elevated Vol:  The volatility will spike today making PUTS ( and Calls ) more expensive.  Buying spreads will knock down the premium and insulate the position from volatility risk.
  • Momentum Overshoots:  Technical trading rises to the top on a day like today as fundamentals are made nearly meaningless. That said, don’t be surprised if prices “overshoot” a technical level on the way down as a momentum fueled price move takes hold.
  • Position Size:  Because vol is elevated and technical moves become super-sized, knock down your position size. Bring down position size to a level you are comfortable with because you can still do well with the big moves.  If you are panicky with the first red bar that goes against you, your size is too big.
  • The Opening Gap:  Never under-estimate the power of Team Trick, Trap, and Confuse.  Filling the big OH gap left on the open would be a move No One will be looking for, and that’s exactly the reason to be aware of the possibility.
  • Fib Retracements:  Fibs really shine on days like today. Drop fib levels over moves and look at the key retracements zones 38.2 / 50% / 61.8% for reversals. Fibs work great on mechanical moves.
  • Bounces can be vicious:  These deep, fast, sell-offs often produce sick bounces. Crystallize your strategy when price is heading into support. Are you going to close out just above support or are you going to go for more and hold thru a bounce.  Personal decision. Just know ahead of time; in the moment is too late.
  • Pre-market lows:   Pre-market lows are often tested in the regular session.  Mark the location before the open.  Breaks below are bearish. A re-test that holds bodes well for a tradable bounce.
  • New Positions:  If you are eyeing a new position it is critical that you have an objective trade location where you will immediately know when / if you are wrong.  A stock being off 10% is meaningless unless that pull back aligns with a key support level to shoot against.  If a stock is in no-mans land I’d pass on trying to get involved. 

Key Sectors

  • Energy producers will be boldly green. If you’re still in XOP long, I’d either be rolling up and out or spreading my position.  You simply have to book some profit on a day like today. Remember they started to fade the Saudi Refinery Attack move less than 24 hours after it happened while the refinery was still ablaze.  You can stay long, just book something.
  • Defense names will probably be higher.  Know your levels.
  • Energy users like airlines will get hit hard. Know your levels.

 

$SPY Daily

SPY, as I write this, is at gap support near $320.50.  I’d be surprised if we did not at least go down to tag $319 to fill that first gap. I’d expect a bounce at $319.  How high or how far, no idea.  Below $319 opens up a door to $317.50. Be ready for overshoots and snap reversals. 

$SPY 60min chart

My levels are usually on the money; trust them. At the end of the day, we need to trade this from level to level. Gap supports hold or they don’t. Stair step price down as far as it wants to go constantly looking for signs of a reversal at key support locations.

Zoom in: You may find pulling up a 15min chart helpful as it will give you added granularity. Do whatever you need to do to see the levels I’ve identified.

The 20ema comes in at $318. Would not be surprised if we tag that today.

$QQQ Daily

Use the same idea outlined for SPY.  Price currently sitting on gap support at $213. A break below sends price back to the lows of earlier this week down around $211.  While there is another small gap at $211, I’d expect that area to produce a bounce.  After that its hard to tell. Go level to level.

The 20ema comes in at $209.50. Seems like a stretch for today, but a natural pull back target.

 

$IWM  Daily 

The wide gap from 163.80 to $162.50 is the first natural target. As of this writing, price is sitting on the top of the gap.

When we open, price will likely be below the 20ema at 164. The 50ema comes in at $160.50 which seems like a stretch but a level to be aware of.

 

 

 

 

 Trade Set ups and Charts

Not a day to be hunting set ups. Focus existing holdings. Hunt opportunities once market settles in if you have time.

 

$GDX

GDX will be popping today. $30.50 is T2 on the chart. We are set to open about $29.85.  If price were to break above $30.50 I will be looking to either spread my Feb 30Call position or to roll higher. I plan to roll my GDX Jan 29 Calls out to Feb strikes to book profit but remain long.

Like XOP, I think if you’re long GDX I think you have to book at least some profit on a day like today.

 

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