While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.
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The trade war fears continue. And the market is reeling as a result. And I suspect we will see more of this selling action until there is some clarity on the issue.
For the day, the S & P 500 was down a massive 69.53 points. The intraday range was only 38.76 points but that was only because the market gapped down 41.21 points at the open.
I received a really interesting question from one of your fellow members yesterday. He asked this ...
"Can you give me your synopsis based on your feelings or do you never do that and you strictly are always going by the levels?"
Quite frankly, I thought this was an excellent question and worth responding to.
The simple answer is no, I don't only rely on the levels, but they are a major component of my analysis.
The other major component being trend analysis and the use of the extreme bollinger bands.
The levels provide us with clear price objectives and more importantly, we have confirming levels that can help to determine if a level should be hit.
The other truism, if you will, is that my price expectation in a bull market is that a stock or market should not drop more than two levels.
And it just happens that yesterday's low came in at 2,801.43 and the market rallied back to close at 2,811.87.
You may recognize that 2,812.50 is a major level and represents a two-level drop off the top.
The market, of course, did not hit the 2,968.80 level we were looking for and failed.
So, to me, a drop to 2,812.50 would be a 'normal' pullback in a bull market.
A violation of 2,812.50 and a drop to 2,734.40 would suggest that we want to short the next rally. And that the next rally should not exceed 2,890.60, assuming the 2,734.40 level is hit.
You no doubt recognize the logic of that being the market would have a three-level drop, followed by a two-level rally.
I also will look at the trends. That is why I constantly review charts of various timeframes on the webinars.
As I mentioned a few days back, the S & P 500 is very close to crossing into an uptrend on its daily chart. And it still is, even with this pullback. In fact, the 200 ema is 2,770.91 and the 253-day average is 2,771.59.
So you can see that they are now within 70 cents of each other. I submit that if the S & P 500 can cross into an uptrend, it would suggest that we want to buy this selloff, as opposed to looking for the next rally to sell. Actually, you could still sell the next rally because we do expect a retest of the low.
The other factor I look at are the extreme bands.
The 253-day average is the midband on the extreme bollinger bands using the settings I suggest. And at this point, the S & P 500 is about 100 points above it.
I would expect support at that level the first time it is tested from above, especially with the Chaikin Money Flow bullish, which it is.
Speaking of price expectations, the test of the midband and anticipated support or resistance is one that I expect.
So, a violation would be a significant event.
The other price expectation I have is this. Sharp moves are followed by sharp reactions. It seems we are having that now.
And expansions follow contractions.
Another key but subtle price expectation is that the VIX and the S & P 500 should always close in opposite directions.
And when they both close in the same direction, it typically signals something is happening with the market.
And on April 29th and 30th, the S & P 500 and the VIX both closed to the upside. Two days later, they both closed to the downside.
Considering the top for the market came on May 1, this was a pretty decent warning that something was changing.
As a point of reference, the September 20, 2018 top followed a day when both the S & P 500 and the VIX closed to the upside.
On September 20, 2018, both the S & P 500 and the VIX closed to the downside.
So, this simple indicator can help you make strategic decisions about the market.
Another key about the extreme bands is that when price takes out the lower bands, we usually expect them to come back inside. This is what happened in December last year at the bottom.
And once the price started to move higher, I remember saying the price target was back to the midband ... which it ultimately took out.
As I mentioned above, the midband should be support on the test.
If it can't hold, where should the market go?
I'll let you think about that for a moment before I give you my opinion.
Earnings do continue this week. BABA reports Wednesday after the close. And BIDU reports Thursday after the close. And NVDA also reports after the close on Thursday.
Oh yeah, if the S & P 500 breaks under the midband, I can easily see a retest of the lower band.
This is because back in December, the market broke under the lower band before staging the massive move higher. And it was never tested.
The lower band is 2,484.39, which is very close to the major 2,500 level. Of course, there are few impediments in the way before the market can drop to 2,500.
Here are the Key Levels for the Markets:
$VIX:
Major level: 21.88 <
Minor level: 21.10
Minor level: 19.53
Major level: 18.75 <
Minor level: 17.97
Minor level: 16.41
Major level: 15.63
Minor level: 14.85
Minor level: 13.28
Major level: 12.50
Minor level: 11.72
The VIX closed at 20.55. For the day, it was up 28.12%. It was a move of 4.51 points.
Quite frankly, for the size of the move in the markets, I would have expected a larger bounce in the VIX.
At this point, I am looking for a test of 21.88. And the upper band on the 30 minute chart is 22.60.
Watch to see if the VIX stalls out at the upper band. If it does, we should see a push up in the market.
If the VIX does clear 21.88, I expect a move up to 25.
SPX:
Major level: 2,968.80
Minor level: 2,949.25
Minor level: 2,910.15
Major level: 2,890.60 <
Minor level: 2,871.08 **
Minor level: 2,832.03
Major level: 2,812.50
Minor level: 2,792.98
Minor level: 2,753.93
Major level: 2,734.40
Minor level: 2,714.88
Minor level: 2,675.83
Major level: 2,656.30
The S & P 500 is sitting right on the 2,812.50. A break or support here should tell us where the market is going for the next move.
Pre open, the S & P 500 is trading about 21 points higher. This projects the open around 2,832.87
This would suggest an open above the lower band on the 30 minute which is 2,819.68.
A retest of the lower band would be expected. And minor support should be at 2,807.60.
The only positive, if any from yesterday, was that the day did qualify as a selling climax. The down to up volume was 9.85.
This tells us that a bottom is not far away.
QQQ:
Major level: 193.75
Minor level: 192.19
Minor level: 189.06
Major level: 187.50
Minor level: 185.94
Minor level: 182.81
Major level: 181.25
Minor level: 179.69 **
Minor level: 176.56
Major level: 175.00
Minor level: 173.44
Minor level: 170.31
Major level: 168.75
Minor level: 167.19
The QQQ closed out Friday at 178.58. If the QQQ closes under 179.69 today, it should test 175.
179.90 is the lower band on the 30 minute. If the QQQ can clear it, watch to see how it reacts around this level.
IWM:
Major level: 168.75
Minor level: 167.19
Minor level: 164.06
Major level: 162.50
Minor level: 160.94
Minor level: 157.81 **
Major level: 156.25 <
Minor level: 154.69 **
Minor level: 151.56
Major level: 150.00
Minor level: 148.44
The IWM closed at 151.63. Watch to see if the minor 151.56 level can hold. If it can't, I would expect a drop to 150.
154.69 is now minor resistance. And a close today under 154.69 and it should confirm a drop to 150.
Like the QQQ and the S & P 500, the IWM closed under its lower band on the 30 minute chart. That level is 152.24.
TLT:
Major level: 126.56
Minor level: 126.17
Minor level: 125.39
Major level: 125.00 < HIT
Minor level: 124.61
Minor level: 123.83
Major level: 123.44 <
Minor level: 123.05 **
Minor level: 122.27
Major level: 121.88
Minor level: 121.49
The TLT closed out at 125.73. If it takes out 126.17, I would expect the move up to 128.
125 should now be support.
Short term charts are strongly bullish.
GLD:
Major level: 126.56
Minor level: 126.17
Minor level: 125.39
Major level: 125.00
Minor level: 124.22
Minor level: 122.66 **
Major level: 121.88
Minor level: 121.49
Minor level: 120.70
Major level: 120.31<
Minor level: 119.92
Minor level: 119.14
Major level: 118.75 <
The GLD closed at 122.67. The GLD took out the 121.88 target we were looking for. A close today above 122.66 and the GLD should test 125.
The GLD is above the upper band on its 30 minute chart. That level is 122.49. Overbought in the short term.
XLE:
Major level: 71.88
Minor level: 71.10
Minor level: 69.53
Major level: 68.75
Minor level: 67.97
Minor level: 66.41
Major level: 65.63
Minor level: 64.85
Minor level: 63.28 **
Major level: 62.50 <
Minor level: 61.72
Minor level: 60.16
Major level: 59.38
The XLE closed at 62.95. The XLE could not close above 63.28 but is holding just above the major 62.50 level. I am still biased for support at 62.50.
If the XLE breaks under 62.50, the drop could be significant.
Watch to see if the XLE can reclaim 63.28.
AAPL:
Major level: 212.50
Minor level: 210.94
Minor level: 207.81
Major level: 206.25
Minor level: 204.69
Minor level: 201.56
Major level: 200.00
Minor level: 198.44 **
Minor level: 195.31
Major level: 193.75 <
Minor level: 192.19
Minor level: 189.06
Major level: 187.50
Apple had a massive one day move of $11.46. Getting hit hard from the trade war.
There are a couple of key issues for Apple at the moment.
The first is that Apple broke hard under the midband on its daily chart. That level is 189.86.
If Apple cannot reclaim it, expect more damage on the downside.
The second key is that Apple closed under the major 187.50 level. If Apple closes under this level today, it could drop to 150.
Short term it is oversold, like everything else. The lower band is 188.75.
WATCH LIST:
Bullish Stocks: NOW, FLT, LLL, WDAY, MCD, HRS, MKC, SAFM, WIX, TEAM, DRI, AWK, OLLI, ZEN, ROKU, PAYX, MNST,
Bearish Stocks: GOOGL, ILMN, GWW, TSLA, AMGN, NVDA, FFIV, BIDU, CAT, UPS, CTXS, AMG, SLG, PSX, NTAP, SQ, R
Be sure to check earnings release dates.