Updates for Friday October 20, 2023

Click here for Signal Trades spreadsheet.

Updates 1:50 AM ET - Friday
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​Upcoming key events
Jerome Powell spoke on Thursday, and pulled the rug from under bulls as well as bears.  Read more about what happened here.

Key S/R levels
The table below has been fully lowered.

Transitioning to bearish climate
Some key things happened on Thursday that are giving us big warnings that ES NQ RTY may be transitioning to bearish climate.   As traders, we personally are bulls at heart.  So this is not the kind of news we brandish about casually.

Here are the key indicators that we have observed.

1. VIX 200 EMA green line has now formed a clear W bottom on its 4-hour chart, setting the stage for VIX to rise more.
2. VVIX (vol of VIX) 20-week EMA blue line has crossed over its 50-week EMA red line.  VVIX is likely to be at the start of the dreaded CTC (Coiling Towards Catastrophe) pattern.   Read more about this pattern here.

The key bearish catalyst is of course the steadily rising bond yields.  US10Y has tagged 5% tonight.  Powell's comments certainly are not helping.

However, while this bearishness may be shaping up in the big picture, in the short term we are more likely to see a relief rally.  Despite the surge in volatility on Thursday, market breadth (Stockcharts.com $SPXA200R $NDXA200R) actually managed to stabilize.  Nasdaq 100 breadth in particular seems ready to climb back up again in the short term.

So what does it take for a relief rally to succeed?

• ES NQ RTY all have to find support at their new S1 levels.
• Breadth (Stockcharts.com $SPXA200R $NDXA200R)  must continue to stay above their late September lows: 57% for Nasdaq and 35% for S&P.
• VIX needs to form a clear top, most likely in the zone 22 - 23. 
• US10Y must form a short-term top, visible on its 4-hour chart.

For the very short term (between now and early next week), we expect ES NQ RTY to continue selling while VIX continues climbing.  The path won't be straight up or down, but we don't think a relief rally can take place until we see all of the components in the above setup.

Our personal trade plan
Our beautiful SVIX position entered in the low zone got stopped out from Powell's comments (sigh!)

Now that market is entering the rising VIX era, we are not going to trade SVIX bounce because the risk is too high.   Instead, we'll focus on TQQQ for the relief rally, and UVXY for the sell-off.

We don't plan to chase UVXY right now though, even if it may rise higher as the possibility of a sudden short squeeze is high.   Best to wait for the relief rally setup described above to trade 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.