Market Outlook for the week of 3/21 – 3/25

Higher highs and higher lows.   

Congrats for surviving a week full of major market moving events! Jerome Powell did an excellent job last week and  removed uncertainty from the markets by setting out a clear path for rate hikes. Of course, since we have that pesky war situation still showing no signs of a resolution, that will continue to remain a wildcard and can throw a wrench into any possible recovery that we may see from here.

After being stuck in a clear downtrend for months, we finally saw the first signs of higher highs/higher lows again. Price/Action is always the King as it gives you real time information about what is happening. Indicators always lag behind and simply provide confirmation of what is already happening. Keep reading to find out what seems to be brewing across all market indices and how I expect next week to unfold based on technical signals.

Can we trust this bounce?

After a blood-bath since January, the spread tracker is finally beginning to turn green. We had our first week in a long time where we had 100% winners. The spread tracker is usually a pretty good gauge of the market pulse. If VIX keeps dropping next week and the spread tracker continues to have more green than red, that would be a good time to start adding some trades.

I am still wary of the war situation so will not trade with the same momentum as I usually do. During “normal times” I used to take up to 10 trades per week and on my larger account I would go upto 4 contracts per trade. Since January, I have been trading only 1 contract per trade and keeping trade volume low. I am not going to stop trading but I would like to see some solid signs of a de-escalation in Ukraine to get back to normal.

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Market Moving Events next week

After what we had lined up for last week, the coming week looks like a piece of cake. There is the regular slew of market data that is coming next week which is always interesting to watch, but nothing stands out so far which can surprise the markets. Of course if any of the numbers are way-off than expectations, that always generates some volatility. The only wild card that remains is War! Peace negotiations seem deadlocked so far and this is news that the markets have already priced in. What we don’t want going forward is any kind of escalation. 

What to watch for in Earnings next week :

I hardly took any trades during this earnings season due to horrendous market conditions and Earnings are pretty much behind us. NKE and ADBE are two stocks from our watchlist reporting earnings next week and I will be watching them to see if they generate any trading opportunities. 

Macro Analysis

After shooting up to 38 the previous week, VIX has been on a downtrend. This is good news so far as VIX below 22 brings signs of stability and removal of uncertainty from the markets. With the War still going on, we could see brief spikes on any news of things turning ugly in Ukraine. 

SPY observations – (Ignoring QQQ/DIA this week as they are all moving in sync)

I used QQQ for my analysis last week, but will use SPY this time. All major indices are behaving the same so there is no point regurgitating the same information over and over again. I do cover individual sectors/indices when things start diverging.

The entire market has been stuck in a downward channel since January 2022. With a lot of uncertainty behind us and inflation/rate hikes news mostly digested by the markets, we are finally seeing the first signs of this “market crash” coming to an end. Also, note that DI- and DI+ is showing a possible cross-over. In my experience, when this rare cross-over occurs, expect a major trend reversal. I have highlighted several instances where we had a DMI cross-over. Look how markets changed direction at those points.

What to watch for in the coming week

  • Bullish: SPY takes out $450 for the first time. Even if we get a pullback after that, it will most likely be a Bear Trap. It will be shallow and SPY should bounce back at $438-$440 level.    
  • Bearish: Don’t ignore Putin’s War! I am pointing out information based on what price/action and technicals  are telling me. This is a news driven market and I cannot predict bad/good news. If the war escalates and SPY falls below $438, we could enter a side-ways chop zone. Any drop below $430 brings back the chances of a Bear Market/Recession into play.

IWM observations (Breaking out of its range?)  

  1. IWM has been range bound since 1/20. The range is between $190 and $205. We are finally seeing the first signs of IWM wanting to break out of this range. 
  2. If markets stay stable next week (barring any surprise geo-political news), expect IWM to test $210 as early as next week.

Bitcoin (still range-bound)

  1. We have been using Bitcoin as a measure of the market’s “risk-on” sentiment and it has become rangebound between 35k – 45K. This further reflects the indecision and lack of conviction in market participants.
  2. Bitcoin needs to blast past 48K for a bull scenario to play out. Or, fall below $30K for a bear scenario to unfold.

Portfolio Allocation:

As we are well into the 3rd month of this “market crash”, I have been keeping my trading frequency very low. I haven’t stopped trading and am still taking small trades on every sign of a recovery.  I usually take upto 4 contracts per trade on my larger account but have been taking 1 contract trades for months now. Next week should set a new trend for this market if we can maintain the positive momentum. I will consider ramping up my trading frequency/allocations based on how next week turns out.

Key Takeaway: Most of the Inflation/Fed/Rate Hike uncertainty is behind us. War is the only wildcard. Markets are already showing signs of a trend reversal and we may be setting up for the next Bull run.