Stock Market Recap March 11

Tickers discussed: SPY / SPX  Strategy and Tactical Update

The Market recap provides a short overview of the market along with key levels, strategies and timely commentary to keep you on the right side of the trade.

Market Highlights

  • SPY & QQQ successfully tested and held the prior lows
  • IWM not as much; falls to the Dec 2018 lows
  • BA destroyed as cancellations top new order bookings; Implement a hiring halt and tap their credit revolver for $13B
  • Trump to announce fiscal plans at 9 pm tonight. Will he bring a Bazooka or a BB gun?

Ripe for a Rip

While I am overall bearish on the market going forward, this market has been tough to trade. Lots of misdirection making overnight holds more of a guessing game than anything else. A painful lesson for me back in 2016 was “fighting NYMO”.  That is, holding a boatload of shorts with the $NYMO oscillator deeply oversold. When the $NYMO is stretched tight and to the max, it is a prime set up for a “rip your face off” rally. Not a place where you want to be holding shorts. Lets look at the charts.

$NYMO Oscillator

As you can see, we are well below the Q4 2018 and early 2018 sell off levels. Notice that below -60 you enter the danger zone for holding shorts. In the annotations are my thumbnail rules for respecting $NYMO levels. What has been frustrating this time has been the duration in time for the oversold conditions. As other commentators have mentioned, this sell off has dwarfed / over run commonly used technical indicators making it a tough market to position bearishly or bullishly anticipating a bounce. I think the oversold signals are about to win out at least short term setting the stage for a rip. Realistically the only alternative is a cascading panic sell off that results in a capitulation / exhausting sell off.  I vote for plan A.

$SPX with $NYMO indicator

Here is the weekly $SPX chart with $NYMO in the lower panel as an indicator.

The purple dashed lines are where the $NYMO went to minus 75 or lower. It has tended to give pretty good signals at the extremes. In the prior instances, we saw big rips.

 

Technical Posture of $SPX 

  • 2700 is a key support level. It’s not shown on the weekly chart, but we’ve tested that level twice this week. Monday and now again today. I think it holds and we bounce. Let’s put it this way, if 2700 breaks, I think we will be in waterfall mode down to at least 2600, maybe more with a momentum overshoot.
  • I favor a bounce to either the 50% fib level at 3056 or the 61.8% fib level at 3138.  If forced to guess, I’d say thew 61.8% level. You ‘d have people screaming V-bottom, sucking in as many bulls as possible convinced the Fed or whomever saved us again.
  • Then the bottom falls out as “Wave 2” hits.  Wave 2 is when all the corona affected data continues to hit the tape and all the knock on effects of the economic slow down are revealed.
  • If all goes according to Hoyle, we then come back for a back test of 2700.  There we either bounce and move back to the highs or we break below which would open the door to lower lows.
  • That’s a long ways off so no sense for speculation ; we’ll see how it goes.

Note: There are lots of other technical signals pointing towards favoring a bounce.  There is positive divergence on the SPY 60 min chart.  Also, TLT is backing off it’s over bought run. Yields backing up would be a boost for equities. I’m also thinking that the VIX is going to have a hard time sitting at 50. If the VIX relaxes even to the mid 30’s, equities should be able to nicely advance.

Short term strategy and positioning

  • Positioned flat, but ready for a bounce
    • I’ve already tried a couple of baby overlong long positions in SPY / QQQ  anticipating a bounce that have failed.  So I am a little gun shy about overnight holds.
    • If we see a good upswing develop, my game plan is to hop on intra day, then try holding modest bull positions overnight and see how it goes.
  • Stay Bullish, but be ready for a reversal
    • I’d be happy to ride a bull wave to 3050 or 3100; works for me
    • The higher the better. That would give great trade location to reset shorts at higher levels for a back test of 2700.
    • That said, I want to be open and ready for a reversal at the various overhead resistance levels. There are lots of trapped longs out there that would love to get out at higher prices.
  • Stay Mentally Flexible
    • Grand plans are great, but they rarely work exactly as envisioned.
    • There is always a wrinkle or curve ball.
    • I want to stay as mentally flexible as possible. For instance, if tomorrow morning we break 2700, the NYMO be damned, I’m getting short with a stop just above. I don’t want to be sitting there frozen waiting for a bounce.

Trading a Hi-Vol Tape: Tips for success

  • Cash is king.
  • Overnight risk is elevated in both directions.
  • Be ready for swift 2-way trading during the day; Know your levels
  • Hi-Vol markets are technically driven 
  • Narrow your focus to the liquid indexes, Sector ETFS, and a select number of stocks.
    • The wild moves will demand focus and attention. If you stretch yourself thin, mistakes will multiply.
  • Migrate from strategic to tactical thinking and trading. Near term, the days of sitting in positions for weeks and weeks is likely over.
  • Expect added chop and volatility.  A VIX greater than 30 is not “invest-able” it is a trading environment
  • Reduce position sizing. With the added vol and out-sized moves you  can make good money with smaller position sizes.
  • Consider using spreads to mitigate the high cost of options.
  • Consider selling call spreads instead of buying put spreads to express bearish outlook. Premiums will be elevated which is great for option sellers.
  • Flip your mentality from offensive to defensive if you have not already done so.
  • I expect bounces into key fib and OH resistance levels will ultimately fail. The range of possibilities are huge so trading becomes day- to- day, hand-to-hand combat keying off support and resistance levels

 

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