Weekend Profit Navigator February 23

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Tickers discussed: SPY QQQ IWM $USDJPY $USD $XAD $TYX $TNX  PUT/Call ratio Sentiment Gauges 

The Weekend Profit Navigator provides a big picture stock market analysis for the week just past with a look ahead. 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: 

Approach Markets like a great Interviewer 

I stumbled upon a YouTube video that referenced the attributes of a great interviewer. Among those attributes are that the interviewer approaches each subject with a genuine curiosity and from a position of “not knowing”. They listen and watch their subjects intently and form follow up questions to tease out new information and perspectives.  Larry King or Charlie Rose may be examples of some of the best.  Most common, everyday interviewers however approach subjects with a mental position they need to protect, then try to lead the subject to a preconceived destination. These vastly different approaches lead to vastly different results.  They also mimic, with striking similarity,  how many market participants approach markets. Most traders approach markets with a preconceived idea of where markets are heading and have a mental rigidity that does not allow for fluid change.  They cling to their idea until the opportunity to profit has passed. Market Wizards on the other hand approach markets with a genuine curiosity and free-wheeling mental attitude that allows for free-flowing mental fluidity.  Making mental shifts in real-time causes no distress or discomfort at all.  Like a leaf on a stream, the wizard can go from bullish to bearish on a dime, and back again if necessary to capture the opportunity.  The results from this approach are vastly different between those that are mentally flexible and curious than for those who are protecting an idea with a rigid mental framework.  Approach markets like a great interviewer; with genuine curiosity and from a position of “not knowing”.  Your results should improve as your ability to be mentally flexible improves. 

Earnings Calendar

That’s different- Tech leads to the downside

XLK, XLC, and XLF led to the downside this week. That is different from the playbook we’ve become accustomed to in recent memory where tech has been the glue that holds markets together as other sectors come under stress. No major damage has been done, but this is something all traders should watch in the week ahead.

Where is sentiment?

The most recent BAML survey of Global Fund Managers shows bullish positioning at a 20 month high.

 

CITI’s panic / euphoria index is also flashing extreme bullishness.

In my own PUT / CALL extreme-o-meter, aside from a brief period of put buying in the most recent corona scare, there has been persistent extreme call buying

 

Safe Havens Rocket Higher

The safe haven asset price action, even prior to the first corona scare a few weeks ago have not confirmed the bullishness seen in equity prices. There has been a real disconnect between these asset classes and equity prices.

Currencies

$USD Zoom Zoom to 3 year highs

Global traders have been piling into the $USD pushing it to 3 year highs. If the upward thrust persists, there will be a real test at 100.50 at the weekly uptrend channel high. A breakout there would open the door to 102.

 

Aussie Dollar continues it’s collapse

The Aussie dollar is a commodity currency, and given it’s proximity to China, a read on Chinese demand. As you can see the Aussie Dollar keeps sliding and is now at a post GFC low and seems headed to re-test those levels. Does not speak well of Chinese demand.

 

Japan flashes recession bound Q4 GDP print.

Japan printed a disastrous Q4 GDP print of -6% well before Corona showed up. Now with Corona on the scene, Japan may well print another contractionary print for Q1 as Corona takes it’s toll on demand / trade.  The USDJPY pair jumped higher as traders dumped the YEN last week.

Gold explodes to 7 year highs

Gold has been in a bull market since breaking out last year. That said, there was an explosive move this past week and appears to be taking a leg higher. On the weekly chart of $GLD you can see that I’ve marked in the measured move target from the most recent bull flag breakout. That target is 165. That said, the prior high of $172.50 would likely be achieved over time.

 

Bond Yields collapse.

$TYX

This past week we saw the 30 year bond yield close at all time lows.

$TNX

We also saw the 10 year bond yields dive to 1.47% and clearly have a test of 1.36% last seen in 2016 in the cross-hairs.

 

Safe Haven Recap

The safe haven asset classes have been flashing a problem for a while. These problems have largely been over-ridden by FED liquidity. That dynamic may well persist. I have no doubt that global central bankers will do everything in their power to intervene to help equity asset prices. It is interesting to note that Friday’s repo injection was only $26B after running consistently between $45B – $80B.  When repo liquidity injections fall, almost like clockwork, the equity markets struggle.

A look at Equities

$SPX Big Picture

This is the weekly chart of $SPX that shows the broadening top we highlighted last year. If, and that is a big if, SPX pulls back and has a corrective phase, the location that has the most significance is the trend line of the broadening top and the 40 week ema in green. By the time price moves down, the 40week ema will have risen above the trend and will provide the first zone of support. If that does not hold, then the rising trend of the broadening top will be the other. If either of these levels hold, then the correction will be in the context of a continuing bull market. A price move back into the broadening formation would be a bearish long-term development.

$SPY Weekly

Price remain above the weekly uptrend channel and therefor presents no immediate concerns. A drop below $330 would drop price back into the channel and at least from a technical perspective, open the door to a test of the low side of the channel near the 40 week ema in green. Watch for a trendline break on RSI  and / or a PPO bear cross for additional confirmation of a trend change.

$SPY Daily

Price held the 20ema but the PPO has put in a bear cross and the RSI is moving toward a break of 50 which are bearish.  A move below $332 would open the door to a 50ema test near $326. You can also see the many open gaps below that would act as magnets on any down move. You can use these gaps as support / resistance locations when price approaches them.

$QQQ Weekly 

Price has been working its way up into a narrowing wedge and was rejected at the top. The first concern would be a break of the dashed blue uptrend line. A break would favor a move toward the low side of the bigger rising wedge near $220. Any break of the bigger wedge would signal a deeper pull back. 

$QQQ Daily

The bulls successfully defended the 20ema test. As long as price manages to hold $227.50 I’d say bigger problems will have been averted. That said, any break below the rising channel will flash a sell signal on the daily chart. The fact that PPO has put in a bear cross likely favors additional down side. 

$IWM Weekly

Price had a mostly indecisive week. To make it simple and visual to my eye a move above $170 is bullish and a move below $164 is bearish. In between is likely a chop zone with no particular directional bias.

$IWM Daily 

Price had a great deal of difficulty at $169 which capped all advances for the better part of a week. On the PPO indicator, you can see that momentum has been fading since the beginning of 2020. From this perspective, lower prices would be favored. As long as price holds the 20ema the bulls are fine. Any move below would likely result in a move to again test the 50ema in green.

Pulling it all together

The market never makes it easy or simple. We’ve got sentiment signalling a crowded long coupled with the safe havens signalling a larger problem.  Price has not yet signaled any grave problem but does show signs of initial weakness. The risk of course is that all those with deep embedded gains from the sharp run up decide to take chips off the table en mass out of an abundance. of caution.   I think the path of least resistance is lower but as we’ve seen before, Fed liquidity can fix almost anything. Currently I am positioned bearishly, but not anything close to “all in bearish” I’d have to see some outright sell signals on the daily chart to boost my bearish conviction. Currently we simply have some short-term weakness. That is all. Time will tell if corona persists or if sentiment makes a turn down to make a more definitive call.

 

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