Tickers discussed: SPY QQQ IWM SPDR Sectors Risk on / Risk off 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.
Trader’s Couch
Escape the drama cycle
Boastful and chiding remarks of “You should have known the rug pull was coming you dummy” now fill the twitter-sphere. All the people who’ve been locked down in bear camp since Mid-April are now re-emerging to remind us how right they were. So what if you got caught at the top and had a give back after an epic run. You’re doing fine. Don’t let all this garbage enter your mind and knock you off center. Don’t let these micro seeds of doubt and indecision bore into your psyche and grow unabated. Do one of 2 things. Either go “max filter” on the material you choose to consume or if you can’t do that, simply pull the plug. 90% plus of this game and getting good at it is dictated by our mental approach, maintaining mental stability, and working on calming our minds to the point where stress and fear no longer dominate our thoughts. As you move forward in your trading, be keen to identify the sources that contribute to your instability, then systematically eliminate them. Feel stress dissipate.
Earnings
What to watch for Next Week.
Market Dynamics and Direction
- Last week saw a sharp 2 day sell off that was mostly contained to QQQ.
- Was that it? Is it time to pile back in and buy the dip or will this morph into something that takes longer to work out and a deeper pull back to stabilize?
- If it is buy the dip I think we will see prior levels quickly recovered and SPX move toward 3500.
- If more corrective activity is seen, I think we have to focus on the 50 emas being tested hard. A failure at the 50ema means way deeper pull back.
- We may see a rotation out of tech into more cyclical stocks. We could see cyclicals rise while the broad averages decline because of market cap of big leaders.
- Don’t forget that big tech names are also sentiment leaders. If big tech keeps getting knocked down, it will be hard to maintain positive sentiment.
- Coming off the March lows, the almost robotic buy every dip, every time crowd have been the clear winners. Will the market continue to let them win or must retail get run over to remind market participants that yes, stocks can drop every so often. Time will tell. I can’t predict.
Oil
- Did you notice oil getting dwarfed this week? off 7.5%
- Oil has been consolidating into a narrower and narrower band for months. The Bollinger Band Squeeze looks to be releasing to the downside.
- Don’t be surprised to see a flash move towards $35 in the next couple of weeks.
- As I write this oil is off another 1% and attacking $39 as Saudi drops prices.
- There is the potential for another cascade lower here as demand fears elevate. Price cuts by Saudi don’t inspire confidence.
The $USD
- The last 2x times they tried to break the lows, the Dollar reversed.
- The short Dollar trade is crowded. Real potential for a short squeeze to force weak shorts to cover.
- Such a squeeze would be bearish commodities and precious metals not to mention the market as a whole.
- When the boat is overloaded to one side, the market usually figures out a way to make them lose.
- Note: I have a long USD position but my timing was off. The USD will have to pop fast for my Sept calls to work.
Bonds
- TLT was off sharply on Friday, dropping $3. The exact opposite of what you’d expect on a generally risk-off day. Why did TLT not act as a safe haven as expected?
- Are we going to see yields continue to rise?
- Rising rates / yields are good for banks, commodities and the reflation trade in general. The week after OPEX often mark inflection points in the market
FAAMG / NFLX / TSLA
- These should and will continue to be the focus. If these names stabilize the market stabilizes. It’s just that simple.
- TSLA was off $20 Friday AH after they were stoned for inclusion into the S&P 500. That gap down will hit tomorrow.
- Within the whole scope of things, considering the recent run up in FAAMG over the past couple of months, Last week’s sell off was a paper cut.
- The question now is, must more come out or was that it? History tells us much more, but it never tells you when.
Strategy Update – Getting Neutral / Defensive
- Neutral is the right place to be regarding new money. Can easily be a place where the dip is bought or a place where dipsters can be summarily run over. Signals are mixed. Another healthy day of selling will trigger some trip wires. A healthy day of buying reduces the near -term pressure.
- Those with longer term, long money are ok to remain long IMO. We don’t have any big sell signals. Thus far, the sell off has been contained primarily to tech and even there, no massive sell signals.
- So with no compelling reason to get in ( not much of a dip ) and no reason to Sell core positions ( no SELL signals ) I choose to watch and wait for more evidence.
- FAAMGs: Considering the prior run up, even taking into account the recent selling, the sell off hasn’t been too bad. There’s a lot more air to come out if the powers that be want to see these balloons deflated further.
- FOMC Meeting next week Sept 15-16
Review of Key Relative Performance Ratios
Transports vs Utilities
PPO putting in a bear cross. The key level is 13.40 and the uptrend line. A break below would be a risk off signal.
Consumer Discretionary vs Consumer Staples
Shot across the bow. Trend break coupled with recent divergent high, PPO bear cross and RSI with TL break are all warning signals.
$QQQ vs $SPY
Yellow flags turn red if/ when the ratio breaks trend. No problem yet but momentum and RSI beginning to fade.
Semiconductors vs SPY
Semi’s are a cyclical sector that is often viewed as a canary in the coal mine for risk on / risk off. No worries here. The ratio is in a well defined uptrend and thus risk on. A break of trend would change the picture.
$VIX – Volatility
Last week the VIX was below trend and it was advised that the 25 level should be alarmed. Now we’ve clearly broken out and vol is in a new range. From here I’d say a move back below 27.50 would be bullish while a move back above 35 would definitely be bearish. There is resistance at 44 to the upside but if we reached that level, we’ll have a lot of moving pieces to worry about. A move above 44 would likely align with a cascade in equity prices. From Thursday and Friday’s action, the zone between 30-32.50 seems to be somewhat of an equilibrium point. Moves above 32.50 things get a little jiggy. For me, tough to pile in long with the VIX being north of 30 and having just broken out.
% of Stocks above their 20ema by Segment
Each panel shows the graph of % of stocks above their 20ema. The bullish or bearish set up is driven off of over sold or over bought conditions. Here we see that for all market segments we’ve moved from a strong % above their 20emas to now below 60%. THat’s a bearish development. It’s not enough for me to go gonzo short but is enough for me to be cautious here. Now if we plunge these graphs below 30%, that is a dip set up worth watching for a buying opp.
Index Charts
SPY Daily
After a look below the channel, they closed it on the 20ema. RSI has broken trend and PPO has a bear cross working. Watch closing prices in relation to Thursday and Friday closes. Recapturing those levels will be important for bulls.
QQQ Daily
They closed it right on the channel line to keep everyone guessing. THe indicators turning down but still at levels can be reversed. Again, key off the channel low and the closing prices for Thursday and Friday.
$IWM Daily
I’ve been keying off $155. Below is bearish and favors a move to $150. They tagged that level Friday. Unless they can get closes above $155, it is favored to go back for a double check of $150.
Daily Sector Charts
$XLB
Still easily within the wedge and above the 20ema. If the dollar continues to fall, it should help this sector.
$XLC
These guys are incredible. Another close right on trend to keep everyone guessing. Closes above keep bulls in control, but closes below trend open the door for bears to push it towrd the 50ema at $59 then 56.50 if that can’t hold.
$XLE
With oil close to an all out breakdown, XLE is worth paying attention to. A break below $34 opens the door to $32 and quite possibly lower. It would take a lot to get me bullish here. Leaning short below $34 is the trade. If you are looking for something more tied to oil, XOP is a nice ETF with a liquid option chain to work with.
$XLF
Price in no man’s land as far as I am concerned. Above 25.75 traders can get long and look toward $27. Below 24.50 I want to be short with the target being $22.50.
$XLI
I am keying off of $76. A nice long if it holds but if it breaks, an objective short with the 50ema as a first target. Below the 50ema and 71.50 / 72 comes into focus.
$XLK
THis is the whole key. Notice the deep look to the 50ema and 112.50 before parking it on trend. As long as the trend line is held, the market and XLK will hold it together. RSI trend break and PPO bear cross have to be concerning for longs. For bulls, recapturing The Thursday close would be a nice first step toward stabilizing it.
$XLP
Price closed right on the trend line. I don’t think there is much to mess with here until price moves close to $64. Then there would be an objective long with a hold and an objective short if $64 breaks down.
XLU
$58 and $61 look to be the important levels to my eye. A break below $58 opens the door to $55.50. A break above $61 opens the door for a run much higher. Alarm the key levels. It’s not FAAMG, but nice opportunity on both the upside and downside on moves outside the range.
$XLV
Watch / Alarm $104. Price is on a sell signal on the break of trend. That said I am keying off of $104. Breaks below $104 coupled with a roll over of PPO and RSI break below 50 would likely mark a down cycle.
$XLY
All about Amazon. 25% of index; Watch for a decisive break or recapture of the channel support line.
Pulling it all Together
I am a defensive trader. My default position is to be careful. Way too many warning flags to be comfortable piling in long. The dip has not been deep enough for me to warrant the risk of BTD. I want to see the Friday and Thursday closes recaptured. On the flip side, aside from XLV and probably XLE I dont see any compelling sell signals. Certainly not enough to lay out a bunch of shorts. Position wise, I like being neutral here to slightly bearish. By default, I think bulls remain in longer term control, but it would not take much to pop those downside channel levels. If that happens, the snow ball may move down hill quicker. I need more evidence for both the bull case or bear case to emerge. Be patient here.
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