Updates for Monday 12/12/22

Click here for Signal Trades spreadsheet.

​Updates 1:00 AM ET - Monday 12/12/22
​
Upcoming key events
This week is huge, with three major events highlighted below.  

Earnings releases this week
Chart courtesy of Earnings Whispers.

​What to expect this week
Macro economic conditions remain bleak overall. The bear market rally that started on October 13 has ended by December 2.  Messages from market breadth and volatility charts suggest short-term bearish mood coming up.  (See chart details further below.)

Tuesday CPI report is the key event that will set the tone for the week.  Market breadth and volatility are leaning bearish right now, so CPI has to be substantially cooler than expected in order to launch a new rally.  A much hotter than expected report will cause a big drop for ES NQ RTY.   A so-so report will likely result in selling, but more slowly.

For Wednesday FOMC announcement, the current expectation is for the Fed to raise rate by 0.5%.   However, nothing is guaranteed.  Super hot CPI data can upend the Fed's current plan, and they may continue with the 0.75% rate increase instead.

If traders feel very bearish post CPI, they will load up on puts. This means dealers will have to short equity futures in order to balance out all the puts they sold.   In this scenario, dealers will be selling into weakness, and it will turn into a vicious cycle for ES NQ RTY to drop sharply

However, this bearish scenario may reverse by OpEx Friday when the majority of the puts expire.  It means dealers will need to cover their massive shorts which can lead to a short squeeze.  This means ES NQ RTY may reverse sharply upward on Friday or Monday.

Details from key charts
Market breadth
Market breadth is steadily declining, which reduces support for ES NQ RTY.

• The daily charts of S&P and Nasdaq A/D percent show multiple tops followed by lower highs.
• The weekly charts of S&P and Nasdaq percent of stocks above 200-day MA show topping patterns, suggesting a big pullback is coming up for stocks.

We want to point out that while these charts are bearish for now, bulls should feel encouraged by the big W pattern from the above chart (true for both Nasdaq and S&P).

​This pattern suggests that we should expect big pullbacks for ES NQ RTY, but they may not go to lower lows (relative to Oct 13).  Instead, ES NQ RTY may form a higher low pattern, which would be very bullish and likely will launch another bear market rally eventually.  

Volatility
It's difficult right now to discern the next move from $VIX chart.  But $VVIX (volatility of $VIX) suggests that volatility will surge when $VVIX 20-day EMA blue line crosses over its 50-day EMA red line, just like it did back in mid September this year, and mid November last year.  This surge is likely to happen soon, and surging $VIX means sell-off in ES NQ RTY.

However, bulls should again feel encouraged by the current $VVIX level.  Its chart below suggests that while $VVIX may surge, it probably will not rise higher than 106. A lower-high volatility surge is a bullish setup for ES NQ RTY eventually.  This concurs with the messages from S&P and Nasdaq market breadth charts above.

Key S/R levels

• The support levels S1-S3 are the same as previous table.   
  
• ​R1 has been lowered.   Even so, ES NQ RTY may still not be able to rise above R1 before dropping lower.
• If CPI report is hotter than expected, the sell-off may drop ES NQ RTY down as low as S3.
• If ES NQ RTY find sufficient support at S3, the higher low pattern may launch another bear market rally.
  

Our Personal Trade Plan
Despite all these projections laid out above, no one really knows what's going to happen.  Still based on market breadth and volatility charts, we are leaning bearish.   

We are monitoring for the scenario where RTY retests R1 quickly post CPI and then drops. That's the buy target we have in the spreadsheet.  But we are going to have to jump in if RTY simply drops with no retesting of R1.

If the CPI number turns out to be substantially cooler than expected, we'll definitely consider entering TQQQ.   

​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.
​