See the update below. The coronavirus health scare is eerily similar to the last big health scare that ramped up fear and volatility in the stock markets. The Ebola outbreak in the 2013-2015 period mirrors the concerns of investors today. As Ebola spread, so did the stoking of fear by the financial media. As the world health organization put it, in a 26 September statement,
“The Ebola epidemic ravaging parts of Western Africa is the most severe acute public health emergency seen in modern times” and its Director-General called the outbreak “the largest, most complex and most severe we’ve ever seen”.
Sound similar? Note the updated chart below (SPY).
Fear Volatility and SPY in 2014
The SPY chart and investor reaction just after the world health organization statement on September 26, 2014, is similar to now. As Ebola cases popped up in the US, volatility increased and fear spread.
Predictably, traders watched price action cascade lower shortly after the 9ema crossed below the 21d. A descending pattern developed, resulting in a (-10%) drawdown once fear and capitulation took hold.
Note RSI and MACD momentum signals reset, then turned bullish after fear spiked and volatility hit an apex. We’re looking for similar signals now.
Fear Volatility and SPY in 2020
We have the same thoughts today. It’s one of the reasons we started selling aggressively last week. Potential support levels are mapped out.
The 9ema is still above the 21d.That will change today most likely.
Caveats: Bulls have to wait until RSI and MACD momentum reset. Only then will we have an opportunity to trade to the long side more aggressively. Until price action gets back above the descending 9ema and 21d, we are day traders. Swing traders are more vulnerable as this news catches many traders and investors offsides.
Bears will take partial profits on downdrafts. We’ll look for intraday bounces back to rejection at overhead resistance to re-enter puts or hedges.
If the previous Ebola scare is anything similar to the coronavirus, we’ll probably see more downside before capitulation. Wait for institutions to start buying aggressively. That means we need to see heavy “block” size trades hit the tape during the “LIVE” broadcast.
SPY Updated Chart – 30JAN
The caveats pointed out yesterday have shown noticeable improvement. Price action pushed back above the 21d and closed at the 9ema. RSI turned higher, as a function of price, as did MACD histogram.
A few key points follow:
- If SPY remains above the delineated zone, a base would most likely form at the confluence between 23.6% and 38.2% Fibonacci.
- The January breakout level at 323.00 (+/-) is more important now, as buyers seized the opportunity.
- Trading volume was substantially higher relative to Tuesday and Wednesday while just below the distribution days 4 and 5 days prior.
- A higher close today would change our short-term outlook.
- We are still in “day trade” mode as swings remain riskier.
AMZN earnings beat is headlining this morning and the stock is substantially higher, so traders will most likely focus on it most of the day.
UPDATE: 04 February. While no one knew what would happen next, we were safely in fewer positions.
SPY Updated Chart – 04FEB
A week later price action is back above the 21d. Traders defended the 50d on Friday. If SPY can close up here, we can begin to trade more aggressively, as big money traders start making their presence known. Wait for confirmation; watch for more buying activity today.
MACD still needs to turn, as we discussed in the weekend video. This will require a few days of aggressive buying. RSI will rise above 50 today.
We’ll talk about which stocks are moving during the LIVE session, so watch your “instant alerts” closely today. FANG stocks are up big this morning.
TSLA +97 pts AAPL +5 NFLX +2 NVDA +4.56 FB +2 AMZN +22 GOOGL (-55)
A few points for new traders to internalize.
- When volatility spikes trade less often in smaller positions
- Emotions are reflected in VIX – high values signal opportunity
- VIX 20 and above look for short term reversals – fade the fear get long
- Look for pullbacks to support when considering new positions
- Institutions buy weakness, but not indiscriminately.
Systemize your thought process and follow the money. As Tony Dwyer puts it,
Be careful thinking the market is telling you something in isolation. You have to look at everything. Forex, the bond market, commodities, and equities.
- Watch equities and look for shifts to bonds as traders look for safety.
- Watch yields, currencies, and commodities.
- Your system should be able to track this flow.
S&P Futures are higher (+41.75) trading at 3286.50.
Join us today in the trading room for our LIVESTREAM broadcast
during market hours, as we navigate the current environment. Watch, listen and trade from 9:20 AM to 4:15 PM Monday through Friday.
Happy Trading,
Vinny
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