Updated: Nov 22, 2020
Thanks for taking the time to read today's blog post in here we'll discuss some of the macro trades in the market, some Fibonacci levels we hit and some levels that we need to be concerned with as technical analysts as price is the only truth in the market that dictates a market participants behavior. Please be sure to read our disclaimer on our site before moving forward and purchase a shirt if you like the information we provide!
What a week on Wall Street! We had been talking about taking profits this week on my twitter account to lock in some of the spectacular gains we had. +400% equity returns in April from $TSLA (Tesla) alone and after moves like this it be prudent not to take gains even if we want to hold some positions longer term. In addition, we got some great news Friday that $ETSY is being included into the S&P 500, it's another stock I talked about getting long in April of this year.
So why then were we looking to take profits this week, get long volatility and short the $SPY? Our targets were getting met and the recent bounces in several stocks showed that while we were making new highs as the technicals were confirming to take profits. For instance in the chart below we see that Technology ETF, or $QQQ and $TQQQ was hitting the 161.8% Fibonacci target an area we tend to find market participants taking profits. As a technician were price is the arbiter of truth we can't ignore these levels in this market.
The chart above shows us that the RSI, or Relative Strength Indicator, was extremely stretched with a reading as high as 83.87 which is quite stretched for that given ETF. This, combined with the Fibonacci target helped us take positions on longs and even have the opportunities to open some short positions. The bulls made a good attempt for the opportunity to buy into some weakness at the previous week's low, $272 in the $QQQ,s. For now this should act as short term support after some decent selling last week in technology.
The next question is does this weakness continue? For the answer to that we'll look at some charts combined with the weakness we are seeing in tech this week were the majority of gains have been coming from in this rally. If we look at the $SPY it hit an upper trend like target of the megaphone pattern I had been talking about since March. The wave 5 (based on Elliot Wave Analysis) of the megaphone pattern looks completed as our wave 3 of the 5 wave pattern was completed. In addition we had a bearish ascending wedge pattern that confirmed a break towards to the downside this week. An important area that held was $3,400, however a look at one hour and 4 hour charts shows that the relative strength of this move was low and therefore could be more vulnerable to downside move in equities. What other evidence is showing weakness in the market?
Glad you asked! A sign of further weakness is being shown by Crude Oil ($CL_F, $USO), and High Yield Corporate Debt (HYG). As we take a look at the first picture of Crude Oil below we broke down out of a bullish symmetrical triangle. While this pattern generally signifies a bullish pattern, we broke towards the downside and think that we see ~$35 per barrel of crude oil before we even try to retest $44 again due to the nature of this pattern.
In the High Yield Corporate Debt space or $HYG is breaking down out of a bearish symmetrical pattern on the daily and weekly charts. In addition, lower prices were confirmed by a negative divergence in the RSI, a momentum indicator, and MACD (Moving Average Convergence Divergence) Indicator that we look to determine if we should be buying or selling when prices hit new highs. So even as prices in the High Yield Debt space were testing levels of $85.39 the indicator was not getting overbought (overbought is generally considered around 70) with a reading of 63.
In addition to that, a really great simple indicator is the 200 Simple Moving Average, or SMA, that calculates the average of a selected range of prices by the number of periods in that range. Crude Oil continues to be below its 200 SMA and $HYG is right above its 200 SMA, both of which are sloping downwards! Why is this important? Because when we have a downward sloping SMA it shows that there continues to be overall weakness in those markets, where that's different for Technology chart where are recent huge rally leads to a positive slope in that line.
The last chart I want to look in this blog post is the $VIX weekly chart, as we saw last week volatility definitely picked up with the markets selling off hard Thursday and Friday. While many new traders are probably new to this type of market action there are clues that the volatility index can give us about the market that we can utilize to be more cautious during certain periods of heightened price movement.
In the last week of August we had the VIX moving up while prices continued to rise in the indices this meant we were likely to see some volatility soon. Boy did we get it this week and now the VIX has confirmed an outside and up week reversal potential hitting at further volatility in the near term suggesting large cash positions, more volatility in the near term and shorter term trades.
The last chart I want to take a look at is provided by Helene Meisler, the Citigroup Panic/Euphoria Model that shows as overall market sentiment goes it's very euphoric out there and if we are looking to enter to new positions they are more of trading versus long term investments at these levels, this is referencing the last blog post I did in regards to trading versus investing longer term.
As always we will continue to be disciplined with both our long and short positions as market participants looking for the best setups to take. Enjoy your labor day weekend!
Essex's Trading Quote of the Day (QotD)
"Only when the tide goes out do you discover who's been swimming naked."