Updates for Monday 7/25/22

Click here for Signal Trades spreadsheet.

Updates 9:16 AM ET - Monday 7/25/22

$VIX gapped up above 24
At 3 AM this morning, $VIX gapped up to 24.57.   It has dropped a bit since, but it is forming a rising pattern.   As long as $VIX stays above 25, it confirms that the vol signal is transitioning from "Fading Bull" to "Rising Bear". 

We have a buy order to enter SQQQ.   We will add TZA buy order once $VVIX and $VIX form clearer W bottoms.   

(If you are not familiar with $VVIX which is one of our very important indicators, read more about it here.)

Updates 1:00 AM ET - Monday 7/25/22

Upcoming key events
​This is a big week in economic news, but the event with the most power to move the market is FOMC rate announcement on Wednesday. 

In addition, there are some major earning announcements this week.

The big picture:  still gloomy fundamentals

• Inflation reached 9.1% in June, its highest rate in nearly 41 years.  The impact of inflation on consumer spending, confidence and sentiment will be reported this week. 
• The latest GDP estimates coming out on Thursday may reflect the effects of rising rates on economic activities.   A declining GDP is certainly a sign of recession.
• Treasury yields are still on the verge of inverting: 2-year Treasury is 2.999%, while 30-year is 3.003 as we write this. Over the past several decades, yield curve inversions had frequently been followed by recessions.  
• US dollar peaked on 7/14, and has been heading down.  However, unless USD drops substantially soon, a higher USD is a drag on earnings for large US companies. A higher USD as the global economy slows down also hurts foreign countries which have borrowed in USD and need to pay back their debts.  Some countries may end up defaulting as a result. 

So is the bear market rally done?
The current bear market rally that started on 6/16 was fueled primarily by three factors:

• Traders betting on the Fed pivoting to cutting rates in early 2023.
• Bargain hunting.
• Expiration of huge hedging puts on 7/15 triggered massive short covering activities by dealers.   (Read more about the effects of gamma, vanna and charm on stock prices here.) 

As we discussed in Friday's post, the short-covering activities that functioned as fuel for the rally since 6/16 has been mostly burned off.   The short-term bullish volatility signal is starting to fade. 

The market is now vulnerable to the effect of economic news since it's not as well hedged yet as it was before 7/15.  There are a lot of triggering news this week, along with the big one which is FOMC rate announcement on Wednesday.  So we should expect big price swings, potentially both up and down.

Speaking of FOMC, the Fed is expected to raise rate by 0.75 percentage point on Wednesday.   (They usually float their numbers to the Wall Street Journal.)  The market has already priced this in.   It is the hints of how much longer does the Fed expect to keep raising rates that will matter more to the market at this point. 

Market breadth

• The charts of NYSE and Nasdaq A/D lines formed tops on Friday and are starting to head down.   
• NYSE and Nasdaq percentage of stocks above their 200-day MA have reached key resistance levels (23% for NYSE, 22% for Nasdaq).  Their weekly charts suggest they are likely to drop from here to retest the lows.

​
​Taken together, waning breadth is usually a bearish warning. 

Short-term volatility signal:  "Fading Bull" (close to becomimg "Rising Bear")
$VVIX 2-hour chart below continues to form a W bottom with its 20 EMA blue line.  These W bottoms typically precede a big rise in volatility (red arrows).  This is a warning from $VVIX that the bullish force is fading.  

To be clear though, $VIX itself has not risen up enough yet.  It is still below its 20 EMA blue line in the 4-hour chart below.   

What would turn the signal to "Strong Bull" again?
If $VVIX quickly spikes up from here to about 103, and $VIX spikes up to about 27, and then they both drop quickly, the setup would recharge the bull again. 

During the quick $VVIX $VIX spike, prices may retrace to these key levels:

• ES:  3800
• NQ:  11786
• RTY:  1720

These are potentially bullish setups, and ES may rise from 3800 all the way to 4200 (high 5/30).

What would turn the signal to "Rising Bear"?
If $VVIX and $VIX spend a few days building a bigger W or multiple W bottom, then conditions will be turning seriously bearish. $VVIX $VIX may rise a lot higher.   In that scenario, ES NQ RTY are likely to retest the lows of 6/16.   

Trade plan
Given that the signal is "Fading Bull" and close to "Rising Bear", we plan to enter one Multi-day Bear position SQQQ on Monday for at least  short ride down.   

Click here for Signal Trades spreadsheet.

​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.