Stock Market Weakness Entering Earnings Season? January 20 Preview
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You can find today’s YouTube video by clicking Community at the top of our homepage. We take a look at SPX, the VIX, IWM, and NFLX, so check it out if you have a few minutes!
Let’s take a look at Thursday’s newsletter for a reminder of our favorite IWM scenario as we entered Friday’s session:
Scenario 1 (in order of odds of success, according to my own opinion): IWM consolidates around 265 (presumably while SPX heads for 7000). A pullback begins sometime between tomorrow and Wednesday, targeting 250-260, depending upon GEX movement.
Scenario 2: IWM surpasses 265, reaching 270, failing and retracing back to the border of the upper Keltner channel, which is rising. A pullback likely stops at 255-260 and we continue higher.
Our “Scenario 1” appears to be in play, though an argument can be made that we saw a blended scenario 1 and 2 on Friday, given the move toward 267 before falling back to just under 266, and both scenarios included overlapping lower targets anyway.
If the current dip in futures holds through the cash session open, IWM will open around 262, fairly close to the upper edge of that lower 250-260 zone. 260 also saw elevated volume Friday, so I still think we have a shot at seeing any further downside below 260 as a buying opportunity, based on current information.
As for the VIX, we talked about a move toward 20 this week, and we actually already saw 19.59 as of Monday’s futures session (admittedly faster than I expected).
20 is a key area in that it represents the largest positive GEX cluster and the approximate upper Keltner channel. VIX spikes can notoriously expand beyond the limits of Keltner channels, given how infrequently they occur, so it’s possible we could see 25-30 in a scenario where the market pulls back more deeply than we’re expecting at this point.
We did see volume at the 25 strike Friday, and 25 represents the last noteworthy positive GEX cluster visible.
With monthly VIX options expiring Wednesday, we could see a whipsaw with the VIX, whether declining into Wednesday or just after.
The first lower test for the bullish volatility picture may be at the rising Hull Moving Average, currently at 16.43. A daily close below the Hull may signal a return toward the 14-15 zone, so we’ll watch action early this week and any accompanying clues from shifts in GEX.
Previously mentioned lower targets for QQQ include the 600-610 area, and we appear on track to test at least 610.
Glancing at the weekly chart below, I like the confluence of the weekly middle Keltner channel and the large negative GEX cluster at 600, which is barely 2% away from the current QQQ indication.
Retaking 623 is necessary to open the door toward 630-640.
SPX closed Friday in slight negative GEX territory, though we currently see 7100 as the largest net positive GEX cluster, overtaking 7000 as of Friday.
The weekly rising 9 SMA is at 6852, which I think is a relevant line to watch Monday. A quick glance at the chart reveals the 9 SMA’s importance in stopping most of the red weeks since April, with one exception visible back in November. The market promptly bounced back the following week. Will we see a solid break below the line that lasts all through Q4 earnings releases? That’s not a bet I would typically make.
This week will be more interesting for earnings reports than last week, with NFLX kicking off Tuesday after hours, then JNJ, INTC, COF and others later in week. Given the overlap with Wednesday’s VIX expiration, we’ll be on our toes regarding potential intraday shifts in the GEX picture, and potentially reacting to opportunities created in the aftermath of this week’s earnings.
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