Updates for Wednesday 9/2/20

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Updates 12:59 PM EST - Wednesday 9/2/20

Short Term
What a morning!  Full of whipsaw and head fake.  You are on a roller coaster ride whether you are long or short $NDX QQQ TQQQ.

The fact that $SPX $NDX are detached from market internals and the volatility indices makes it very hard to gauge whether $SPX $NDX are done with the current up swing within their channels, or whether there's still room to go higher.

In general, letting FOMO decide our trades usually leads to poor results.   No one says we have to trade every move in the market.   

Meanwhile $VIX $VXN UVXY keep grinding upward.   So we are going to stick with UVXY for now and wait for $NDX to drop lower in its channel before entering long.

Please note that the up channels for $SPX $NDX IWM are all still intact from a big picture perspective.   We are simply waiting for $NDX to drop lower inside its channel to give us a better short-term entry price.   See our Signal Trades for the trade setups.

Updates 9:15 AM EST - Wednesday 9/2/20

Pre-market
$VIX dropped a small amount, but is forming a pattern pre-market indicating it is ready to rise higher than 26.5.

Meanwhile $SPX $NDX are going to gap up big, and most likely will drop some amount.  They are not necessarily done with their up swings within the their channels just yet.   In other words, after some morning pullback, they may rise up sharply again.   

See our Signal Trades for entries so far.

Keep in mind we are now entering an environment where $SPX $NDX IWM can rise while $VIX $VXN UVXY can rise too.   See our detail explanations from last night.

This is a tough environment to trade.  So please trade small, take profit frequently, don't get married to your positions, and certainly don't bet on what you think the market should do or should not do.   Let the signals guide your trades.

Updates 12:55 AM EST - Wednesday 9/2/20

Table of Support & Resistance Zones
$NDX QQQ TQQQ have been updated.   The rest remains the same.

$SPX $NDX IWM
On the surface, $NDX and $SPX are very bullish.   Even small caps IWM is starting to come back to life.

$VIX $VXN $VVIX
$SPX $NDX IWM are rising sharply, but they are rising against a backdrop of persistently rising volatility.  We have been sharing this bearish divergence with you since mid August, as shown by $VIX $VXN and $VVIX daily charts below. 

For those of you who may not be familiar with these indices, they are:

• $VIX measures the volatility of S&P 500.

• $VXN measures the volatility of Nasdaq.

• $VVIX measures the volatility of $VIX itself.   

We couldn't give you the reasons why $VIX $VXN have all been rising for multiple weeks now.   But our trading system has been designed to monitor volatility closely.  It picked up these patterns pretty quickly.   And now we have more explanations behind this persistent rise in volatility.   
 
Apparently very strong demand for call options on the biggest tech names has spurred derivative dealers to bid up both stocks and their implied volatility indexes.  This is because dealers need to hedge their long positions using bets on volatility.  This can cause the actual stocks and their implied volatility to rise together.    Dealers are also using $VIX $VXN for additional hedging.

Now when these very popular stocks start to drop, dealers may unwind their hedges at very fast speed.   This unwinding can add fuel to the drop in price and the sharp rise in volatility.   

Please read this article and this for more details. 

Here is how we interpret this information.   Whether stocks continue to rise, or start to fall, a bet on rising volatility actually seems like a low-risk strategy.

• If market continues to rise, the demand for call options in popular tech stocks will continue to rise, and therefore the demand for $VIX $VXN will rise also because of short gamma dealer hedging.
• If market drops, the demand for $VIX $VXN will rise immediately.   
  

So in theory, we should see $VIX $VXN UVXY continuing to rise.   But we have to track the charts closely for actual confirmations before placing the trades.

See Signal Trades for our UVXY entry setup.  

​Disclaimer
The information presented here is our own personal opinion.  It is intended to supplement your own research and trading systems.  Consider it as food for thought. We are not registered financial advisers or licensed brokers.  We make no guarantee that anything will unfold according to our projections. While we offer scenarios for you to consider in your trade planning, know that you are proceeding at your own risk if you follow our suggestions.  

Note that we trade highly risky 3x leveraged ETFs.  You may end up losing a lot of money with them. They suit our portfolio, but they may not be appropriate for you.   Please read more about them before trading them.

Proshares UltraPro and UltraPro Short ETFs
Direxion Leveraged and Inverse ETFs
Why 3x ETFs like TQQQ lose money over the long term
The risks of investing in inverse ETFs
Simple explanations of contango and backwardation

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