So we’ve got Russia-Ukraine throwing global markets into chaos, and we have Fed rate hikes like a month away.
With these things in mind, read this week’s Market Primer below:
SPY Stock Chart
Any kind of dip in 2021 was met with aggressive buying where we wouldn’t see a retest of the lows, much less any kind of lower lows.
Things have changed, though…
Not just in terms of the newsflow, but also in sentiment, fundamentals, and Fed policy.
The Russian invasion of Ukraine we saw last week accelerated things.
This selloff’s total volume appears to be lower than January’s, but the moves have been larger — especially on the overnight session.
That tells me this market’s overall liquidity is low. We’re whipping around 2%, both higher and lower, and it’s dominated by newsflow.
All that said:
We very possibly had a capitulatory gap down on Thursday. We were down something like 2% on the day and coming into some very key levels. While we never hit the lines marked on the chart, there was a further downside stretch in the futures market that got it “close enough” for me to consider it a test.
Taking out Thursday’s low in the short term will require extraordinary action. I’m not saying it’s impossible, but given the reversal we had, it’s telling us we simply ran out of sellers.
Remember: Low liquidity can run both ways, so we shouldn’t be shocked at the bounce we saw. We probably have one more push before the upside energy stalls for a bit…
And that’s when we start watching.
Even if you’re not speculating on this market’s short-term movements, you must watch the market’s behavior as it heads into these key levels.
For example, we have a local low volume node (LVN) coupled with a declining 20 Exponential Moving Average (EMA) that’s coming into play at about 442. If we find sellers there, will it be a swift rejection…
Or will selling simply not pick up because those who panicked already did?
We also have another key level at 449.
Why there?
Structure aside, it’s the “measured move” if we were to have the same kind of bounce like we did in January. That’s probably a cleaner level to short right now.
Looking at the downside, we have 425-427.
Even though the market blew through it on the war news, it would be interesting to see if that level holds now that the narrative is getting fleshed out.
QQQ Stock Chart
The Nasdaq came down and collected that key level we’ve been watching.
I was surprised to see it hit so quickly, but that’s headline risk for you!
That level is where the swing Anchored Volume Weighted Average Price (AVWAP) from the March 2020 lows are. That’s why I’m not surprised we had the kind of move that we did.
We’re coming back into that weird volume pocket, and it’s quite possible to just blow through that and come into 354-357 — the swing AVWAP from the most recent highs along with the declining 50 EMA.
Watch for the nature of the pullback when it comes.
You can throw on a very short-term swing AVWAP from the recent lows to see if buyers show up there.
If they do, it’s not that it’s a super bullish sign…
But that liquidity is returning to the system and algorithmic traders are more comfortable putting on risk, now that the headlines are known.
IWM Stock Chart
The Russell 2000 is showing relative strength. It made a double bottom while large-cap stocks got absolutely crushed.
The next big level is 211 — the prior resistance and some key AVWAPs. That is a “must-hold” for the bearish case. Otherwise, we can get sucked back into that awful trading range.
VIX Stock Chart
One bullish divergence signal we saw last week was the lower low in the VIX.
That’s critical because it indicates funds were willing to offload hedges into that nasty gap lower…
And nobody is left to panic on their hedges.
The market may not find a proper top until we burn off the rest of these hedges — similar to what happened during the January options expiration cycle.
If you’re still concerned about downside and want to protect yourself, try and wait for hedging instruments to get cheaper again.
If you missed the exact low in this market, don’t freak out!
Volatility is going to stick around for a while — you’ll have plenty of opportunities to play continuation longs and failed breakdowns.
The best way to do so is by using our Market Roadmap.
