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Boom Goes The VIX Dynamite - Morning Market Squeeze

Key Tactical Takeaways:

>  With the VIX now firmly above both a 1-month range and near-term trailing stop, the potential for follow-through up to a minimum target of ... will be on the table pending a close < ....


> The S&P 500's near-term bull trend officially broke down with Monday's close < the 3430 stop. Risk now shifts ..., with an initial target zone of ..., against a trailing stop of ....


> All eyes should be on the 10-Yr yield's ... level. This level must hold not only to keep the reflationary rotation narrative alive but also to prevent a possible long-end short squeeze from crashing rates again.


> To have a successful trading system, you have to trust your system's stops and keep losses small. With that in mind, we will exiting our UPS and USO longs at the open today.


Some Quick Thoughts:

Throughout the day, we do our own version of "channel checking" the "FinTwit" universe to get a gauge of the sentiment that exists among both retail and institutional investors. For several days ahead of Monday's sell-off, we simply could not believe the complete disregard not only for a potentially disruptive Covid spike as flu season nears, but also for the seasonal turbulence that so often shows itself heading into presidential elections. Finally, after 5 consecutive days (last week's action) of watching every intra-day rally attempt get smacked by big selling, the S&P's near-term trend has turned in the direction that both the technology/utilities ratio and VIX has been forecasting for the past 3-4 weeks (see update on page 8).


When it comes to the VIX, the upward rotation of the past 2 weeks, which led to Monday's break above a 1-month range, is the kind of action we warned of way back at the end of September. Given Monday's > 2-sigma stretch above the 50-DMA by the VIX, we'd be inclined to take profits on our ... long position at today's open during an average market window. Given the VIX's tendency to maintain a higher trend into presidential elections, however, we're going to leave this position open, preferably for the remainder of the week, as long as ... does not settle below the short-term stop at ... 


Sans the upcoming election, we'd be eager to start buying this market. This is especially true given the ongoing leadership of industrial metals vs. precious metals, smallcaps vs. large caps, discretionaries vs. staples and high beta vs. low beta. Not to mention the hoards of cash sitting on the sidelines. Given the higher than usual odds of there being a contested election or a massive outbreak of post-election unrest, however, we're going to wait and see how the S&P responds to what we see as an inevitable test of the ... area. This will remain our outlook pending a close > a trailing stop of ....   


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