Updates for Thursday 1/6/22

Click here for Signal Trades spreadsheet.

​Updates 12:45 AM EST - Thursday 1/6/22
Today we are going to examine the signals in the order of how clear they are.

Hedging by Traders:  Put/Call Ratio 
The signal from P/C ratio chart is "Approaching Bearish".

In the P/C ratio hourly chart below, the 20-hour EMA blue line has formed a rising W bottom. This tells us that market participants are buying more puts and selling more calls.   This reflects a more bearish outlook for stocks.

Note that the signal is not "Fully Bearish" yet.   We want to see the 20-hour EMA blue line dips one more time below the 200-hour EMA green line before rising for real.   At that point, the signal will become "Fully Bearish". 

Hedging by Dealers
Dealer hedging has changed.  It now has the "fueling" effect on volatility.  This tells us to expect bigger price swings, instead of the calm environment before year end.

​If $SPX $NDX IWM rise above these key levels below, dealer hedging will change from "fueling volatility"  to "dampening volatility".   This means smaller price swings in both directions.

• $SPX:  4745
• $NDX:  15775 
• IWM:  224 (updated)

​Market Breadth:  Advance-Decline Net Issues
The signal from A/D line has changed to "Approaching Bearish".
This is true for NYSE, Nasdaq and small caps.

Volatility:  $VVIX $VIX $VXN $RVX
Read more about $VIX $VXN $RVX $VVIX and the effects of options and hedging on the market here.

Volatility chart signals are complex and tricky to interpret right now.  $VIX $VVIX $VXN $RVX all spiked up on Wednesday  when the FOMC minutes were released and deemed too hawkish by market participants.

However, what are the chances that these volatility spikes will reach the levels of 12/3?  Low.

Can they rise as high as 12/20 levels?   Maybe.   

But even if that becomes true, it is still technically a lower-high pattern.   And that is usually a bullish setup to enter long $SPX $NDX IWM.

Keep in mind though that while volatility charts form lower-high patterns, stocks can keep dropping to lower low levels.   See $VXN daily chart below for an example.  Observe the lower highs formed around 3/4/21.   

So this calls for a nimble strategy around volatility.    See more below.

Other Signals
The Dark Pool Index shows that silent money continues to decrease their buying of $SPX.  This has been true during the entire last week of 2021, and so far into 2022.  This is an intermediate-term indicator.  It's not useful for short-term swing trades, but it may be an early warning of bearish time to come for $SPX.  

Bond volatility (MOVE index) eased up again on Wednesday, and is continues to form lower high relative to late November.  We interpret this to mean that the bond market is not in turbulent mode.  This is interesting given the sell-off in Treasury on Wednesday.      

Junk bonds (JNK  HYG) continues to form a short-term top.  Junk bonds tend to behave more like $SPX, so this is not bullish news for $SPX.   This is some thing to continue monitoring.

Short-term Key Levels
All entries below have been updated except for IWM TNA.

​TQQQ 2-hour chart below gives us a quick visual guide as to how price might traverse downward.   Here is one possible path.

We think that if price drops really fast, there might be a snapback rally that would show up soon after.

​Trade Plan​
At this point, the combined signal is basically "Approaching Bearish".   

Here is our personal short-term strategy for trading.

• Stay away from UVXY for now, as $VIX may not spike that high.
• There seems to be a rotation out of tech stocks, so we are looking at shorting $NDX by buying SQQQ.
• We may trade TZA as well to hedge our TNA positions.
• We prefer not to chase SQQQ TZA up.   Rather we want to wait for pullbacks to scale in.
• We are scaling into half of the final positions.   We want to wait for the signal to turn "Fully Bearish" to scale in the remaining 50%.
• We are not planning on holding SQQQ and TZA for very long, especially if volatility charts start to form a clear lower-high pattern.​

See updated plan in spreadsheet.

To Read
We urge you to read this article about risk management and position sizing.  
1% Risk Rule
If you are new to trading 3x leveraged ETFs like TQQQ TNA SOXL FNGU, read:
Why 3x ETFs like TQQQ lose money over the long term
If you are new to trading inverse ETFs like SQQQ TZA SOXS FNGD, read:
​The risks of investing in inverse ETFs

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 suggestions.