Tickers discussed:  SPY, QQQ, IWM, PANW, MOV, SMH, QURE

The Daily Profit Compass  provides the stock market outlook 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

Inspiration

Making big plans and having “great expectations” is a set up for disappointment. Be open to life unfolding the way it wants.  Same thing in our trading life. Building a huge bull or bear thesis is counter-productive to seeing price movement for what it is. If you’re open to a move either higher or lower you’ll see it. If you’re locked in on a preconceived idea you’ll miss it. 

Headlines

  • Bloomberg reporting that the US-China Deal is a lot closer than the heated rhetoric from yesterday suggest.  Markets cheer!
  • HK dialing up $500M of fiscal stimulus as it faces civil unrest and an economy in worse shape than during the GFC.
  • OPEC talk of an additional 400K  BBL / day production cuts are helping lift oil.
  • $MA ok’s $8B stock buyback; bumps divvy
  • Trump winds up NATO Summit and will be headed home later today.
  • Larry Page stepping down as CEO at $GOOGL

Earnings Calendar  More well-known names report after the bell today.  RH / FIVE / WORK / ESTC / SMAR

 Market Observations, Technical Developments, Outlook,  and Strategy

Broad weakness hit the tape for the second day in a row with 9 of 11 sectors closing red on the day. Unlike Monday, during Tuesday’s sell off,  the safety trade instruments TLT ( up $2.90 ) and Gold ( up $15 )  saw veritable moonshots higher, especially when compared to recent trading action. After the morning lows were put in around 10.15am, all the major averages mounted a slow, steady rise the rest of the day and all moved into the morning gap. Here is how key segments of the market performed.

XRT – off 1.36%

KRE – off 1.4%

IWM – off 0.36% w/ nice closing ramp but still flashing failed breakout

SMH – off 1.4% with a bearish island reversal on the 60m chart

TLT / Gold – Strong bids for both

IYT – off 2.17% bad day at the office.

IBB – up 0.59%  good day

Definitely a risk off day but under the hood I saw a lot of software names go from red to green. One example was $SHOP which put in a huge bullish engulfing candle flipping from red to green and going up $20. As is often the case, price bounced off of key support levels and consolidated the rest of the day. With futures up today, prices will open with air gaps both above and below. THat can make trading tricky. My guess is that price will advance off the open and make a run at filling yesterday’s open gap. I then favor a reversal lower but that guess is far from certain. Price could easily plow higher and recapture key levels.  I just somehow believe that price favors coming to back-test the breakout at SPY $302 / $301 and QQQ $194 / $195.   New Tariff Day is Dec 15 and we had an over-extended run in November.  In the very short-term, Tilting bearish but watching key levels to see if bulls can recapture them.  At this juncture I do not have any positions on the indexes so I am flat. Waiting for this bounce to play out.  

Strategy Update:  Looking to fade the bounce at key resistance levels. Conviction however is not overwhelming so sizing will reflect that. Open to the possibility to a one n done drop. Overall trend remains bullish.

  • 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; a back test of the breakout levels that holds would be a great place to anchor new longs.
  • 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 – Spy closed below the 8 and 20 emas but off the lows. The key level this morning is $311.64. That is the top of the gap.  Prices above $311.64 are bullish; below keeps chart bearish on short time frames. Be aware that price will open with a gap below if prices remain where they are. Be open to a move either higher or lower out of the gate. Open air will be on either side of price at the bell.

Swing Traders.  If you bought in or around $307 / $308 near yesterday’s low, well done. Stay long against your stop. A good place to begin scaling out would be on a gap fill at $311.64 and then $314 if we get there.  I’d expect some sellers to be active after the gap fill.  $311.64 is an objective place to try a short with a stop slightly above.

$SPY 60min chart

Bear Set up:  $311.64 is an objective, low-risk location to anchor a fresh short.  If the bulls have more gas in the tank, $312.50 is another location at the top of the 60min breakdown candle.  Also you can always use a break below the prior’s day low as a place to add or initiate a new short. in this case $307.10

Bull Set up:   Recapturing and holding $311.64 would be a place to add or initiate a long. Also, a move above $312.50 would be a place to add.  Lastly, if we get a move down to $307 that holds it would be a second chance to enter a long at a great trade location.  

$QQQ Daily Here too price closed below the 8 and 20emas. The 50ema lies at $197.64 where a gap is also located. Might be a logical target if more selling resumes, but for now focus on the potential gap fill and reversal zones.

Swing Traders  $203 is a gap fill. Above is short term bullish and below is short term bearish. Like SPY. Price set to open with gaps both above and below price. Be open for a move in either direction off the open.    

QQQ 60 min

Bear Set up:  A rejection at $203 looks like the first objective location for a short. There will also be resistance at $203.50 if it makes it that far.   The 50ema sits at 197.64 and is the first target if downtrend resumes.

Bull Set up:  Above $203 and above $203.50 are places to start, then add to a long position if you did not buy at the lows yesterday. If you did buy at the lows, trail up your stops and be aware they’ll now be a gap below price.

$IWM  Daily Price closed below $160 and thus has a failed breakout look.  That said, a move back above $160 to recapture that level would be bullish. Simple set up here. Above $160 is bullish, below $160 is short term bearish. Keep it visual.

$IWM 60 min Bear Set up: Price set to open above $160. Get short against $160 if that level fails again.  

Bull Set up:  Prices above $160 are bullish. If price pulls back off the open and $160 holds, it would be a great place to anchor a long with a stop just below.

**************************  TRADE Updates   ******************************

$SPY Closed the Dec 4 $314 P  just off the lows around 10.15

$QQQ closed the DEC 6 $204.50 puts for $1.13 just off the lows around 10.15

$DLTR – closed my DLTR Dec 6 $90 P for a small loss after price showed nice relative strength in a very red tape.  IMO after this turbulence is over DLTR will be a nice long set up against $90.

$KL long Jan 40C / GDX long Jan 27C / XRT short w/  Dec 44P no action; holding all for now.

Entered new PANW Dec 6 227.5 / 230 / $232.50 call butterfly.   Short term lotto w/ 6 to 1 payout with pin at $230 on Friday.   Was intrigued because PANW showed relative strength in a bad tape. Price is just on the edge of the pay window.  Keep in mind, this is a lotto.  I bought 3x contracts at 39c.  Less than $120 in the trade.

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

$SMH – Relatively rare island top reversal.  Notice the gaps on either side of the “island” of prices. Price at an interesting location.  Below $128 its a short with a gap to fill below. Above $129.50 you can play for a gap fill long to $131.  If price were to make it to $131 I’d be a motivated seller there with a stop just above.  The big island of overhead prices should create a tough wall of resistance at $131. Time to give some back and repair all the open gaps below.

$QURE  Our old friend $QURE did a moonshot yesterday and thus sets up nicely for a bracket trade. Alarm both sides and go with price on a breakout or breakdown

$MOV  Altho the move was not impulsive, price nonetheless closed below $19 triggering the short entry. $MOV will remain a short candidate as long as price remains below $19.  

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Notes: 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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