Weekend Profit Navigator February 17

Tickers discussed: SPY QQQ IWM

The Weekend Profit Navigator takes a big picture view of the market. Broad market analysis is given along with Key levels and trading locations for the indexes.Trading plans and timely commentary to keep you on the right side of the trade.

Trader’s Couch:   

A good mentor’s Mentality

 

 

 

 

In the above quote, if you replace the word “leader” with “mentor” what you’ll have is a description of a good mentor.  Good mentors focus attention on their students, not themselves. If your mentor isn’t focused on you, there is a high probability it isnt going to work. Look for someone else.

Earnings Calendar

Headlines

  • China moves to delay Parliamentary meeting for the first time in decades
  • US evacuates infected citizens from China; over 3000 cruise ship passengers head home potentially spreading virus
  • German courts halt TSLA’s Giga Berlin on Environmental concerns
  • Macau Casino’s given OK to re-open Thursday
  • GM to exit Australia

 

Frothy Market continues to churn higher

Last Week, the market continued to churn higher as Corona Virus fears seem to have been set aside as traders look forward to an over-whelming liquidity policy response from global central banks.  In fact, 8 of the 11 equal weight SPDR sectors hit new highs this past week. Yet while traders enjoyed the unprecedented run up, still more signs of froth pile up.

SentimentTrader on Twitter posted this chart showing how reckless the call buying has become with the 6 week rolling sum of net call contracts bought going parabolic.

MacroCharts posted the XLK/SPX ratio pointing out the RSI is at its 2nd highest reading of all -time. The only other time it was higher was during the dotcom bubble.

 

Yet from another perspective, if the economy is humming along and unemployment is at record 50 year lows, how come auto delinquencies are exploding.

We can also see some disturbing employment trends emerging in the transportation sector.

If we take a look at the ratio between Transports ( $TRAN ) and Utilities ( $UTIL ) we see utilities being preferred over transports. ( ratio falling ). So this is a defensive posture.

 

We can also observe a defensive posture again taking hold in the chart showing the ratio between High Beta ( $SPHB ) and Low Volatility ( $SPLV ).  In Q4 2019 we can see the sharp reversal and steep move higher ( risk on ) then in early 2020 that sentiment shifted to a more defensive tone as the ratio rolled over.

Fed-driven Liquidity Bubble

In past posts, I’ve referred readers to the great job Sven over at the Northman Trader has done tracking the Fed and it’s liquidity injections that have largely fueled this past accelerated move higher in equities. Given the impact of these injections on equity prices, I hope you all sent Jerome a Valentine’s Day card.!

 

 

Pulling it all together 

  • Risks continue to rise as evidenced by surge in speculative call buying.
  • Lots of technical signals flashing “overbought” yet the most important metric that continues to rise is price
  • Trying to pick a top has been a losing trade and a sucker’s bet.
  • Focusing on the “why’s” like Fed liquidity may be an engaging thought exercise, but isnt a trading strategy.

How to trade this market 

Focus on what you can observe in price and the things you can control.

  • IMO not the time to pile on excessive risk. Only to the point of sleeping well at night.
  • Adding some hedges on SPY / QQQ would allow you to have more long exposure while maintaining your “sleep well at night posture”
  • Know your key levels and watch them like a hawk. Bad things cannot happen until key support levels are broken.  These levels can be actual price levels for a given security or the ema’s which are dynamic.  For instance, you could use the 8ema and 20ema as follows.  If price moves below the 8ema, i will take off a certain percentage of my exposure. If the 20ema holds i will add that exposure back. If the 20ema does not hold, I am out. You can adjust your rules according to your risk tolerance.
  • Raise some cash and be ready to use it at support.
  • Be flexible in your thinking. A lot of money can be made on the downside if you are open to seeing it and flexible enough to flip from Bullish to bearish bias.
  • In your game plan, make some notes about locations and other short triggers that would get you bearish.  THis might be a combination of Price being below certain levels and / or your indicators going bearish.
  • Remember, SPY broke out around 300.  QQQ broke out at $194.  A full 10% pull back from current levels would be a garden variety correction and the charts would still be bullish.
  • Maintain a cautious, yet bullish bias. Focus on Price and know the levels where you’ll both react, and be forced to change your mind on a given stock or market in general.

 

Index Chart Review

SPY Daily

Price continues to put in marginal divergent new highs ( RSI and PPO lower with price higher ) but these in and of themselves is not a sell signal. Price is well above all the ema’s that are bullishly configured. The first sign of real trouble would come with price losing the 8ema at $334.80 and making a move to the daily pivot at $332ish. A move below there would test the rising 20ema at $331. Below the 20ema price would likely make a run to fill the gap and go for another tag of the 50ema near $325.

SPY Weekly

Price has jumped above the well defined rising weekly channel . It would take a weekly close below $330 to get price back inside the channel . Just to let you know how extended we are, we have not been to the low side of the weekly channel since last September. It would take a move all the way to $310 to re-connect with the channel low and the 40 week ema. I’d expect a ton of buyers there if we evenr got down that far.

QQQ Daily 

Price here is also above its daily rising channel as I have drawn it. No worries as far as I can tell as long as price stays above $230.30.  The real test would come at the low side of the channel.  Any break below the rising channel would put the QQQ on a sell signal for those trading the daily chart. I’d expect lots of buyers to show up if / when we revisit the low side of the channel. Last time in late January they piled in hard.

QQQ Weekly

You can see the near parabolic advance since early October and how far away we are from the 40week ema. A break below the dashed intermediate uptrend line would be a warning shot for bulls. A break below the rising wedge would give a solid sell signal on the weekly chart and would favor a move back to the 40ema in green and likely back to $194 for a back test of the breakout. Nothing remotely hinting at that scenario though.

 

IWM Daily Chart

Different look and feel for IWM. Price needs to reclaim $168 and then take out $170 once and for all to get this chart on solid bull footing. Below $168 and price is vulnerable to pull backs, possibly all the way to $160 to back test recent support.

$IWM Weekly

A solid break above $170 with a hold would likely bring in a bunch of buyers as the double top look will have been foiled. Traders can be long against $168 and hope for a breakout / continuation above $170 where traders can add to their positions and look for the mid $170’s as a first target.

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