Happy Valentine’s Day from the PVA team!
I’ve got a brand new Market Primer for you. Plus, I’ve added a brand new index at the end that I’ll start watching and analyzing each week.
So before you go out to any fancy Valentine’s Day dinners…
Read today’s market primer below:
SPY stock image
I hate to admit it, but I jinxed it.
Last week, I wrote, “So what does that leave us with? A news vacuum?“
We had anything but that.
Thursday premarket, a huge CPI print came out — with some ugly inflation numbers — that led to a nasty gap down. The market clawed back all those losses…
Only to reverse and close near the lows.
And then on Friday, we got more saber-rattling out of Eastern Europe, with nations like the US and UK advising their citizens to get out of Ukraine before it goes hot.
I’m no foreign policy expert, so I’ll leave the commentary to the esteemed group of experts that’ve steered US foreign policy so well over the past decade.
Anyways — to top it all off, we now have news the Fed is meeting early today. We know this because of a sunshine records requirement that lets the public know they will be meeting early.
We now have the prospect of an inter-meeting hike just to nip inflation in the bud. Heck — on Thursday, the tone shifted so much, the Fed Fund Futures market is now pricing a 50 basis point hike in March.
Current odds are 93%. A month ago, that was at 3%.
And now there’s the possibility of a hike this week!
So that’s the macro backdrop. I could be wrong on this, but I’m not expecting massive downside into bad news. We already know the bad news. Once we rip the band-aid off, we may see further upside in the markets.
Of course, none of this analysis is complete without a look at our Roadmap. The Roadmap dictates our trade — not betting on what the Fed is going to do next.
From the highs, we have a pretty good idea of where sellers will sit. We’ve got 457 as this week’s and last week’s highs. Underneath, we had some selling wicks around 452 — that’s where sellers popped up that were not headline-driven.
Just underneath current price levels sits a very important level. It’s a key Low Volume Node (LVN) and internal structure, along with a swing Anchored Volume Weighted Average Price (AVWAP) coming up to test price. That’s 434-436, and I’ll be watching the price response.
If we gap down on bad news today, watch how it acts testing it from the other side. That could be a place to try and “chase” the market lower with only a small amount of risk.
Below that… It gets weird. The market was very “sloppy” during January’s correction, so it’s tough to get any info from that. We did have buying wicks around 427, and we could even include levels up to 432 — this is a very wide area since liquidity was much lower during this time.
Below that, we have a huge swing AVWAP coming into play right at the swing lows at 420. I don’t expect a picture-perfect double bottom to show up. Instead, look for an overshoot and a stop run, followed by a reversal.
Next week will be all about the responses. How will the market respond to bad news or no news? How will price act as it comes into a level?
If you want to be bullish, you want to see a failed follow through. Watch for obvious levels where everyone will expect a breakdown… if those levels fail, then the snapback rally could be large.
QQQ stock image
Large-cap tech looks a little worse for wear as the rotation continues.
Sellers showed up right at those key AVWAPs, and the selloff is taking us through that low volume pocket to the other end of the range. A large AVWAP and volume shelf does come into play at 342.50 — that’s a good place to look long if we have a small gap down into that or an early morning selloff.
If those levels don’t hold, 323-326 is the next major level down. I don’t expect it to do a straight shot down into that level, but I’ve been wrong about that before.
Remember: The large names no longer have earnings risk, so the Nasdaq’s price movement will most likely be tied to inflation risk and if AAPL decides to finally roll over.
IWM stock image
IWM saw a bit of a tone shift last week.
Yes, the Russell 2000 has sucked and has been in a bear market for over a year…
But the index finished green and with a higher low while the large-cap indexes were taken to the woodshed.
All the levels are still the same from the past few weeks, and it could just end up being a choppy mess given the index composition. You could see small-cap biotech still suck, while regional banks rally with the changes in the yield curve.
I’d focus on options selling strategies and play for the range instead of the trend.
VIX stock image
One major reason I’m not too bearish in this market is that many market participants are hedged from January’s pullback.
Think about the mechanics here.
Say you bought some index puts or VIX calls when the market was rolling over in January.
And maybe the market takes another hit and starts to sell off hard again…
Well, if you’re the fund manager, you realize your hedging instruments only have a few weeks left in them.
So you will have to either close the hedges or buy some more duration. Either way, that has follow-on effects in the market — where it puts a floor in equities when those hedges close.
Yes, inflation is apparently structural, and the Fed is going to hike faster than what we thought.
And yes, the narrative in Ukraine is heating up, leading to a spike into the 30s on spot VIX.
But think about who is left to hedge. Either the wheels truly fall off this market, and spot VIX heads to 40…
Or we see risk premium deflate like a balloon very soon.
GLD stock image
We’re adding gold to the list just to bring your attention to it.
I’ve been watching the shiny metal for months now, looking to see if it would finally bust loose and roar higher. We have the swing AVWAP from the highs in August, and while there have been attempts to clear above it, sellers just kept showing up.
It’s starting to feel like this time is different. I think gold gets some tailwinds when the Fed is in a hiking regime.
Thank you for reading today’s Market Primer!
To learn more about the Roadmap I used to analyze each index:
