Weekend Profit Navigator January 19

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Tickers discussed: SPY QQQ IWM TLT 

The Weekend Profit Navigator takes a look at the big picture and provides the stock market analysis for the week. Key levels and trading locations are provided, along with trading plans and timely commentary to keep you on the right side of the trade

Trader’s Couch –    Tiny Steps

 

 

Instant gratification is something that is pervasive in society today. We all want what we want and we want it now. Virtues of patience and hard work seem to have been lost long ago or have they?  I watched a show on the Jonas Brothers today. Raised in a religious family, the brothers were surrounded with music from birth. In their early years the talent began to emerge. Through much hard work and set backs, opportunity came knocking.  Finally after 10 plus years of wandering in the wilderness, the “overnight sensations” we know today burst on the scene. There are no overnight sensations people. Not in showbiz nor in trading. Gains are made in tiny steps over time, with much hard work and plenty of set backs. Set your goals, then resolve yourself to grinding out the incremental gains day after day, week after week, year after year.  The gains will be imperceptible in real time, but when you look in the rear-view mirror, the trader you used to be will be far behind.

Earnings Calendar

Earnings season continues to ramp up. With valuations stretched, expect any shortfall or disappointment to be severely punished.

The Week ahead

Markets will be closed Monday for MLK observance. On Tuesday the impeachment proceedings officially begin in the Senate.  The news flow this week on the economic front will be primarily focused on the World Economic Forum in Davos, Switzerland.  You know, the one populated by dignitaries and billionaires.  Looking ahead, the FOMC is scheduled to meet on Jan 28,29.

One Way Train

January Op-Ex week was mostly uneventful on the volatility front with volatility continuing to be suppressed.  The steady grind higher proceeded on course like a one-way train headed for a destination.  With many talking heads trying to be the guy who called the top, the market paid no heed and forged new all-time highs. The top-calling game has been a suckers game but folks continue to try. If you call a top every week, you’ll eventually be right but your P&L will have suffered greatly.

The market profile of gap-camp-ramp continued with very little 2-way price discovery during the regular session.  That said, the week following op-ex is often a place where directional changes take place so traders should not become complacent. The market may change at any time for any reason or no reason.  From the table we see the weekly performance of the SPDR sectors. All sectors advanced except energy. Interesting to note Utilities blazing the trail. Not what you’d expect in a risk-on environment but it is what it is.  Just another brick in the wall of worry.  Housing starts put in a blow out number this week posting the highest number in more than a decade.  Many members have been on top of the move and are long $ITB / $XHB which both broke out this week to new all time highs. 

Fed Liquidity in Control

The Fed continues to inject liquidity on a daily basis and it’s balance sheet continues to build. This in no doubt is driving markets as it has since October 3 when the “not QE” program was initiated. Sven Henrich of the Northman Trader has done a great job of documenting the Fed’s role in this rally. If you want to do a deeper dive, jump over to his website. There you’ll find at least 5 detailed posts on the topic. Find them HERE.

Bond bears got nothin

One part of the great reflation trade thesis is a rising rate environment. That thesis has not played out thus far at all. Rates have been trapped in a narrow range well below 2% and have not showed any meaningful inclination to move higher. So there remains a viscous bid for treasuries by traders. I still think the path of least resistance for rates is lower. Probably wouldn’t be a bad idea to establish a starter position in TLT if only as a hedge to your long book.  From the chart below $134 and the 200ema should serve as strong support and a nice entry point for a long. A move above $140 would be a breakout and should result in higher prices for TLT.

Extreme Call Buying

My Put / call extreme-o-meter continues to show excessive call buying. Normally under garden variety market conditions, this would spur corrective activity. Because we have not seen even the slightest hint of corrective activity tells us we are in anything but a “garden variety market”.  The FOMC liquidity dynamic is distorting everything.  I could show you at least 10 other indicators saying the move is over done except the one that counts…..price.

Weekly Charts of the Indexes.

SPY Weekly

Price has blown through the top side of the channel but has yet to show any signs of weakness. From a technical perspective, a move back into the channel would favor a move to test a move to test the low side of the channel. Given the steepness and width of the channel, this would be a big move. Therefore, those that are long should sit up and pay attention on a price move back below $325. The bottom of the channel is around $305 but that level will be fluid depending on how long the corrective move takes.  So from a trading perspective on the weekly charts if price breaks below the uptrend line on the topside of the channel , I would use that as a stop.  An objective place to re-enter would be on a test of the low side of the channel .

QQQ Weekly Chart

Price continues to ramp at an aggressive pace and is beginning to get a parabolic look. Those that are long should be focused on the following things that likely signal corrective action is coming / underway.  1. RSI dropping below 70 2. PPO indicator flattening and / or putting in a bear cross. 3. Price breaking below the dashed uptrend line.

Price will be your first signal. The moves on the indicators lag price and would be confirmation that a trend change is underway.  For now, stay long until evidence signals the epic run is coming to an end.

 

IWM Weekly Chart

The IWM chart has a completely different look than SPY or QQQ. It has lagged during this recent run, but is now threatening to break out.  On lower time frames, $167 was an important level of resistance that price convincingly powered through.  The wide range impulsive bar this week suggests strong buying interest. On the weekly chart, $170 marks the prior high back in 2018. A move above $170 this week opens the door to fresh all time highs and thus no overhead resistance.  For traders not currently in IWM, a break above $170 would be a great place to anchor a long with a stop below.  For traders long from lower prices, a move above $170 would be both a good place to add to the position and to raise stops to $169.50 or so.  Once price breaks to new highs, there should be little reason for price to back track below $170 again if the move is legit. Most likely, if SPY and QQQ continue to move higher, IWM should follow. Because price is not stretched as badly as QQQ or SPY, I view a long in IWM above $170 as a less risky trade. It remains to be seen if price can outperform SPY / QQQ. For that we will have to wait and see.

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