We witnessed history this week, as 2016 was kicked off with a market plunge. Of course, if you followed the posts the previous week, and hopefully created a position to profit from long volatility, your portfolio should of reaped some nice profits, as UVXY 21,38 -0,32 -1,47% roared from under 26 to 45.
As noted in Sunday’s blog, the key to watch on Monday was the support that held the markets in a range since October 22nd. That broke Monday, and predictably plunged after that. For those who receive Invest Wisely emails, you hopefully enjoyed the updates Sunday night and Monday morning preparing you for the breakout.
The biggest problem I had this week was because my positions have limited profits in order to reduce risk by lowering the break even point, benefiting from time decay, and having a higher probability of success, I was able to take profits quickly, and found myself mostly in cash by Thursday. No wanting to be on the sidelines while volatility continued to spike, I took out a 22/34 long call spread on UVXY, and closed half my position the next day for an 18% return on capital (ROC)!
To put it simply, I consider it likely that we’ll have two more down days. What happens in Shanghai will impact the volatility of the next two days as it remains our daily wild card. Yet, the bigger factor is simply technicals clearly visible on charts.
The vast majority of traders are expecting the market to retest August lows. As you can see on this daily Nasdaq 100 futures chart, we’re probably a day or two away from that. It most recently just broke a minor trend-line support that it bounced on Thursday.
On this chart, we’re looking at August support around 4000, with the 8/24 close at 4002.5. Of course, this was after an intraday low of 3908.25, with a strong pull-back above 4000.
On the S&P 500 (SPX 2.846,06 +84,43 +3,06%), we’re looking at an 8/25 close of 1867.61 for a possible bottom. Note, by the way, that while I’ve been using the Nasdaq 100 futueres chart a lot recently due to how the Nasdaq has been leading the markets both higher and lower, the S&P really does a great job of showing that we’ve been on a downtrend with lower highs since July. Don’t wait for “official” TV talking heads to tell you when we are in a bear market. Look at this chart and decide for yourself.
Note, that it was in July that I began to move my 401k to cash. As a result, while the markets closed 2015 negative, I managed to hold onto my gains, ending 2015 in my very limited 401k with an 11.9% return. Yes, you can time the market.
Yes, most traders, myself included, expect a nice bounce, probably beginning Wednesday. Keep in mind, if you are looking to sell long assets, or re-position for long volatility again, this bounce is very unlikely to return to the Oct-Dec range it was in. That range is now what we call a “topping pattern”. Those patterns, especially when they take months to form, tend to repel the underlying back down when it tries to approach it. Thus, if I had long assets I wanted to sell at this point, I’d wait for that first attempt to approach it, which, on the S&P, is around 2000.
The red and green arrows on this S&P 500 chart show the most probable path the markets are likely to follow, with the bounce in green.
Of course, “probably” is not “guaranteed”. Markets could just return to 2008 behavior, plunging on below its August low. Or, alternately, it could reverse before reaching it, or just spend time near it trying to decide what to do next. You’ll want to watch it closely for confirmation.
Nevertheless, this is the path most technical analysts expect it to follow. Expectations are important, because they drive the decisions that ultimately drive the day to day market gyrations. Overall, economics (including government and central bank decisions) drives the big picture, and news can change daily direction. Yet, technicals remain a powerful factor in deciding how the market bounces around.
Rally In Oil Coming?
Not too many people can agree, or will even attempt to call a bottom on oil. However, oil does follow technicals very well, as one of the last things on earth that the central banks and governments cannot impact the way they’ve impacted the markets as a whole, with interest rates and quantitative easing. Thus, oil has a strong tendency, like the dow does on numbers divisible by 1000, of having strong support and resistance on numbers being divisible by 10. You can see this on any historical oil chart.
Thus, I believe, as we are rapidly falling to 30, the setup is in play for a strong bounce off of 30, or something close to it. Note that, it is the FIRST time it hits this that matter. In March, when it came close to 50, it had a huge long bounce to 67, and didn’t see 50 again until August. But, the 2nd time, in August, this was a dead cat bounce, taking it into 40s. The first time it approached 40 in September, it quickly bounced to over 50. But, the 2nd time, in December, it ran right through it, stuck under 40 since.
Also, when it bottoms, it may be a similar setup. Looking at Nov 2001 to Feb 2002, it didn’t go far below 20, and then closed and opened each month just below 20. This became a bottom it has not seen since.
Either way, whether a bounce or a bottom, going long oil near 30 just looks like a high probability of success setup. Perhaps Wednesday, combined with a market bounce, will be a good time to enter such a trade. With the Crude Inventory report coming out Wednesday at 10:30am, any hint of optimism can light this pent up rally in oil.