Ding Ding Ding!
We've got ourselves a fight
For those of you that caught last Monday’s newsletter, you won’t have been surprised to see the markets bleed throughout last week.
Citing weakening breadth, a rising VIX, and climbing credit spreads, the market was screaming risk off — with my simple indicator pinned deep in the red from Monday through Friday.
[For those of you that are new to my custom indicator, check last week’s post]
No doubt, it was a rough few days — at least if you were long.
But after a week of body blows, Friday felt like that classic Rocky moment — the hero’s on the ropes, bloodied but unbroken, wiping his mouth and grinning as the bell rings.
The bears may have taken the round, but the fight’s far from over.
Which way it goes from here is anyone’s guess — but if I’m betting on anything this week, it’s a far more balanced bout.
This chart shows the battleground heading into the new week — two clear lines in the sand marking support and resistance. The next move will decide who lands the next big punch.
In the green corner, the bulls.
With signs of the government shutdown drawing to a close, the 50dma holding strong and last Friday’s hammer candle fresh in both fighter’s minds, momentum is very much in the bull’s corner heading into Monday’s open.
Looking at SPY, there’s also the continued uptrend through key Fibonacci levels that’s held since April, with the golden ratio sitting above the former highs between 694 and 713 - a logical place for some profit taking to take place.
Bitcoin is holding exactly where bulls want to see it hold too - currently riding the 50WMA that’s been working as support since March 2023. Just check the green arrows on the chart below, and how this level has consistently dealt crushing blows to crypto bears on not one, but three separate occasions this cycle.
In the red corner, the bears.
Since landing some uppercuts in Q1, bears have spend the best part of six months pinned on the ropes, unable to land a jab, let alone a killer blow.
But last week, that changed.
With huge put flows hitting the tape, a VIX sticking above its 50dma, credit spreads on the rise and breadth falling away like an undercooked welterweight, the bears finally showed up the fight - pinning the bulls below a key area of resistance and slamming SPX down to its 50dma for the first time in over 130 trading days.
It’s been a long time since bears looked this confident, and I’m not expecting them to give up the key level of 680 on SPY without a fight - so should the tape get that far in the early stages of the upcoming week, I’ll be happy to take some bets off the table, grab the popcorn and watch for clues as to which way the final rounds may go.
What are those bets?
During Friday’s fightback I entered the META 640C with a two week expiry - looking for a quick pop into the gap created post-earnings. Should they scoop and score into the money, I’ll gladly take the profits and move on.
I’m also tempted to add some short dated COIN calls should Monday play out as I expect it might - with Bitcoin currently holding its 50WMA teasing what could be a late flourish for crypto-stocks. MSTR might also be worth a look, as might RIOT - so long as Bitcoin shows some guts above $103k in the short term (I can’t stress enough the importance of the aforementioned 50wma here).
Beyond that, I’m content to sit back and let the fight play out.
This isn’t the moment to swing wildly — as was the case throughout most of the summer months. Instead, it’s the moment to read the fight.
The tape will tell us soon enough whether Friday’s rally was the start of a comeback or just a counterpunch before another round of selling.
Either way, I’ll keep my gloves up, my stops tight, and my eyes on the referee — because when it comes to trading, nobody can afford a knock out blow this late in the game.
See you in the next round. 🥊
Al
*Not financial advice. Please do your own research before making any trades*