Signals & Trading Plan for Thursday 8/22/19

Was Major Pullback2 really due to economics fundamentals?
In preparation for Powell's speech on Friday 8/23, it is important to step back and review how we got here with Major Pullback2. 

As early as 7/25, market internals were starting to send out bearish messages. They were saying that under the hood, stocks were primed for selling.  All that needed was a negative catalyst.

We got not just one but two negative catalysts.  FOMC disappointing 0.25% rate cut on 7/31, combined with the tariff tweet that almost resulted in a currency war on 8/1 rattled investors in a big way.  $SPX $NDX $RUT dove between 8/1 and 8/5.  

However, despite talks inverted yield curve and other harbingers of a recession, the US economy is not on the verge of a collapse yet.  In fact, a good chunk of the sell-off in Major Pullback2 was driven by systematic selling. 

According to Bloomberg: “In a week when the key part of the yield curve inverted and recession fear sparked an equity rout, systematic strategies posted $75 billion of programmatic selling, more than half of which came from index option delta and gamma hedging, JPMorgan’s analysis found. The rout pushed hedge funds’ equity exposure to near record lows and that of trend-following and volatility-targeting funds to the 27th percentile relative to history. Such low positioning is a positive signal for stock performance, according to Marko Kolanovic (JPMorgan analyst).”

So the probability of a new major selling that will take stocks down to 12/24/18 level is low.  In fact, the probability of $SPX $NDX retracing back to 6/3/19 is relatively low as well.

At the same time, it is unlikely that the Fed will announce a 1% rate cut and the start of QE again this Friday.  So the idea of stocks skyrocketing from today’s level immediately to a new all time high is also extremely unlikely.

So what are the likely scenarios then?  First, let’s get an update from market internals.

The rest of this article covers:
Updates from market internals
Major Support and Resistance Zones
Planning your trades

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