Weekend Profit Navigator October 18

Tickers discussed: SPY / QQQ / IWM / GLD/ SLV/GDX/ 20 industry group ETFs /  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.

Earnings Season begins to Ramp

This week the earnings season really begins to ramp.  NFLX will be an important one Tuesday AH. TSLA headlines Wednesday. Thursday will be busy with Airlines, Homebuilders and Intel. With AXP finishing up the week.

Market Factoids

 

 

 

Companion Video

The companion video not only provides additional commentary to the charts and set ups shown below, but also covers about 20 industry ETFs that traders can use to gauge industry performance, and use as trading vehicles during the thick of earnings season.

Users can run the video at 1.25x normal speed to reduce run time with no loss of quality.

Find the video HERE

The US Dollar Confounds

A week and a half ago, I thought the $USD was breaking out and that the crowded short positioning would add fuel to the move as short positioning unwound.  After several significant down moves, I was shaken off that position.  Since then the $USD has regained some strength. You can see PPO never went bearish.  THe next week or so will be very important. Will USD take out the recent high and generate a short squeeze or will it proceed lower?   A higher $USD will be tough on precious metals and miners. It will also be a headwind for equities which have stumbled in periods of Dollar strength.  Too dicey to guess. We just gotta watch.   You can see in the second chart that price is pinned beneath weekly trend line resistance. A break above and hold would signal a longer term reversal higher in the Dollar.

Precious Metals and Miners Struggle

Gold, silver and the miners gave us a fake breakout about 10 days ago. We go long GDX december calls on that move. Since our entry, the precious metals complex has struggled. Gold and Silver are both testing their uptrend support lines. A break below opens up more downside. That said, breakouts are just as close.  These charts are finely balanced with no clear path easily identified. If gold breaks lower, we’ll need to exit our GDX calls and re-think the space.

Gold

Silver

Gold Miners

Broad Market Index Breadth is Strong

One of the bearish narratives of this market is narrowing breadth. You know, the bull market is limited to tech and mostly FAAMG stocks.  That used to be the case but one by one, this bull market rally has broadened out. Mid Cap ( MDY ) and now Small Caps ( IJR ) have toggled bullish and are not only participating, but leading over the past couple of weeks. Of course these metrics can change, but as it stands now, this is what bulls need….broad market participation.  This broad participation bodes well for a broad market advance with legs.

Sector Breadth remains Strong

Aside from Energy, which is pretty much a lost cause, all the sectors have strong breadth signals. As you do your own work, focus on the top 6 sectors by their weighting.  The bottom 5 sectors have little impact on SPY. All told, the bottom 5 sectors comprise only roughly 17% of SPY.

Source:  Breadth Charts from Arthur Hill, Stockcharts.com

How are the major indexes positioned?

SPY Broadening Top

Price still within the broadening top formation. A breakout above 3600 would be significant and if it occurs would give a great level to shoot against for a renewed bull run.

SPY Weekly

This past week, SPY printed a spinning top candle near the highs. It is a cautionary candle showing indecision and a potential turning point. A red candle this week would lend credence to more corrective activity while a green candle would mostly negate it. It should be noted that a green candle would have the distinct possibility of closing at an all-time high.  Note the bearish divergences that remain present.

SPY Daily

After a big up day last Monday, price spent the rest of the week pulling back into what might be construed as a bull flag. A bull flag breakout early in the week would favor a move to challenge the old highs. On the downside, bulls dont want to see price re-enter the prior trading range below $340. Bearish PPO and RSI divergences persist.

QQQ Weekly

Another spinning top here showing indecision. PPO still has a bear cross working but it would take red candles going forward to prevent PPO moving higher and putting in a high-level bull cross. THe chart is still bullish and there are no sell signals. Only a weekly close below $280 would turn the chart bearish short term.

QQQ Daily

After an insane move on Monday, price spent the rest of the week pulling back. The bulls can point to price being above all the bullishly stacked moving averages and printing a bull flag formation. A breakout would point to new highs. Bears dont have a lot to work with but can point to dramatic bearish divergences that bulls need to be aware of. With Price in the middle of the range its not the best place to put on a trade. I’d rather see traders be patient and wait for price to move closer to either $280 key support or $300 at key resistance.  A breakout would obviously be hugely bullish but a move back below $280 would be about as bearish as it gets.

IWM threatens a relative performance breakout

If the IWM / SPY ratio takes out the overhead resistance shown below it would likely signal a period of outperformance by small caps. THis dynamic could play out in a scenario where the SPY / QQQ pull back but IWM advances with fiscal stimulus powering cyclicals.  If interest rates tick up, Banks would likely catch more bids and are a significant component of the IWM index.

IWM Weekly

IWM has been an outperformer the past few weeks. A break above $167.50 would mark a significant breakout as that level has capped a couple of advances over the past few years. Buy the breakout if we get it.

IWM Daily

Simple set up. As long as price holds $160 the chart stays bullish and would target $167.50 which is OH resistance. A breakout above $167.50 should be bought as it would signal outperformance and favor a move to new all-time highs. Below $160 would likely signal a failed move.

Pulling it all together

Indexes hold their breakouts

  • SPY, QQQ and IWM are holding their breakouts. 
    • That makes me more confident in adding long exposure.
    • We have well-defined, objective levels we can now shoot against. ( SPY $342 / QQQ $180 / IWM $160 )
  • Small cap and value names are not only participating, but leading.
    • This has broadened out the rally and has kept the advance – decline readings healthy
  • Breadth
    • Breadth has broadened out and almost everything, except energy, is participating.
  • Calendar Seasonality
    • Although we’ve certainly had Q4 nightmares in the past, Q4 has been generally bullish.
    • Once the election risk subsides, I think we can look forward to some Vol being drained from the system, which would be bullish.
    • The base case is that fiscal stimulus is coming.
  • The Lead in to Earnings Season is usually bullish
    • We will do our best to catch some of these runners in our swing trading
    • Once earnings unfold, there will be plenty of GAPS for us to work with Bracket Trades.
    • There’s an ETF for that.
      • ETF’s are great vehicles to trade during earnings season, especially if you have a fundamental view on a sector / sub-sector.
      • ETF’s eliminate the single stock risk
      • For example, if you’re bullish on regional Banks, you can sit in $KRE as earnings unfold.
      • For those who are not yet comfortable with options, there are lots of 2x – 3x ETF’s that will get you some added leverage if desired.

FATMAAN still seems heavy 

  • The price action in mega-cap tech has been soggy ever since they pulled the rug in early September.
  • We may be entering ( or already are ) in a period of under-performance as money flows toward beaten down cyclicals and value.
    • This mostly applies to FB / AAPL / AMZN / and MSFT.
  • Implications: 
    • We could see a rotation out of mega cap tech into value.
    • We have to watch closely because we have heard that before and they’ve been head fakes.

Summary

  • As long as price holds their breakouts, the default needs to be toward the bullish side
  • Bearish divergences continue to be present; yellow flags to remain aware of.
  • Add long exposure in a managed, reasonable way
  • Market risks remain.  Elevated VIX, Headlines, Tweets, Election are all still out there.
  • The week following option expiration can sometimes lead to market turns or at minimum a reset as all the month-end positioning rolls off.
    • Be psychologically ready for a potential market turn. 

 

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