Tickers discussed:  SPY, QQQ, IWM, GLD, SMH

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

Headlines

  •  Novartis buying MDCO for $85 / sh
  • UBER denied renewal of license for London; shares off 6%
  • LVMH buying $TIF for $16B
  • Pro-democracy candidates win 85% of seats in Hong Kong elections
  • White House reviewing pro-democracy HK Bill passed with almost unanimous consent.  It would look politically weird for Trump NOT to sign even though risk to trade deal is real. How can a US President be for democracy but yet not sign a pre-democracy bill?   Tough nut to crack.

Earnings Calendar Holiday shortened week and earnings are winding down but several names of interest. NTNX, BBY, MOMO, DLTR, BURL, ANF, VEEV, DE to name a few.  

Market Observations, Technical Developments, Outlook,  and Strategy

Resilience

Last week we saw the heaviest selling volume since September on Wednesday as traders reacted to trade news. This hardly put a dent in the recent advance, so from a price action standpoint the rally rolls on. From an indicator perspective though, yellow flags piling up. Now SPY / QQQ / IWM all have put in bear crosses on the PPO indicator. As momentum wanes, the odds of a corrective pullback increase but are not a forgone conclusion. As we’ve also discussed, bearish divergences have also been extended. High-yield credit ( HYG, JNK ) have also diverged from equities. Also VIX shorts remain at historic highs.  I could fill this page with yellow flags, but hopefully you get the idea.

The most important thing to realize is that these yellow flags are NOT sell signals. They simply set the stage / conditions for a pull back. Only price dropping below support and / or violating trend lines constitute a sell signal.  So IMO if you’ve been rigorous raising stops along the way there is no tangible reason to exit long positions.  FYI – Thanksgiving Week is one of the most consistently bullish weeks we have on the calendar.  So, bottom line, keep your head on a swivel and your stops tight.  Furthermore, when / if we do get a correction it could potentially be fast and deep. This rally has been built on overnight gaps and poor technical structure. All that weak technical structure will get repaired at some point.  first stop on a real pull back will be to back test the breakout at SPY $301 and QQQ $194.

Last Week’s Sector performance

Strategy Update: 

No changes. In my opinion, now isnt the time to mash the gas pedal. While there are no sell signals and therefore no reason to close out whatever long positions you may have, that also does not mean to add meaningful new longs.

  • 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 volatility, excessive bull sentiment, excessive call buying ) collectively they simply mean to be careful.
  • Nothing truly bad can happen unless SPY $301 fails or QQQ $194 fails
  • 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 moved lower from the channel highs last week to test the lower channel line and 8ema. Despite intra-day breaks and probes below, both the channel and 8ema supports held. THe Daily PPO has put in a bear cross signalling waning momentum but as long as price holds $309.55ish bulls maintain full control.  A close below $309.55 favors a 20ema test at $308. 

Swing Traders.  $309.55 has proven to be a good place for tight stops. While probed intra-day, we’ve had no closes below that level.  No reason to close longs until you see daily closes below $309.55.  Bottom line, have a long bias and a short leash.

$SPY 60 minute chart

Bear Set up:  A move below $309.55 should bring in more sellers. Targets below are $308 and $307.

Bull Set up:   Support zones are at  $309.55, 308, 307,  and $304.75. Traders can nibble on long positions with a tight stop below and play for a bounce. 

$QQQ Daily

The QQQ daily PPO has put in a bear cross as momentum wanes. That said, as long as price holds $201 / $200.50 zone of support, there’s no reason to sell.

 Swing Traders.    Bulls in full control so your bias should be to look for entry points if / when you see a pull back to a marked level. Place stops just below in case the pull back morphs into something more. With price above the rising 8ema not a lot to worry about on the downside. Sit taller in your chair if price closes below its 8ema.

QQQ 60 min

Bear Set up:  Breaks below 201,  $200.50, $199.85, $199, and $197.63 are price support levels and objective places to either add to or initiate short positions.  Like SPY, QQQ is in an uptrend so keep it real on position-sizing. Bulls may decide to defend any of the levels listed above so be ready for bounces.

Bull Set up:  Honor what ever stops you have in place. I think a break below $200.50 would signal a deeper pullback. Watch price action at / near support levels for signs of buying.  Play level to level.

$IWM  Daily

No changes to the technical picture as price remains trapped between $157.40 and $160.  To me, IWM offers one of the more compelling set ups if price can break above $160 and hold it. A perfect place to anchor a long-term long.

Swing Traders.   Stay long against $157.40 and short against $157.40 with a break below. A break above $160 that holds will be a great place to anchor a long for those that have been on the sidelines waiting for a decisive move.

$IWM 60 min You can see the well defined trading range between $157.50 – $160.  Price action between the range is choppy but wide enough to trade if you’re sharp and nimble.

Bear Set up:  Short below $157.40 w/ stop just above.

Bull Set up:  Above $157.50 and bulls are ok. A break above $160 breathes new life into IWM with a chance to make a run at old highs.    

**************************  TRADE Ideas  and updates on other charts   **********************************

$GLD Update  Gold has formed a down channel during this most recent corrective phase. Currently price is in no-man’s land almost exactly at the mid-point of the upper and lower channel bounds.  THe optimum trade locations at at the channel boundaries ( either high side or low side ) as shown on the chart.  Stay patient and wait for an objective, low-risk trade location.

$SMH 60 min

Price seems poised to fill the gap to $130. If price breaks below $130, then a move to gap support at $128.50 would be favored.

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