Tickers discussed: SPY, QQQ, IWM, AAPL PSX
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 – Will Return
January Earnings Snapshot
- Iran fallout rattles markets; Oil / Gold zoom
- China installs strongman in HK liaison role to bolster Lam and signal resolve against protesters
- NFLX snubbed at Golden Globes with only 2 Prizes
- BBBY reportedly plans to sell 1/2 it’s real estate assets
Market Observations & Technical Developments
Fears surrounding Iranian countermeasures are seeing follow through this morning from Friday’s session. Today’s action will be more important than Friday’s in the sense that everyone is back at their desks with the holiday wrapping up. With the big boys on the field, whatever moves that occur will hold more weight than a thinly traded Friday session. As it stands, price has back tested the premarket lows seen on Friday. That level is $319.80 on SPY. If that level holds it would be a sign the drawdown can be contained. If however that level fails, then the downside open gaps become targets. Stay nimble and respect your stops, especially if your see key levels start to fail.
Game Plan – ( Friday’s Key Thoughts apply today ) 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.
- 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.
- 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. Stay long; look for more gains
- Gold and Gold Miners: Both up sharply in the premarket. If GDX clears $30 and is able to hold it, I will likely roll up and out of my Jan calls to February expiration.
- Defense names will probably be higher. Know your levels.
- Oil up again today; Energy users like airlines will get hit hard. Know your levels.
Stay defensive. Key off the Premarket lows near $319.80. If price can hold that level it will be no worse than Friday’s action. If price breaks below, then more downside is favored. THe 20ema at $218.75 would be the first place to look for a meaningful bounce.
Swing Traders. Prices below Friday’s close favor lower prices. If prices fall below the premarket low would likely bring in more sellers.
$SPY 60min chart
The daily chart is on a sell signal with price breaking below the rising wedge. On the 60min chart, the first open gap is a natural downside target. If prices fill the lower gap and gap support at $319.33 fails, it favors a move to $317.50 which is the top of the next gap.
Bear Set up: Trade level to level using the top and bottom of the open gaps at natural support levels. Downside targets are $319.33, 318.75 ( 20ema ) 317.50, 316.
Bull Set up:
Look for prices to find support at the key levels cited above. The first area that should be a slid place to look for a bounce is at the 20 ema at 318.75. Set stops just below whatever entry where you try a long.
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 $210 which coincides w/ the 20ema. I’d expect a bounce there.
Bear Set up: Prices below $214 favor moves to $212.61 for a gap fill. If $212.61, fails, a move toward the lows of last week near $211.20 would be favored.
Bull Set up: For an outright bull set up, price needs to move above the Friday close. Otherwise look for price to hold at the key support locations in and around the gaps and 20ema on the daily.
The gap entry at $163.80 is the key level. Breaks below favor a gap fill to $162.50. As long as price holds above $163.80 and the downside will be contained.
$IWM 60 min
Bear Set up: Short on a break below $163.80 and look for $162.50. Moves below $162.50 would be a place to either add to a short or initiate a new one.
Bull Set up:
Bulls can initiate a long at $163.80 w/ a tight stop below. $162.50 would be another place to try a long w/ a tight stop.
Trade Set ups and Charts
For nimble, active traders, AAPL is forming a very clear bull / bear toggle at $294.50 in the premarket. If it breaks below, go short. Holds above 194.50 and traders can be long w/ a tight stop.
Last week PSX short was a trade idea. If you are in the trade, stay short and look for $103 as your target.
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