Macro Analysis

1. During quick corrections, markets fall through the floor, VIX spikes up, a few weeks of our trades get affected and things recover.
2. This time, we are seeing a different behavior. Markets have been bleeding slowly for the past 2-3 months in a sideways chop. VIX never spiked up throughout this long drawn out bleed. This week we finally saw that extreme VIX spike into correction territory and briefly touched 30! This was accompanied by a massive capitulation candle on high volume. 
3. A capitulation candle accompanied with high volume usually signifies the end of a correction. The last time we had this level of volume on Nasdaq was at the end of Feb 2021 correction. This is another topic so I will not go too much into it and is purely based on technical analysis when no other market moving event is in the foreseeable future. This time we have major earnings in the next 2 weeks, so bad earnings can nullify this theory. 

QQQ observations – 

Qs have now had a 14% correction. I zoomed out the chart to 1 year, so that I can point out the last “real correction” that happened in Feb 2021 when Qs dropped 12%. Notice the excessive volume on that last capitulation candle. We are seeing the same thing after almost a year. During normal market cycles, you will hardly ever see major indices drop into oversold region like what we have seen this time. Notice that when this has happened in the past (March, May and Oct), it is followed by a face-ripper rally. 

PS: I am not in the business of predicting the future. I am just pointing out historical patterns and how they usually play out. My experience also comes in handy because I have seen these patterns repeat over and over throughout my trading career. So, use my market outlook as you deem fit.

What to watch for in the coming week

• Sorry to say this, but we have that earnings wildcard that has been thrown into the mix which can invalidate all technical analysis due to the binary nature of the event. So, the only thing to watch out for in the next 2 weeks is Earnings and price/action with Support/Resistance levels (Cheat sheet at the bottom)
• On the down side in the Qs, we have next support at $345 and then at $340
• On the up side, we are due for a relief rally but until Qs touch $379, we are not in safe territory. A relief rally could take us to $375 but if it starts stalling there, expect another pullback.
• Above $385, is when we can expect the rally to be real (not just a dead cat bounce), and the correction will be behind us.

Treasury yields usually go inverse with growth. As Nasdaq was taking a beating TNX (10 year treasury yields) were spiking. However, note that TNX has pulled back and heading back down. Something to keep in mind.

DIA observations – 

While DOW resisted the pullback for quite some time, the selling pressure on Nasdaq eventually carried over to all 3 indices and although not as bad (only 7% down) DOW is also nearing correction territory. 

What to watch for in the coming week

• Long term support at the 355-356 level will now serve as short-term resistance. If we do get a relief rally, unless DOW gets to 360, we are still not in safe territory.
• On the down side, 340 and 338 are next support levels. Note that RSI is already oversold, so like everything else, this sell-off is overdone.

SPY observations  

1. Like DIA and QQQ, SPY has also entered oversold territory.  
2. Also, note a similar capitulation candle on high volume.

What to watch for in the coming week

1. $450-$452 area which was long term support could become resistance if a relief rally stalls here.
2. On the downside, $436 and $426 are the next support levels.
3. A break above $470 will be bullish and will put the stock market out of this misery.

IWM observations  

IWM has been in Bear Territory since 11/26. We finally got a relief rally back to the 200 day SMA before IWM got absolutely decimated again.

What to watch for in the coming week

1. $197 is a very critical and strong support level. Break below this could take us to $170, but I am doubtful this will happen.
2. If we get a relief rally again, expect IWM to bounce back again above $215 with ease.

Bitcoin

Bitcoin, the speculative safe-haven so far has been obliterated for months now. We are nearing a massive support line at $30K pretty soon and I believe that Bitcoin is near the end of its struggles. 

1. Critical Support at $34,000 and a massive amount of support at $30,000.
2. Unless Bitcoin goes back above $45K, it is not out of trouble.
3. Stay away from MSTR, COIN and other trades unless Bitcoin clears the $48K mark.

Portfolio Allocation:

I have been sitting on 40% allocation and not taking any trades unless I see signs of a recovery in the market. Once you hit 40% allocation, all speculative trades stop and it becomes a waiting game. If you are below 30%, the $25K methodology still calls for an increase upto 40% allocation at this time using Index ETFs like QQQ, SPY, DIA as your primary trading vehicles.

 Key Takeaway: Earnings decide the direction in the markets in the next 2 weeks. 

This is a different cheat sheet. We are knee deep in the DANGER ZONE. The first step is for the markets to come out of this zone which is our “Chop City” area. Only once we are out of that, can we start looking forward to a healthy trading environment which is the “Safe Zone” area.