Market Analysis

Navigating the Storm

Nothing is scarier then crashing markets and one can debate whether his here is a crash or not. When I look at the $VIX ($VIX Shock) and some of the asset classes I definitely think we’ve seen a crash. The pain is immense if caught wrong footed.

And we can have a larger debate where it will end up and what it means, or when and where this market bottoms. This article is not about that.  Rather I wanted to offer some thoughts on how to approach these big market movements from a technical perspective, how to navigate the storm so to speak.

The first task is to have a view of the possibilities and technical targets and risk zones. These help tremendously to understand what sort of market we are dealing with. The second task is to understand the potential pivot points, places where the market may technically be inclined to react in the opposite direction.

And understanding these things then can help formulate a trade plan in advance. You don’t want to be doing major analysis when the bombs are flying. And the price action in a $VIX 50+ environment is incredibly fast.

And so awareness of the targets and pivot points ahead of time a key component of any trade plan to decide where to decide to get engaged.

Example, this weekend I talked about possibilities on $VIX, specifically the $VXO. Question was which one of the charts will be relevant. For now we can observe a perfect tag on the linear chart, quite amazing if you think about it as the chart for back to 1987 and we definitely saw a reaction off of it today:

The notion of course being that the trend line may offer a potential market pivot.

More importantly though was a view of what could happen in terms of targets based on the action we saw last week, the incredible high speed back and forth.

Here our charting goddess (my better half) offered an intriguing outlook last week on one of our private Twitter feeds:

She spotted a bear flag forming and tracked it with a target zone into 2730:

Here’s the updated chart:

Perfect tag of the ultimate pattern target area. Why was this area so important as a potential pivot or reversal zone? Not only because of the bear flag structure, and not only because of the June lows, but also the fib constellation there, the .618 fib:

This was part of the price zone we had identified in advance of market open today as an area we viewed for at least a bounce zone. From this morning’s Daily Market Brief:

“2730 is the .618 fib. Definitely an area of interest. So that’s a zone then I want to test if we trade there today.”

As it turns out $SPX today bottomed (as of now) right near there around 2718.

That is not to say markets will bottom here for good ( Mella’s charts above show even deeper retrace possibilities)  but the zone offered a pivot opportunity and intraday we saw an aggressive tradable rip that went from 2718 to 2838 making the pivot a solid risk/reward proposition.

And that’s the point: Using technicals to identify a potential roadmap for markets to embark on, using additional technical tools to identify key support/resistance confluences to then help with formulating a trade plan. Don’t be afraid of the storm, rather navigate the storm with technicals.

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Categories: Market Analysis

6 replies »

  1. ‘Twas a horrid day, and I fear we have a few more weeks before a sound bottom is found. My guess is we’ll see the ‘poop your pants’ levels before this is out and, by then, we may be happy if that’s the worst of it.

    Hey ho. To look on the bright side, over 15 years ago I constructed a scale which I called ‘levels of collapse’. It steps back and gives a wider context:

  2. Bear market has started…..don’t forget that bear market have the most sharp rallies….right now we are EXTREMELY OVERSOLD….

  3. In speaking with numerous people today including family members I do not see any sense of panic regarding markets…yet. The concerns are there but right now they all seem more focused on buying toilet paper and the assortment of junk food for the pantry.

  4. Kudlow on Friday spurned calls for the wide-ranging approach that some economists have urged.

    “We don’t want to willy-nilly throw $300-$400 billion, with a thousand-dollar check to every American,” Kudlow said in a Bloomberg Television interview. “We are in the camp that wants timely and targeted micro-measures.”

    President payroll Tax reduction is not enough (300 point DOW futures bounce…LAME). Send a $1000 check to every American citizen, $350 Billion direct to real people versus infrastructure “not shovel ready” projects or slow drip payroll tax deductions that will be only a few buck a month for a year.

    Go big now…else say hello to SP500 at 2,000 level in a few short months. Personally, I’d send $3,000 to every American, as $1 trillion is nothing compared to the fallout we will see over the next few months if the perception of panic is not avoided.

    Good luck in all your investments!


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