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Updates 12:50 PM EST - Thursday 8/27/20
Selling is accelerating
Well well well!
Our prediction is coming sooner than we expected. What we wrote at 12:04 PM EST is coming true.
...we are expecting $SPX $NDX IWM to drop lower in their channels soon, possibly to their green support zones before they find enough buyers to resume the rise.
So it was a wise move not to be fooled by $SPX $NDX morning head fake. Alas UVXY reversed too fast for us to re-enter.
At this point, we have clear confirmation that $SPX $NDX IWM are going to continue the short-term selling process. We will monitor for pullbacks in $VIX $VXN to enter UVXY.
By the way, we prefer UVXY right now rather than the inverse ETF such as SQQQ TZA SPXS. This is because $VIX $VXN movements are more reliable than $SPX $NDX IWM right now. You can't trust stock prices, but you can trust volatility any day.
Updates 12:04 PM EST - Thursday 8/27/20
$SPX $NDX IWM: short-term upside is limited
As you know our trading system is based primarily on the messages sent out by $VIX $VXN. When both of these indices send out the same message, it's usually a big signal for a directional change in $SPX $NDX IWM.
This morning $VIX $VXN have been sending out fluctuating mixed messages. However, they do have one underlying theme. VIX $VXN are transitioning to climb higher. But before they can do so with strong momentum, they must anchor themselves in their own short-term support zones. So $VIX $VXN are spending today probing for these support zones.
While $VIX $VXN are doing this, we get a lot of short-term fluctuation in $SPX $NDX IWM as well. There is a good chance that $SPX $NDX will try to climb higher today and Friday. They have been rising despite the bearish divergence from market breadth and volatility. So they may very well continue to do so.
In our experience, this is a high-risk low-reward setup. So we are choosing not to chase $SPX $NDX up at this point. Our Signal Trades have generated some handsome profit this week, and we prefer to keep it rather than give it back to the market by overtrading.
By the way, please note that we are not saying there will be a huge sell-off. We are not saying Dive2 is here. We are not saying $SPX $NDX IWM up channels are coming to an end.
But we are expecting $SPX $NDX IWM to drop lower in their channels soon, possibly to their green support zones before they find enough buyers to resume the rise.
Updates 10:09 AM EST - Thursday 8/27/20
Get out of short-term long positions
The sell-off is accelerating for $SPX $NDX IWM.
We are scaling into UVXY.
Updates 10:01 AM EST - Thursday 8/27/20
Conflicting $VIX and $VXN
This mixed message results in rising $SPX IWM and a more bearish $NDX right now.
We are not comfortable entering into long or short positions when $VIX $VXN are not sending out the same message. We are not seeing any low-risk setups right now for long or short entries.
So we are staying in cash this morning and continuing to monitor for setups. We will post updates if the setups start to form.
Updates 9:39 AM EST - Thursday 8/27/20
Stimulus is here to stay
“While the Fed didn’t change its inflation target, it made an important and widely anticipated shift by stating that if inflation runs below 2% following economic downturns, it will seek to hold longer-term inflation expectations steady by seeking periods of inflation above 2% when the economy is stronger.”
In other words, no pre-emptive move by the Fed to withdraw stimulus if inflation starts to rise and gets close to 2%. Fed will let inflation run higher than 2% to juice the much needed extra growth.
We are monitoring for the other scenario where $VIX $VXN will form a spiky top and start to drop back down into their channels.
This would be a bullish setup for $SPX $NDX. It would provide us with a short-term pullback to re-enter $SPX $NDX long positions, and to continue capturing the short-term up swing that started on 8/20.
However, the setup is not here yet. Proceed with caution. It is not necessary to trade constantly. We are looking for low-risk setups as always.
Updates 9:10 AM EST - Thursday 8/27/20
Waiting for Powell
$SPX $NDX IWM are not gapping up this morning. Instead they are stuck pretty much where they left off. The same is true with $VIX.
This tells us that market participants are awaiting Powell's speech at 9:15 AM EST. Similar to FOMC announcement, this speech has a way of moving prices sharply.
Monitor for this scenario during or post speech:
When this combination happens, it is a setup for $VIX $VXN to rise up higher. We will be looking for low-risk setup to enter UVXY for a short-term up swing.
Updates 1:05 AM EST - Thursday 8/27/20
High Probability of Selling On Thursday
We discussed in our post late Wednesday the fact that $SPX $NDX were breaking out against growing bearish divergence.
There is a high probability that $SPX $NDX will gap up at open on Thursday.
At the same time, if $VIX $VXN continue to rise sharply above their 200-hour EMA lines on Thursday, it's a lot of bearish headwinds for $SPX $NDX IWM. So there is a high probability that $SPX $NDX will do an intraday reversal on Thursday and start to drop.
Expect to see some selling on Thursday, not enough to drop $SPX $NDX down to their green zones yet. But the selling process is likely to start.
Table of Support & Resistance Zones
This table has been updated with new orange and green zones.
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