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Market Outlook |Week of 5/23 – 5/27|7-losing weeks in a row!

Previous Week’s Update: https://25koptionschallenge.com/market-outlook-week-of-5-16-5-20-is-the-capitulation-over/

That light at the end of the tunnel is looking more and more like a train

We wrapped the 7th week of relentless selling. Many are likening this to the 2008 market crash and pointing out similarities between charts. History doesn’t repeat itself but it does rhyme so there could be some truth to that. S&P 500 briefly touched Bear Market Territory before bouncing back and closing flat last Friday.

It is human nature to try and make sense out of everything by overlapping chart and historical patterns. My suggestion is to stay objective and use price action and VIX as your primary tools to act on this market.

Market Moving Events – FOMC minutes

We have a bunch of Fed speeches lined up from Mon-Wed. On Wednesday, we also have FOMC minutes being released. Note that this is not FOMC meeting but simply details of the previous FOMC meeting being published so the economist can slice and dice it further. On Thursday, we have a 2nd estimate of GDP growth lined up. This is just a another estimate of the already negative GPD number that we are aware of and there are no changes expected. 

Earnings next week

WMT, TGT, ROSS annihilated the retail sector so far.  

Earnings season continues to roll through. Stocks keep dropping off of our watchlist as many stocks have suffered 70% – 85% collapse and have dropped to sub $100 levels. We have AZO, INTU, NVDA, SPLK, SNOW, COST, DLTR, DG, ZS, ADSK, ULTA, WDAY, BURL all reporting next week. If markets continue with this bearish sentiment, I will consider a bear put spread on any company which reports good earnings and spikes up after that. I don’t plan to go ballistic with bear puts and sticking to keeping trading to a minimum will still be the theme for next week.

Macro Analysis (VIX)

VIX has been bouncing between 28-35 levels showing no signs of a respite. For smaller account sizes, these levels of VIX should cause you to stop trading. For my $100K+ account, I am sticking to 2-3 trades a week at a greatly reduced size. (1 contract vs 4 contracts). We will need VIX to drop below 24 for the markets to stabilize.

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

QQQ, DIA, SPY are all touching oversold levels at this point. The tech sector has been the weakest but nothing has been spared. The oversold levels are a point of interest especially on a longer time frame like 3 years. We are definitely due for a bounce. Whether it is a huge dead cat bounce or a recovery, nobody knows that part. We also don’t know when the bounce will come. Just look at possible price targets on the downside. If market continue to sell-off next week, $260 is a real possibility!

What to watch for in the coming week

Bear Case:

  • This case has been unfolding for weeks now. We are clearly stuck in a descending price channel. Look at the 6-month chart for QQQ below (after the 3 year chart). If markets continue to sell-off next week, a $270 price target is a real possibility as early as next week. 

Bull Case:

  • China lockdown is supposed to end on June . That can bring relief to the rest of the world. 
  • Although there is no end in sight, any positive news on the Ukraine front can also provide fuel for this market to stop bleeding.
  • We have a busy earnings week. Any positive earnings surprises, can also offer a helping hand.

QQQ 6M/D chart

We made a new log of $280 last week. If markets continue to tank, $270 is a very realistic price target as early as next week. The possibility of Qs touching $260s before bouncing off is also become very real.

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

  • The week is lined up with several Fed speakers, FOMC meeting and a second estimate of GDP.  
  • If markets continue to tank, several lower price targets are becoming a reality.
  • Keep and eye on TNX, VIX for further clues.  
  • If markets continue to tank, I will try to take Bear Put spreads on any earnings spike that we get next week. If this doesn’t happen, I will just keep trading volume low. 

CHEAT-SHEET

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