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Market Outlook for the week of 1/31 – 2/4

This is not a Bear Market. It is a Stock Market Correction!

This correction wasn’t one of those plain vanilla corrections, where markets make a quick drop, bounce at support levels, a recovery happens, and everybody lives happily ever after. 

This time, we blasted through multiple support zones and even the 200 day SMA causing many people to worry about a possible Bear Market. It is so tempting to keep buying the dips, but as you may have noticed, dip buying doesn’t always work. There is a reason why I have rules in place like “Below 30% allocation, be risk averse and buy the dip”, “after 40%, be very cautious and take trades only on clear signs of a recovery”. These rules are there because I have been a victim of “buy every dip” in my younger years and it never ended well for me. Of course, there are still no guarantees in the stock market but having rules in place increases your probability of weathering these storms and avoid blowing up your portfolio so you can live to trade another day. 

The downward momentum seems to have stopped and the markets are trying really hard to mark a bottom and head back up. Bottoming out is not something which happens on a single day. It is a process and we are just going through that right now. 

When markets drop like this, support/resistance levels get reset, traders become fearful as they get programmed into thinking that every time they buy a dip, it will be met by another fierce sell-off. Keep reading to find out how to tackle this difficult trading environment.

What to watch in Earnings next week :

After NFLX started tech earnings with a massive disappointment, we got a break last week with great earnings from MSFT and AAPL. We are not out of the woods yet and we do have some market movers reporting earnings next week as well. These include Alphabet, Meta, Amazon. It is a difficult situation to be in as markets are already very nervous so we need the big boys to report stable earnings to return the markets back to some levels of sanity.

Macro Analysis

  1. We saw a capitulation candle in all the Indices last week and the markets have been trying to stabilize after that. Good earnings from MSFT,AAPL offered some help too. 
  2. VIX is highly elevated and is manifesting itself in the wild daily swings we are seeing in Futures and even during daily Market sessions.
  3. We did see VIX pullback to 27 after peaking to almost 38 on 1/24 (Capitulation Candle day)
  4. Good earnings next week should help VIX drop to the low 20s. This is where we can expect some level of stability in the markets.
  5. At this point we are not concerned about new highs or chop zones. All we need is some stability in the markets and VIX around 20-22 will bring it back.

QQQ observations – 

The 17% correction in Nasdaq is now over. After such a massive correction, all technical support/resistance levels get reset. This also means that all the zones which were support zones earlier will now become resistance. We did have a very Bullish close in the Qs on Friday.

What to watch for in the coming week

  • We briefly crossed over the first resistance at $350 on Friday. 
  • Next resistance is at $360 and then at $365. 
  • $372 is the level which is resistance right now, but a break of this puts us back on the Bull. 
  • TNX (10-year treasury yield) is also heading down, which is good news for Tech/Growth stocks.
  • I don’t want to look too far ahead right now above $372 as we have a lot of resistance to cover before we even get there.

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

  • DIA also had a very Bullish close on Friday and it appears that it wants to test the first resistance at $355-$356
  • As mentioned earlier, all the support zones until last year are now resistance zones. I have color coded them so it is easy to see when we are out of the woods.

What to watch for in the coming week

  • Critical Support between $338-$340
  • 1st Resistance at $350 which could be tested and pierced as early as next week. 
  • 2nd Resistance at $355-$356 is the zone where we switch from Bear to Bullish scenarios. 
  • Above $360, sets a clear path for us to look forward to greener pastures.

SPY observations  

  1. Just like DIA and QQQ, SPY also had a very bullish close on Friday.

What to watch for in the coming week

  1. $428 is critical support and marks the end of this correction
  2. We briefly pierced 1st resistance at $440 last week.
  3. $450 is the next resistance and closes above $457 pushes us into Bull territory.
  4. Above $460, we can put January behind us and start looking for new highs.

IWM observations  

  1. IWM is the only laggard amongst all the Indices and continues to live in Bear Territory. We had a small recovery (which is when I bought an IWM spread but it was quickly followed by another sell-off to $191 again)

What to watch for in the coming week

  1. $191 is critical support (a break below this takes IWM to $170ish)
  2. Crossing $205 resistance would be the first signs of IWM recovering
  3. Any break above $212 puts IBM back on the Bull and we can start looking at higher levels.

Bitcoin

After getting beaten down to a pulp, Bitcoin is now showing some signs of life.

  1. Critical Support at $30,000
  2. Bitcoin has bounced off of $34,000 which is great news. 
  3. I have been mentioning for a few months that Bitcoin needs to clear that $48K level for it to go back into a Bull Market. So keep an eye on that level.

Portfolio Allocation:

I am at 40% allocation and I need some profitable trades to cancel out the plenty of losers we had during this brutal correction. I will be making attempts to take trades on every sign of a recovery in the market. You saw some of those signs last week with TSLA, FIVE and NFLX trades. Since VIX is still high and next week could bring earnings surprises and we can still expect wild swings in the market. 

Key Takeaway: Next week earnings can move the markets. AAPL’s 7% move is very bullish for the markets. Expect wild swings until VIX settles down below 22.

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