Market Outlook: Week of 3/28 – 4/1

Markets are irrational by design. Sometimes we see face-ripper rallies over-extended beyond anybody’s imagination and at other times we see massive sell-offs where the light at the end of the tunnel turns out to be a train! Whatever may be the case, and whichever way the markets get over-extended, they always revert to the mean. That is at least the theory behind mean-reversion. Of course when it comes to trading in real-life, there are so many nuances involved, especially when you are dealing with Options since they come with that pesky expiration date. 

Is this a Bull Trap?

There was so much negative sentiment in the markets for the last 3 months that we kept getting over-extended to a level which was unsustainable. Inflation was already being a Debby Downer on the markets towards the end of 2021 and that is what caused the initial correction in January. But just when markets were making an attempt to recover, the topless man from Russia slammed the world with a totally unprovoked War! This was followed by many online publications and gurus calling for a 70% – 80% correction in the markets.

Now that the market has digested all this news,  the same excessive negative sentiment which caused the markets to fall so much is now giving way to an impulsive recovery. As the “Rat” gets cornered, he can always bite and there could always be ugly Black Swan type surprises but I will ignore that for now.

Having said that, markets usually don’t go up in a straight line and we are nearing a critical resistance level across the indices. Although nobody holds a crystal ball, but we can guesstimate future direction from historical patterns. We are at a juncture, where markets can get rejected at the upcoming resistance levels, do a deep pullback and then head back up. Any pullbacks (on no real material news) should now be considered buying opportunities keeping the overall uptrend in mind. Just be prepared that if a pullback does happen, any expiration which falls on that week may get affected. 

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Spread Tracker tells you the story

An old member of our group shared this with me that they use the spread tracker as a gauge of the market. Think of it like a cheat sheet. A quick glance at the spread tracker should tell you that markets are stable and are chugging along in a certain direction. If you have been gun-shy about resuming trading, the spread tracker should have been an indication 2 weeks ago, to start adding trades.

You must have noticed that I am slowly ramping up trading volume (although still doing 1 contract trades and nowhere near my original trading intensity). I am also making a conscious effort of adding Bear Puts to balance out my expirations in preparation for any sudden pullbacks that we may encounter in the coming weeks.


Market Moving Events next week

Next week is another “nothing burger” week with the usual slew of data which can generate volatility but I am not seeing any planned events of earth shattering nature.

Earnings Season is over!

We just have a trickle of earnings still coming in and BNTX and FIVE are the only 2 stocks of interest which report earnings next week and may generate some trading opportunities.

 Macro Analysis

Wow! While nobody was watching, VIX has quietly dropped to 20! If you remember, VIX < 22 represent stability and directional markets. If VIX continues to drop and goes below 18, we will see this Bull rally pick up steam. If markets get rejected at resistance and we get a brief pullback, VIX levels up to 24 would represent buying opportunities. Anything higher than that should make dial down your trading volume again.

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

I am using SPY this week to analyze where we might be headed next, but will mention important levels for QQQ/DIA in the cheat sheet at the end.

I wouldn’t classify this as a face-ripper rally yet but we are definitely seeing a very impulsive rally and are in an established uptrend. As we approach a level of critical resistance, be prepared for a pullback and know before hand what to expect if a pullback does happen.  

What to watch for in the coming week

  • Possible Pullback: SPY is approaching $458 level which can result in a pullback before this rally continues. A deep pullback could take us all the way down to $442 before the dip buyers come in and this rally continues. A pullback should be considered healthy in this scenario as it will help re-establish support/resistance levels and will set a clear path for the Bullish scenario to keep playing out.    
  • Full Bull: Due to the massive market crash in the last 3-months, there is always the possibility that this turns into a face-ripper rally and we don’t get any pullbacks at all. In this case, SPY would take out $460 with ease and head up above $475 before we consider the possibility of a pullback.
  • Bearish: Don’t ignore Putin’s War! But don’t ignore the possibility of a Comet hitting planet Earth either. Unless the topless man goes Nuclear or Chemical in nature, the War situation should not result in another massive pullback. We will continue seeing small pullbacks along the way on any news of the war situation worsening, but nothing that resembles what we saw in the last 3 months.   

IWM observations (Breaking out of its range?)  

IWM is looking really Bullish and if markets stay stable next week and VIX continues to drop, expect IWM to test or take out $210 level, which pretty much puts it back in a Bull Market.

Bitcoin (Breaking out of its range?)

  1. We have been using Bitcoin as a measure of the market’s “risk-on” sentiment and it has been rangebound between 35k – 45K since January 1st. However, it is making a 3rd attempt to blow past that $45K mark or the line in the sand. 
  2. If we blow past that 48K mark, we can start entertaining Bullish scenarios and possible trades in stocks like COIN/MSTR. 

Portfolio Allocation:

For new members, you would want to trade at 30% allocation. For existing members, who bore the brunt of this deathly correction, you will need to slowly keep stretching your portfolio to make up losses. I am personally nearing 55% portfolio allocation.

Key Takeaway: Possible pullback in near future, keep an eye on VIX. VIX < 18 brings a bull market. VIX > 24 is most likely not good news.