Compete to Win Test 03-16-21
Week of March 15, 2021
Compete to Win ©
Leveraged Trading to Build Assets
Overall Sentiment 03/14/21
Consolidation and possible topping action in January, followed by a mid-February sharp run to new all-time highs before reversing, saw downside follow-through that tested primary support. While that support has held thus far, the overall market remains in a somewhat fragile state. To me, the coming week is a very important indicator of the near-term direction, and bulls would like to see the Nasdaq pulled higher by strength in the Dow & S&P. Significant liquidity in the economy raises the prospect of inflation on the horizon. This is likely to lift asset prices, but it also caused rates to spike, in response to anticipated inflation. That spike led to fears of higher corporate borrowing costs, reduced perceived relative outperformance of stocks vs. alternatives, and an excuse to take some profits off the table on fears the Fed may be losing the ability to orchestrate the economy. The question now… is this profit taking where funds are redeployed to emerging re-opening sectors as people rationalize higher rates as a sign of an improving economy, leading to a rotational correction, or is this profit taking where $’s leave the stock market and head for bonds, real estate, or alternatives like precious metals/crypto-currencies?
In the short/medium term, I’m still riding the bull on “investment” positions, but the market fragility is prompting me to take gains quickly on trading positions. As previously mentioned, I was willing to take short-term losses to the downside, by exiting a bit too late, to maintain my bullish “investment” positions. That process is occurring, putting me on higher alert, but so far, the markets are holding. Option hedging has provided some degree of insurance, but additional risk may be taken off if weakness reemerges.
Regarding support, very short-term levels were breached two weeks ago on the QQQ (315.46) , but the primary levels held near 303/297 level. While the market is constructively trying to build away from the support, that remains important, and should it break, 277/272 (13% lower) is likely to be visited. Turning to SPY (394.06 – All-time closing high ) , it remained relatively stronger and escalated away from primary support at 379.85 (4% lower) . While it looks like the SPY wants to resume its uptrend, deeper supported is at 364 (8% lower) then 349/351 (12% lower).
On the upside, overhead resistance in the QQQ is in the 326 (4% higher) zone, breaking that and clearing 334, then the all-time high at 338.19 would shift the bias back to the bullish side and provide the opportunity for further gains. On the SPY , the index moved through resistance at 390/392.50 , then cleared the all-time high at 394.17, putting the ball back in the court of bulls. Acceleration away from this level continues the SPY’s break through long term overhead trend resistance and could signal significant further gains ahead.
Weekly Plan for 3/15/21
With the SPY closing last week at an All-time high, the benefit of the doubt will be given to the markets. Compete to Win © will remain on the long side of the market, but will remain vigilant to a potential resumption of the weakness. While the Nasdaq consolidation was sharp, no real technical damage was done to the charts, and I am beginning to see a high correlation to the sharp consolidation that occurred in early September. As such, we’ll trade according to that script, until it proves invalid. With these beliefs as a backdrop, my bias has shifted to short term modestly bullish, mid term bullish, and longer term modestly bearish (on a future give back of some of this amazing run from the March ’20 lows). We’ll have many short/medium term signals that will assist in getting ahead of the long-term risk, so for the moment we stick with our plans and our positions.
I anticipate a volatile week, which has the potential for some fear-inducing pullbacks, but ultimately should trend higher. My belief is that many market participants added significant short-dated option hedging protection two weeks ago. As the saying goes… “the market’s job is to take the most amount of money from the most amount of people in the least amount of time!” How can the market do that?... Rally into Friday, wiping out all the money that was placed on PUT protection, and sapping all the premium that was collected from covered calls. As a result, how the week closes will be watched carefully, because this is just the type of scenario that can set the stage for another sharp test of lower levels. Any substantive change in these thoughts will be updated as necessary during the week.