Tickers discussed: SPY QQQ IWM TLT NYMO NAMO Strategy and Tactics
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.
Bastiat was a French economist that lived from 1801-1850. From my perspective, his quote nailed it and nothing much has changed in the 200 years since he wrote it. Men will be men and men will go to great lengths to preserve what they have and keep others from obtaining it. If you want to read more about Bastiat, this is as good a place as any to start HERE
Bastiat is most famous for the “Parable of the broken window” The parable discusses what happens to economies when demand destruction occurs due to natural disasters. From that standpoint perfect for the situation we all find ourselves in now with Covid 19. You can find an explanation and discussion of it HERE
Observations and Miscellaneous Ramblings
- The Fed and Policymakers go all in. Whatever happens at the end of this it will be certainly hard to argue that the FED or policy makers were late or too timid. The end is far from near, and more actions will likely be required, but big bazookas have been fired at the problem. Time will tell if they’ll help.
- Wild Moves: When you have the biggest one-day drop since 1931 followed by the biggest 3 day bounce since 1933, its a sure signal the market is still broken. Vol has remained stubbornly high with the VIX in the mid 60’s. Until the VIX gets pinned under 30 for a while, I consider the market a pure trading environment.
- Paradigm Shift In a bull market dipsters often use the 8ema and 20ema as guiding moving averages. These ema’s act as support in a strong upward trending market and thus are great places to buy. The new paradigm of this bear market is to reverse the thinking. In a downward trending market, the 8 and 20 emas tend to cap the oversold bounces. Often a bearish trend will ride the 8 and 20 emas lower and lower. In this environment, use the 8 and 20 emas as guiding emas to SELL just as you once did to BUY in the bull market. Flip you paradigm 180 degrees and you’ll find success.
- Identify and target the Best in Class
- Coming out of this I think it will be important to identify and buy best in class sector leaders
- Strongest brands, strongest market share, strongest balance sheets, strongest sectors
- There are going to be lots of bankruptcies; lots of credit downgrades, lots of wounded companies
- The strong companies should be able to extend their leadership position coming out of this.
- Use this event to upgrade your holdings to the best of the best. They should outperform
- Time to build the list but not to buy.
- The good news is out; Now comes Wave 2
- The monetary and fiscal bazookas have been fired……..there wont be anymore stellar news anytime soon.
- Wave 2 is building and it will potentially be a big one
- Big layoffs will be reported daily
- Credit downgrades are coming
- Expect divvies to be suspended along with buybacks which have become politically toxic
- As time goes by, expect to hear Ch. 11 announcements
- Expect hedge fund and ETF redemptions to be either blocked or slowed by rule
- Dash for cash across the board as companies try to prevent a liquidity problem morph into a solvency problem
- Nothing stops Wave 2 short of Covid infection curve bending or medical treatment emerges.
The Oscillators; From oversold to overbought in a heartbeat
For our new members, there is a rule carved in my desktop. “Dont fight $NYMO”. When we have the time to split 48 beers, I will tell you the story of me fighting NYMO. Or maybe it would be easier to show you my 12 inch scar across my chest. Suffice it to say buying when NYMO is overbought or selling when NYMO is oversold is a kamikaze run you wont win. So the 3 day epic bounce took the oscillators from deep oversold conditions to overbought. The late day fade pulled it back. While it is no guarantee that prices will come down ( fade the bounce ) odds favor it. Closing our shorts at the oversold level and looking to get long last week was the right move. Now I am looking to fade this bounce with tight stops above. Feeling good with NYMO on my side.
Bonds – TLT
As previously discussed, $166 has emerged as a pivotal level for TLT. On Thursday and Friday I was watching it closely. The price action was fascinating. A peek above rejected; a peek below bought. Finally on Friday price made an impulsive move above $166. Because I was watching close, I caught it early. So I am long against $166 with TLT Apr 3 $166 Calls. This trade is right or right out. Either price holds $166 or I am out. Looking for follow through early in the week. If I get that move I will roll higher and buy another week of time. I am talking my book here but there is a part of me that says price wants to back test that prior high near $180. Time will tell. Can just as easily be a false breakout. Notice the high-level bull cross trying to form on the PPO.
Advance -decline Percent
The chart shows the advance – decline percentages for the various market segments. A simple rule is shown for identifying a bull signal. You can see that for a brief moment this week the indicators flashed a buy. Now however the indicator is diving lower and is close to negating the buy signal after only one day. As always use something like this to complement your weight of the evidence analysis
$SPX Broadening Top
Bear market rallies often fail at the 38.2% fib level. We touched it last week. While more upside is certainly possible the sledding will get harder. We captured much of the upside bounce but now my posture flips more toward looking to fade the bounce. If it goes higher I will do my best to tactically participate but for multi day swing trades I will be looking for bearish set ups.
SPY 2 hour
Follow the chart annotations for specific levels. Price is currently in no man’s land between $260 and $250. Be patient and dont jump the gun. Wait for a decisive move in either direction before committing yourself. I favor more downside but let price be your guide.
$QQQ 2 hour
A very nice set up here as price is sitting on the bull / bear pivot. THe chart annotations show the levels and decision points. Use them to guide your trading.
$IWM 1 hour
Like QQQ, IWM is sitting on the pivot. A break below $112.50 opens up a lot of potential downside. I’ve identified $125 as a max short trade location. If price ever makes it there, I will be waiting. So much overhead supply at that location my bet will be that bull dreams die there.
Pulling it all together
Nothing much has changed for me. I am still of the opinion that we have not seen the worst of the Corona fall out both in the real economy and in markets. For the most part we captured a good chunk of the “rip your face off rally” but with price reaching key retracement fibs I think the path of least resistance is now lower. Wave 2 is going to hit the V-bottom crowd like a ton of bricks, especially when companies begin to report and the effect of Covid full stop economy becomes fully apparent.
NYMO is at the top of the range as well. Being long is now dangerous. If price moves higher I will try to tactically participate but my eye now is focused on lower.
At all times keep this question at the top of mind. “What is the mistake you can least afford to make? For me it’s being close to all in long or short and being wrong. The markets remain treacherous. I am not going to permit myself anything close to full exposure. If I am right on my calls, I will do quite well. If I am wrong, it will sting but I will still be trading a year from now. As a trader, preserving trading capital is your number one obligation. If you have capital, you can trade; if you lose it you are out.
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