Market Outlook 13-Aug-2023
Sentiment Analysis and Opportunities: A Closer Look at the Put Call Ratio, VIX, Major ETFs, and Q3 Sector Performance
Good afternoon investors and traders,
In today's outlook, I wanted to provide an update on several crucial areas to help you navigate the market. Here's what's on the agenda:
Sentiment Analysis: We'll dive into the put-call ratio, a key market timing tool, to see what's brewing under the surface.
The Volatility Index (VIX): A look at the VIX and its current level will offer insights into potential opportunities and risks.
Major ETF Spotlight: We'll shift our focus to the four major ETFs (SPY, DIA, IWM, QQQ) and analyze what the charts are telling us.
Third Quarter Sector Performance: We'll wrap up with a glance at the 3rd Quarter sector relative performance chart, with a particular focus on the energy sector.
From what I see, things don't look so bearish as what my social media timelines are suggesting. Stick with me as we delve into these critical areas to uncover what's truly happening in today's market.
Sentiment Check via the Put Call Ratio (PCC - Equity + Indices)
The Put Call Ratio's 21-day EMA, when juxtaposed with the S&P 500, offers a powerful insight into market trends. From this chart, it's evident how major market bottoms are tested at the upper range. Here's what you need to know:
After a major bottom, the 21-EMA typically trends lower to the bottom range, leading to sudden upward bursts. This behavior reflects how market sentiment quickly turns bearish, a phenomenon sometimes referred to as "fear sells."
From Mid-July to Mid-August, the 21-EMA has shifted from the bottom range towards the midpoint between the ranges. If this trend continues, it could reach the 'market bottom' zone in another month. However, as past incidents indicate, it might also pivot and head lower, coinciding with a continued market rally.
This chart doesn't just show trends; it illustrates the market's susceptibility to fear, resetting sentiment even after a bullish period. It provides us with a real-time snapshot of market psychology, offering insights into potential moves and investor behavior.
The Put Call Ratio, as depicted, gives us much more than mere numbers. It's a narrative of the market, highlighting opportunities, risks, and the ever-present influence of human psychology. Understanding this chart is key to grasping the complex dynamics at play in our current market environment.
VIX
The VIX seemed as if it was gearing up to approach the 20 area, but it was sharply pushed down into the weekly close and ended near the lows of the week once again. Options prices remain low-cost, and volatility is subdued.
I find these types of environments to be appealing from an options trading perspective. When everyone is lulled into a sense of calm, the most unexpected and sneaky moves can occur — those moves that only the prepared and risk-taking traders might capitalize on.
Major ETF Spotlight: All Four (Daily timeframe)
Today, I'd like to take a different approach from my usual analysis of one particular ETF and instead examine the daily chart analysis of all four major ETFs. The essential message I've derived from this combined analysis is straightforward: We're currently in a bullish market, undergoing a brief pullback. This is allowing for sentiment to reset and alleviating overextended conditions.
S&P 500 (SPY) Analysis: The SPY has been in a phase of basing and accumulating for a year. Having demonstrated strength by surpassing the automatic rally level (a concept from Wyckoff accumulation), it has now formed a trend channel. Two main support areas stand out:
A confluence of support marked by Friday's low wick (which coincided with June's high wick) and the 50-day SMA.
Further below, the trend channel's demand line.
Depending on SPY's behavior this week, we might identify the low point that swing traders are looking for. However, should Friday's low fail to sustain prices, the demand line of the channel could provide an excellent entry point.
DIA Chart Insights:
When examining the DIA chart, the $351 line is noteworthy, marking a buying climax and ending a substantial upward movement from the COVID lows. Now, two years on, DIA is above this level, consolidating nicely. With a very wide base forming and the rising 50-day SMA, a break higher could fuel a significant move. It's an intriguing prospect, given its relative quiet compared to the tech sector.
IWM’s Accumulation Look: IWM appears to be in an accumulation phase, and if I'm reading this correctly (though there's always a chance I might not be), it may be transitioning into Phase D, just prior to the markup stage. In this phase, maintaining both the Friday low and the 50-day SMA (which happen to coincide with the Automatic Rally of 2022) will be crucial, otherwise a prolonged ranging period might be on the horizon.
QQQ's Strong Performance: QQQ has been the strongest of the four majors YTD but faces a technical resistance at $371. After initially being rejected at this level, it overcame it but is now under pressure again. Though the recent candle hints at a possible reversal, until it regains ground above $371, it's a wait-and-see situation unless a steep pullback offers buy-the-dip opportunities.
Third Quarter Sector Relative Performance Chart
The above chart displays a comparison of the relative strength among the eleven sectors for the 3rd quarter. The most striking feature is the pronounced strength of the energy sector (XLE), marked by a robust and distinctive upward move. Conversely, technology (XLK) mirrors this performance but in a downward direction, essentially making an equal but opposite move lower.
Stay tuned as we explore further and feel free to reach out with questions or thoughts. Happy investing and trading!
Best Regards,
Trace