Testing Resistance
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Today’s YouTube video looks at the indices as we see the market testing resistance after a quick rebound, and we also discuss some stocks not covered in the newsletter, ranging from SOFI to CMA to TSLA and more. You can view the short video by clicking here.
Indices tested and rejected the Hull moving average intraday (except IWM, which was too weak to even reach the Hull), fitting within what we expected and hoped to see early this week. As I’ve mentioned previously, I am biased to the short side any time a ticker is below the Hull, and my bias is long above the Hull. You can look back on the SPX chart below and see that price generally trends for a few days once a shift occurs above or below the line.
That said, I don’t consider initiating a short here a “slam dunk” given the fact that the Hull is marginally rising (meaning we can stay below the line yet still hug the line sideways or slightly higher), and the VIX is far enough above its own Hull that we can see volatility consolidate sideways or down for a day or two. Absent those scenarios, I’d expect a continued drop to conclude fairly quickly or consolidate before continuation while the indicators catch up. Another reason for at least some caution is the calendar this week: VIX monthly expiration Wednesday, FOMC Wednesday, markets are closed Thursday, and monthly OpEx is Friday.
We see SPX GEX taking a sharp turn back up to over 1B, a bullish reading from Friday’s sharp dive to barely 137M (though still positive overall), signaling that participants are potentially shifting rapidly in expectation of different possible scenarios. A number of other possible motivations exist, but I think the bottom line is that we often see large swings in GEX during weeks of perceived higher event volatility, and this week definitely qualifies, along with the current technical picture.
IWM was notably weaker today, not even reaching the Hull, though IWM did paint a doji candle today, indicating indecision. I wouldn’t be surprised by FOMC marking a short term top or bottom, so we’ll see if any net movement can occur between now and then, but IWM has room overhead to move toward the 213-214 area to test the Hull, implying the possibility of more upside for the major indices before continuation lower. The problem is that IWM may also be signaling weakness before the other indices, in which case I’d expect a decline to continue until IWM reaches 205, and possibly 200 before a solid rebound. Futures happen to be down at the moment, but that can shift quickly, as you know.
IWM also saw a sharp rebound in GEX, though IWM overall continues printing lower lows and lower highs with GEX since early this month.
Lastly, the VIX is maintaining a long signal above the Hull, and we still see no growth in lower strikes for the VIX, with 17 appearing to be a floor and 25 as the upper Dealer Cluster zone. GEX is positive heading into Wednesday’s expiration, with 17,18,20, and 25 representing the largest GEX clusters expiring. The odds are fairly high that we approach 20 into Wednesday morning, though the VIX’s bullish setup is maintained even if we see the VIX decline to sub-18 levels. The sequence of a continued rise or drop obviously impacts when new highs for the VIX can be achieved, but a tactical reactive approach that resonates with me personally is to potentially buy any market dip resulting from a VIX spike to 25, while aiming to hedge and/or reduce longs further on a VIX dip to 17-17.70. If a dip occurs in volatility, I’ll be watching where indices are at the time the VIX touches the mid 17s, ideally allowing SPX and QQQ to finally reach their upper Dealer Cluster zones.
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