Market Pulse: 2020.08.25

Markets remain artificially driven by the Fed

As I explained in previous posts, as many cautious traders, since coronavirus emerges, I am working with day and swing trades only, without even creating the usual long-term portfolio, due to the bizarre behavior of the stock market in this year 2020, artificially pumped by the Fed, with not only economic but political intentions. The recovery since March was a great opportunity for gains, now is time to protect them. I am expecting a necessary market correction in the next weeks or months, as we have an extremely overvalued market, which is not in line with the real economy and with many index indicators about to explode (for example, the SP500 put-call ratio or its PE ratio above 25, unseen since 2008).

Levels to watch this week in main indices

The key to a successful application of Price Action Trading is to choose the appropriate support and resistance levels and wait patiently for the price to approach or reach one of them to start making entry decisions. Once decided, the target price and the location of the stop loss should be set, maintaining an adequate risk-reward, 1: 1 as a minimum, conservatively.

These are the technical levels that I am going to follow in detail this week in the three ETF that follow the main indices of Wall Street.

1. SPY, close $342.77

Target: the upper line of its recent purple 2-week bullish channel, at 342.10, was touch today with authority. Good signal. If confirms breakout then the next target is in 347-level, a long-term (black) uptrend line that comes from 2014, in the monthly chart (not shown).

Stop Loss: if the SP500 pullbacks tomorrow I see support at 339, its February highs (flat red line). Then at 336.65, the lower line of the purple channel.

2. QQQ, close $284.11

Target: on the upper line of its amazing 4-month bullish channel, in red, at 285.88. Today touched it briefly and pullbacks. If tomorrow the QQQ breaks strongly above this level, the sky is the limit? No: notice we are in a "tech bubble 2.0" due to the FAANGs and its prices just ride up, and up pulling all the market, until the unavoidable big correction begins. Nothing goes up forever.

Stop Loss: on levels 278.78 and 270.72, the purple lines, their last-week resistances.

3. IWM, close $156.20

Target: on the upper line of its 2-week purple flat channel, at 158.19. Today spikes +1% on low volume towards this level. The Russell 2000 has enough room to raise more. Its recent "golden cross" in its SMA50 and 200 is a nice bullish signal.

Stop Loss: on level 155.69, its recent week support, in purple. Then, the red uptrend line at 153.27, that comes since April recovery is extremely strong, and also match with its Fibonacci 78.6%

Although I have only shown the daily chart, I have already commented that I operate in three timeframes for my day/swings trades: daily, 1-hour, and 15-minute, using different colors for the trendlines in each case (red, purple and ocher yellow, respectively). It is, in my view, the best way to understand the behavior of any instrument on the market, at a glance.

My H2 Stock Watchlist

After three months, on May 31st. my trading system gave me the technical signal that I can re-open my long portfolio. As usual, I consider ETFs for my long portfolio, and the companies, listed below, just for swing trades. Of course, with strong risk management, due to the world economic recession and probable second COVID' wave that could damage more the markets, despite exaggerated Fed stimulus. Some considerations:

- My stock watchlist for the second half year contains my usual-followed stocks from 2019 that get good results as CREEDISFISVGILDKRLENLVSNEMPYPLROKUROSTULTA, and VMW.

- Are include some strong companies from sectors shocked by the coronavirus (airlines, cruises) that are now recovering with many difficulties, like BARCL, or X.

- Biotech companies that are in the "vaccine race" are followed these months, just for short-term trades due to its extreme volatility, with names as AZNMRNA, or NVAX. The play here is speculating on big moves due to its daily news, with long or short trades.

- Of course, popular stocks with big returns YTD, as NEMNFLXSHOPTSLAZM are considered these months to take advantage of its momentum. "Trend is your friend" is the best advice for a successful trade.

- Also, I include companies in bankruptcy due to the COVID crisis, that are heavily supported by the Robinhood traders, as AAL, HTZ, or M. These stocks are only for a quick speculative move in a day session: it's irrational that newbie traders, as the mentioned Robinhoods, are pushing high these stocks. The best (and only) play here is short them when they become overbought.

- Keep in mind that my suggestions, charts, and ideas regarding these stocks, in which I'm long, short or neutral, I do in the blog posts. And more fresh data and news posts daily on my Twitter and StockTwits, which are much more friendly and dynamic platforms for a chat and get feedback from traders.

- Update: June 14th, 19:32 EST
- View the blog Disclaimer: that a certain stock is in this list does NOT mean any BUY or SELL recommendation.