Hi Folks,
I just wanted to give a quick update on some observations I've made of the current market environment. I've shared some of these thoughts with Art of Trading private members but I think this would be a great place to summarize the current state of the market and what I've been seeing over the past 6-8 weeks!
Since "topping" out in mid July this year the market has been a very difficult environment for a variety of trading strategies. This has surely frustrated many traders as they try to piece a run together only to get stopped out or miss big moves simply because of heightened volatility and a barrage of mixed signals. Not to mention political election pressures, Fed news hitting the tape and hot economic data dropping making for very erratic trading conditions.
The $VIX event the market traded through in early August deserves some attention here too.
Lets break it down!
So next week, we'll be on NYMO/NAMO watch. Meaning, looking for more selling, at least in the first half of the week. If we do get an oversold conditions on NYMO/NAMO, we'll look for a snap-back bounce phase. However, when we zoom out a bit more, we'll see that the major US indices are showing signs of topping out after a multi-month rally phase followed by peak in July.
The fact that fewer and fewer stocks have been participating in the uptrend starting in May/June, shows that deterioration under the surface has been under way. I believe we're likely to see a steeper correction in stocks in September Fed meeting(where we're going to see the first rate cut) going into October(the month when more market bottoms happen than any other month in history).
Reasons for the prolonged pullback in stocks: elections uncertainty, economic weakness uncertainty(and whether the Fed is now behind the curve as far as interest rate cuts), the strength in Semis and A.I. hysteria seems to be now priced into many of the Semis. Weakness throughout September going into October is now likely. Bull market isn't over, but we're likely to see at least prolonged pullback phase that lasts into October ahead of US elections. Keep in mind, stocks price things/events in well ahead of time.
Where can we go from here? Lets look at the technicals!
$NYMO & $NAMO pushed closed to "oversold" territory last week. One or two more downside days should get these into an "oversold" condition allowing for a potential short term low to buy in anticipation of a short term snap back rally.
$NYMO closed at -43.06 on Friday. Our oversold level sits at -80.00 or below.
$NAMO closed at -43.57 on Friday. Our oversold level sits at -60.00 or below. The "best" short term oversold buying opportunities have come from conditions below -65.00.
$NYMO and $NAMO are a MUST WATCH for next week!
Lets look at $QQQ next!
If you're in the camp that the market isn't in the beginning phase of a full blown bear market, which personally I don't believe we are as mentioned earlier:
"Weakness throughout September going into October is now likely. Bull market isn't over, but we're likely to see at least prolonged pullback phase that lasts into October ahead of US elections. Keep in mind, stocks price things/events in well ahead of time."
then constructing a scenario off of the August $425 low makes sense. $QQQ is beginning to trade quite close to the 200D SMA. That price point sits slightly above $440. I have the 200D SMA marked in the chart below annotated as a red line.
In this scenario we could look for $QQQ to retest the 200D SMA short term. If the market reacts positively off of this level it could set up a snap back rally and a potential higher low from the $423.45 low made earlier in August. On the other hand if a new "higher low" was made but quickly failed, August lows would be back in play. A much more bearish scenario, especially if the market failed through that August low.
Where has $VIX been and where might it go in current market conditions?
$VIX made a historic move in early August against the August lows created in the indices. If the market was to accelerate lower to the downside short term once again you could look for a short term $VIX divergence where the market shrugs off the weakness by reflecting that in a less dramatic move in the $VIX. This could help signal a potential spot to try for a bounce trade paired with the $NYMO and $NAMO charts above!
Are there any other tools I can utilize to help navigate challenging market conditions?
A very popular tool many traders pay attention to and utilize is equity Put/Call Ratio's. When Put/Call ratio's sway from one extreme to another they can be utilized to help spot potential pivots in the market.
Using CBOE Put/Call ratio's a Put/Call ratio above 1.175 generally signals an oversold condition and a ratio below 0.825 signals an overbought condition.
Friday CBOE Put/Call ratio closed at 1.125. Below the "oversold" threshold but well on its way into that area.
Closing thoughts
We're surely going to see a volatile, rocky environment through fed rate announcements and decisions and with continued pressure from a highly publicized and contested upcoming election the market is going to continue to "price in" news and headlines as it sees fit. For now keeping an open mind, smaller position size and a shorter time frame on your trades is a strategy that could help keep emotions from seeping in.
I have no doubt that the market will price in most of the "unknowns" and will become a lot more trader friendly. It always does! Never underestimate the market's uncanny ability to price in events and quickly move on, leaving most traders still starching their heads.
It often times happens after a rough, stormy multi-week phase. Have an open mind and be ready for it!
Cheers and happy trading!
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