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Updates 11:23 AM EST - Friday 7/31/20
$VIX is likely to be done rising for today. However, it is unlikely to drop below 23.5. $VIX came close, reaching 23.6 pre-market. But like magic, $VIX immediately rose up from there.
$VXN (Nasdaq volatility) gapped down big at open and immediately reversed upward. That's a highly bearish signal for $NDX.
IWM dropped down hard this morning, indicating growing weakness in small caps.
$VIX is likely to continue grinding towards the tip of its pennant. And $VIX is also likely to continue testing its support zone from 23.5 to 25. And as we've been saying, as long as $VIX stays above 23.5, it is building up its bearish headwinds for stocks.
So when $VIX reaches the tip of its pennant next week, there is a good chance that it may break out from there. Next week is the start of August. August is the worst month for the S&P 500 since 1987, according to the Stock Trader’s Almanac.
Keep all this in mind, but we do not recommend holding UVXY right now. This is due to contango. Contango is running close to 10% right now, so UVXY will drop in value each day you hold it.
The current condition is not conducive for holding long or short. Market is undergoing some changes under the hood. Best strategy right now is TMAR (Take Money And Run). Take whatever the market gives you and be happy walking away with it.
Updates 9:42 AM EST - Friday 7/31/20
However, $VIX is unlikely to break out from its pennant pattern just yet. It may only reach up into the zone between 27 and 28 today.
Updates 9:17 AM EST - Friday 7/31/20
$VIX signal is unclear right now. It is forming the kind of pattern that precedes an upward reversal. But it is not done forming this pattern yet. So we have to allow for it to fully form.
$SPX $NDX appear to be stuck at the highs form after hours on Thursday. During the night, ES and NQ hardly moved after the post-earnings pop. This indicates a lack of buyers as well as sellers.
IWM has gapped down, so we should pay close attention to TZA.
Updates 1:55 AM EST - Friday 7/31/20
Breakout? Maybe not
AMZN and AAPL earnings announcements after hours resulted in a big surge for $NDX $SPX. $NDX reached to the top of the previous orange zone. However there wasn't follow-through buying in futures Thursday night.
Additionally, UVXY dropped down sharply after hours but anchored in an important support zone. Between 7/21 and 7/30, UVXY has anchored 5 times in this support zone. This is happening despite UVXY high contango value, and the sharp surge in $NDX $SPX. So there is a good chance that $VIX will not drop below 23.5 on Friday.
$VIX 2-hour chart below shows $VIX is getting to the end of a pennant pattern. It shows that $VIX has formed 4 anchors at this point in $VIX support zone between 23.5 and 24.8.
This kind of “anchor to rise” $VIX pattern tends to precede a breakout from the pennant. So we should keep this possibility in mind. The breakout in $VIX isn't a guarantee, but is a high probability.
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