Updates 12:30 AM ET - Monday 8/22/22
Upcoming key events
The big picture: transition to bearish is possible, but not guaranteed
There are different "wind conditions" pushing on equity market right now.
It is very difficult to trade stocks based on macro conditions. However, it is important to monitor the strength of the US dollar. USDJPY and USDEUR have been climbing up at a sharp rate since 8/11. This is a strong bearish warning for stocks.
Note also that Powell is scheduled to speak this Friday. This will be treated almost like FOMC rate announcement since the real FOMC is not until 9/21.
Market breadth is dropping sharply >> bearish
Volatility: $VIX is basing to rise short term
Market is entering a tricky period here. It could be undergoing a big dip to ease up the overbought condition, brings on more buyers and resumes the bullish trend with renewed vigor.
Or this could be the setup to launch a new bearish trend.
There is no easy way to tell. But we have found in the past that $VIX does send out some reliable signals to look for in this kind of condition.
On Friday, we discussed how it's time to closely monitor $VIX various 200 EMA lines. Another way to monitor it is to look for the small W and big W patterns as described below.
Right now, $VIX is in the process of forming a small W similar to the one formed between 3/19 and 4/5. $VIX needs to tag the zone between 19.2 - 19.5 quickly and then turn up. That will complete the small W pattern. This process is turning the short-term signal bearish.
From the small W pattern, $VIX is likely to rise up to about 22 - 23. If $VIX drops from there to retest the zone of 19 - 20 one more time and surges out of there, then it is forming a big W similar to 4/21. Volatility will really surge and the big-picture signal will turn bearish.
There is no way to determine ahead of time if $VIX will form the big W pattern or not. It may just drop from the 22-23 zone and keep dropping past 19. Therefore we must remain unbiased and let $VIX chart tells us where it is going.
After $VIX finishes forming the small W, it is likely to spike up to 22-23, and price is likely to drop to these levels to look for support:
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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.