Weekend Profit Navigator Oct 4

Tickers discussed: SPY / QQQ / IWM / TRAN v UTIL , FATMAAN Names, ITB, XRT, USO, XOP, XLE    Strategy update

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.

Trade School

Trade like a Casino;

Establishing an EDGE, then playing it.

You’ve likely heard the phrase “the house always wins”.  It comes from the fact that in the Vegas betting games, there is a built in EDGE for the house. For example, in the standard American Roulette wheel with double zero’s shown here, the house edge is 5.26%.    So mathematically, over a long period of time / games played, the house will “rake off” 5.26 % of the monies wagered. If you’re the house, play as long as you like !!

For we traders, its the same thing. Let’s say we establish a track record of winning 40% of the time and on those wins we average $3 and on the losses we average $1.
Therefore after 100 trades our P&L would look like this     40 wins x$3  = $120  minus ( 60 trades x $1 ) = $60.   If you were that trader you should never be afraid to put on a trade that meets your criteria.   Once you establish your EDGE, then it becomes a numbers game.

Keys to the Casino Model ( for traders )

  • Your must know your EDGE and that EDGE must be validated over time.
    • For instance. An EDGE developed over 200 trades is much more statistically valid than one calculated on just 10 trades.
  • You must bet the same amount each time.  ( No favorites )  That way your expected win or lose is inline
  • You only take trades that meet the 3 to 1 risk / reward greater. ( or whatever your model calls for )
  • You honor your stops.
  • The model basically boils down to being willing to endure a bunch of papercuts while waiting for bigger winners to pan out.
  • Understand that just like in casino betting, there will be both winning streaks and losing streaks.
    • If you change the program because you lost 7 trades in a row, you’ve just blown up your model and your EDGE disappears.
    • Likewise, if you double your bet because you won 7 in a row, you are altering the dynamics of your potential losses.
  • The key to the whole thing is “Probabilistic Thinking”.   
    • You have the probability of winning a certain amount or losing a certain amount on every trade
    • If you have demonstrated that “the more i play, the more I win” then you’re on your way to Market Wizardry.

Common Downfalls of Aspiring Traders

  • They trade a mix of multiple strategies / set ups and therefore are never able to truly know or even calculate their edge
  • They constantly trade different amounts based on “conviction”
  • They enter low risk / reward trades so that even if they win the battle, they lose the war. The wins do not cover the losses over time
  • They cut their winners short for fear of losing the win. Again, its the bigger wins that will, over time, cover the losses.
  • They personalize winning and losing streaks failing to recognize that they are statistically expected and have nothing to do with their ability as a trader.
    • Because they personalize results, they alter their trading style or abandoned their go-to trade set ups.
  • They periodically ignore their stops and thus experience catastrophic losses which destroys their edge.

Earnings 

A light week of earnings, but PAYX, RPM, LW, DPZ, HELE worth watching.

Companion Video

The Weekend Profit Navigator  video provides a detailed technical view of Risk on / Risk off,  $USD as it related to Gold and Silver, plus a detailed technical look at the indexes, FATMAAN names along with plenty of market commentary aimed at keeping you on the right side of the trade.  Tickers: SPY, QQQ, IWM, USD, GLD, SLV, FB, AAPL, AMZN, MSFT, GOOGL, NFLX, TSLA,  USO, XOP, XLE,  Trade ideas on ITB and XRT

 

Market Cap to GDP blowing the roof off

All time high. This is the Warren Buffett indicator.  No doubt an asset bubble but when George Soros sees a bubble he buys it. That said, when to buy is everything.

TRAN to UTIL ratio on the verge of a breakdown

Watch carefully. A breakdown in this key risk on / risk off ratio could be telling.

What to watch for Next Week.

President Trump’s Condition and those of Leadership

  • Trump is entering a critical phase of Covid’s progression. Does the infection stay mild or does the condition worsen requiring more intensive intervention?
  • Do any further members of leadership test positive?  Mnuchin / Pelosi / Meadows / Pence / Senators.
  • If Trump’s condition worsens and / or more members of the leadership or either party fall ill, I’d expect market negative responses
  • While not directly related, I’d expect that if headlines on Trump worsen, it might put a damper on the “back to normal” pile into cyclicals trade.

Stimulus Hopes

  • Despite bursts of happy talk, I don’t see anything getting done ahead of the election.
  • On Friday, Pelosi told Airlines to hold off laying off people because they were close to a relief package.  Why would there be a stand-alone airline relief package?
  • Base Case = no stimulus.   If stimulus is passed, should be market positive.

Key Levels and Technicals on the Indexes

  • SPY –  Trapped in the $322 – $341.50 range.  Watch price in relation to the 50ema which it is now slightly above. Breaks below favor a move toward the bottom of the trading range.
    • The Sell signals on the daily chart have not been negated and are still in effect. Bulls have not been able to make a higher high.  Bears too have been stymied.  Until price resolves outside of the well-defined trading range, its tough to make a bold directional bet either way.
  • QQQ – Despite making a run to break out above $280, that attempt failed.  Price still trapped in its Wide $260 – $280 range.
    • The weekly chart is on a PPO sell signal after putting in a bear cross.
    • FATMAAN names were particularly weak Friday, with most losing around 3%.  Many charts look like bear flags have formed with downside projections, should they play out, much lower.
    • With many with deep embedded gains, seems like these names are being used as an ATM as a source of funds to put monies to work in beaten down cyclicals.
  • IWM – Had a good week as money flowed into beaten down cyclicals including banks, cruise lines, casinos, restaurants etc.  Back to normal trade.
    • There is a clear level on the chart where I’d be willing to get long and I point it out.  Still work to do.   This trade has had a lot of false starts. If it is for real, there’s no rush. Previously, those early to the party have been crushed with fast reversals.

SCOTUS Barrett Nomination Process 

  • Dont know if this has any market implications other than impacting Dem-GOP relations on negotiating covid relief.
  • McConnell will need to get creative with hearings to get things wrapped up before the election, but he seems bound and determined to plow forwards.

The US Dollar / Gold / Silver 

  • A massive catalyst here especially for commodities and precious metals.
  • The USD broke out and has not completed a backtest of the breakout, a common technical move.
  • If the USD falls back below 93.50 it will look like a failed breakout and I’d expect strength in Gold / Silver and other commodities.
  • If the USD moves higher from here, then GOLD / Silver will have a headwind. Speaking of gold / silver, both have rallied back into resistance. A critical spot for both.
  • The short USD positioning remains a crowded short. I think the market finds a way to squeeze these people out and the USD goes higher from here.

Strategy Update

Neutral to bearish 

  • Volatility remains king; Expect wild whipsaws driven off headlines.
  • Fairly bearish on FATMAAN names and QQQ in general. I expect more selling to creep in.
  • That said, no definitive cracks; Bears have not had any follow thru, so in theat regard, they are no different than the bulls.
  • Until the trading ranges are broken we remain in a directionless, vol-driven regime.
  • For that reason, I still believe we are in a tactical environment.

Commentary for the charts can be found in the companion video

USD / Gold / Silver

$EUR/USD

 

$USD

After breaking out, price has pulled back in to back test the breakout. Price needs to hold or go higher to avoid a false breakout look.

Gold – $GLD

At $180, the declining 50ema, 20ema and lateral resistance reside along with downtrend resistance. If gold can break above $180 traders can get long with a stop just below, but I have my doubts whether that can happen. Looking for USD strength and a move back toward $170.  Anyone interested in a short, here is your spot. Very objective and low-risk to be short against $180 with a stop just above.

Silver – $SLV

A lot of OH resistance at $23 where lateral resistance and the 50ema reside. Take it long above $23, but I think it wont be able to get through and am looking for lower prices with USD strength.

Index Charts.

$SPY Weekly

On Friday, bulls were able to break price above the falling wedge. THat said, price was again stopped at prior lateral resistance at $330.  A break above would open the door for a move higher toward $336 and then $341.50.  For the bears to gain traction, they have first have got to stem the advance, then take out the prior low below $320 to bring in more selling.   Were we seeing on

$SPY Daily

QQQ Weekly

$QQQ Daily

$IWM Weekly

$IWM Daily

Charts of Interest

Oil and Oil Stocks

Oil was off over 4% on Friday and is testing key support as noted on the USO chart.  Even so, XOP and XLE printed bold green candles.  Have energy bulls said enough is enough and shares have gotten too cheap. Trying to buy the bottom tick on a chart is not my kind of trade, but worth watching if downtrend resistance is taken out and OH resistance is recaptured from below.

Homebuilders ( $ITB ) and Retail ($XRT )

Both technically look bullish. ITB breaking out and $XRT taking out DT resistance.

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