Updates for Monday 4/11/22

We trade 3x ETFs such as TQQQ TNA SOXL LABU UVXY using proprietary analysis of volatility.   
Current trade record here.
Click here for live trades.
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Updates  3:00 PM ET - Sunday

Upcoming key events
This is a short week as the stock market is closed on Friday for Easter weekend.  The CPI report on Tuesday is expected to be hot, but by now everyone knows and expects this number to be high.   So there may be no negative surprise here.   

But April options expiration (OPEX) is earlier than usual, and $VIX monthly expiration follows on 4/20 rather than precedes OPEX.   Given the 3-day holiday weekend, sandwiched between the two expiration dates, there may be some unusual swings.

​Key Price Levels
The table below is the same as Thursday.  

• L1 is a strong support level, and this is where we expect the current sell-off to end.
• If price manages to have a quick bounce before the sell-off, L6 is strong resistance level.​

The Big Picture:  bad news and good news
We've been relying on the Percentage of Happy Stocks chart to show us a pretty accurate snapshot of big picture market moods. ("Happy Stocks" are stocks that are above their 200-day MA).  Below is the Nasdaq Happy Stocks chart.  There are two important messages on this chart.

Bad news:  By 3/29, Nasdaq percentage of Happy Stocks ran into strong resistance at its 20-week EMA blue line (48%).   It formed a topping candle and dropped sharply.  It is on its way to retest 20% zone.   

This means we are likely to see selling this week for tech stocks.   NYSE and small cap charts are showing similar patterns.   This means selling for the S&P and small caps as well.

Good news:   This is a chart pattern that we typically see at the end of a bear market, not at the beginning. This pattern is close to capitulation. The percentage may bottom out anywhere between 20% and 10%.   After that we typically see a very bullish sharp rise back up as a new bull market starts.

​Volatility confirms "Fully Bearish"
Read more about $VIX $VXN $RVX $VVIX and the effects of options and hedging on the market here.

On 3/29, volatility of volatility ($VVIX) gave us the initial warning that market conditions were "Approaching Bearish" as a new volatility cycle was starting back up.   Since then, $VVIX has formed a W bottom and its 200-EMA green line is coiling upward (see 15-minute chart below).

​$VIX itself also formed a W bottom and its 200 EMA green line is coiling upward as well.   We may see $VIX tags 20 quickly on Monday.  After that it is likely to climb up, possibly reaching 29 before this volatility cycle ends.

​Supplemental Indicators:  confirm "Fully Bearish"
Equity Put/Call ratio:  The P/C ratio daily chart below shows only EMA lines to make it easier to discern its pattern.   Observe how the 20-day EMA blue line is forming a W bottom, ready to rise back up to form possibly a lower high top.  This confirms the "Fully Bearish" mood happening right now.

What the P/C ratio pattern is telling us is that traders have been buying more puts, and are likely to keep up the demands for hedging puts as market sells off. This creates a vicious cycle with dealer hedging, becoming a technical force that can drive price down short term.

Dealer hedging:   Given the current dealer hedging of their books, if $SPX drops below 4475 and QQQ below 357, sharp price swings will kick in.   This is because as price drop below these levels, dealers will need to buy into strength and sell into weakness to stay delta neutral.   This means they will be fueling volatility, creating a vicious cycle.   

Bonds:   Bond volatility (MOVE) has been rising sharply again.  All bonds are selling off, and Treasury yields are rising sharply.   We may see capitulation in the bond market in a couple weeks, but until then traders will be selling bonds, and selling equities as well.

Dark Pool Index: This index has been forming a topping pattern, confirming the "Fully Bearish" conditions for now.

Trade Plan
We think there's a strong possibility that $SPX will drop down to retest 4300.   

• A successful retest of this level will end the rising vol cycle and launch a multi-month rally for $SPX $NDX IWM, one that may last into the fall.
• Failure to hold this level will open the door for a rapid drop to retest February 24 lows.

In the spreadsheet, we show our plan to continue scaling into SQQQ and UVXY and where we plan to take profits.   

Looking further down the road, once conditions become "Approaching Bullish", we will start scaling into:

• SPXL:  multi-month hold to capture the Big Picture multi-month rally.
• TQQQ: multi-week hold to capture the "Fully Bullish" phase of the volatility cycle.

Click here for live trades.
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Current trade record here.   

Disclaimer
The information presented here is our own personal opinion.  Consider it as food for thought.  We are not offering financial advice.  We are not promoting any financial products.   We are not registered financial advisers or licensed brokers.  We make no guarantee that anything will unfold according to our projections.  You are proceeding at your own risk if you follow our trades.