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Market Outlook |Week of 5/16 – 5/20|Is the Capitulation over?

Previous Week’s Update: https://25koptionschallenge.com/market-outlook-week-of-5-9-5-13-dow-falls-for-the-6th-straight-week/

Is the light at the end of the tunnel a train coming at ya?

After a bloody 6 weeks of relentless selling, we saw a light at the end of the tunnel? I can’t recall for over 6 months, when I last saw a green Friday. But that is exactly what we got last week. In addition to that, we saw a some more signs which could add more meaning to Friday. I posted about these in my morning announcement on our Discord server, but I will go into more detail here.

Market Moving Events – Finally, a calm week!

I am so tired of waiting the week out until every Wednesday or Thursday, because there is always some kind of “binary”, market moving event lined up each week. Whether it is tech earnings, or FOMC meeting, or CPI numbers, the list is endless. I am feeling a sense of calm that we have no major market moving events lined up next week. (There is of course those jobless claim numbers on Thursday but nothing outside of that) 

A wasted earnings season 

The second earnings season this year is rapidly flying past us and we hardly took any post-earnings trades. Well, that is the state of the markets and you just have to act accordingly. Not blowing up your portfolio, trading at extremely low volume and cash conservation seems to be the theme this year so far.

I talked to two of my friends who run hedge funds and they shared the same story with me. In their own words – “There is no perfect hedge”. These guys have millions (in one case billions) of dollars under management and have the cash to buy expensive insurance. But no matter how much insurance you buy, you will bleed your portfolio in these conditions. Let us be clear, nobody is laughing their way to the bank this year. The guy who loses the least is the winner!

Many of our stocks in our watchlist have tanked sub $100 (That is where you see those Xs). We have WMT, HD, LOW, TGT, AMAT an DE reporting earnings next week.

Macro Analysis (VIX)

After a painful CPI print, VIX shot up to 35 before beginning to settle down. A 1 or 2 day drop in VIX is meaningless, but if VIX continues to drop (preferably below 24), then we can start adding some meaning to it. But it is definitely a piece of the puzzle, so keep a close eye on it.

QQQ Observations (Covering QQQ this week as SPY, DIA are moving in sync)

I posted this 3 year/weekly chart of QQQ on our Discord server on Thursday. QQQ is touching oversold levels on 3 year/weekly chart. Although there are no guarantees in the stock market, but these levels are significant enough to keep a very close watch on. Capitulations are very painful and when you think there is no room to fall further, markets can take another leg or two down. So, just because we are at oversold levels, doesn’t mean the markets will absolutely bounce back from here.

What to watch for in the coming week

Look at the 6-month chart for QQQ below (after the 3 year chart). Markets are making an attempt to put in some green bars. This accompanied with no significant macro-economic event next week  has the potential of providing a relatively stable environment for a relief rally at the least. Monday and Tuesday will make this picture clearer.

QQQ 6M/D chart

On a zoomed in 6m, daily chart, Qs show 2 consecutive green days. Note that Qs (and the entire market) is stuck in a clear downward price channel and we are simply knocking at the upward end of this downward sloping channel. This has no meaning right now, because if Monday brings a red-day, we will go down and possible test $280 levels as early as next week. We need to break this channel and blast past $310 to trust this bounce. 

TNX (10 year treasury yields)

TNX which moves opposite of growth stocks finally showed some signs of weakness last week. After hitting a high of 31, it pulled back to 27. This is a good sign, but we don’t have enough information as to where it wants to go next. TNX has moved back up to 29. If it begins to show some cracks next week, that would be a positive sign for the markets.

Key Takeaways

  • A calm week lies ahead as far as market moving events are concerned. 
  • By Wednesday, we will know if markets break out of the downward pointing price channel.
  • Keep and eye on TNX, VIX for further clues.  
  • We will have to keep trading to a bare minimum as long as the markets are stuck in a downward trending price channel
  • If we get a decent sized relief rally here, (hopefully, at least couple of weeks) we can start looking at Bear Put spreads. 

CHEAT-SHEET

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