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Thursday, March 22, 2018

Daily update 3/22 STA Weekly Report – Volatility: A Useful Signpost

Big splat.  Late in the day SPY broke the key 264.5 level mentioned last night which started a mini cascade lower from delta hedging. 

Despite the big splat there were two sizable rallies intraday.  Breadth was -79%.  New highs dropped way down to 23.  New lows were stable at 126.  All day long they were saying the volume was light.  At the end of the day volume was high.  There was a lot of stock to sell with market on close orders.  Today's close was below the 3/2 swing low.  The last time we closed lower then this was on 2/9.  That was the low that so many people thought needed to be tested.  It is looking like that is pretty likely.

The blue price bars on the futures indicates they closed below the lower Bollinger band.  The -DI line is over 40.  Price is stretched in the short term and subject to a bounce.

The red count shot up to an oversold level.  Not as high as the original sell off, but possibly enough for a little bounce.

The market is oversold in the short term and the TRIN closed over 2.  That is often a recipe for a bounce the next morning.  In addition, a friend mentioned that the last six Fridays have been up days.  About the time I mention a pattern in this blog it usually stops happening.  A bounce tomorrow would not be unusual given the conditions.  However, I think any bounce from here will be of the dead cat variety.  SPX looks headed for a test of the 2/9 low.  It should at least get to the 200 DMA.  If the market continues down tomorrow the next acceleration point is 260.5. 

I am sure the trade situation is the reason for the sell off.  How many times have you heard the market hates uncertainty?  Nobody knows how this will work out.  We also do not know how long it will take to work out.  DT is the most protection leaning president since Reagan.  By the end of Reagan's presidency the U.S. had a lot of bilateral trade agreements.  Our trading partners did not like that.  The trade mess ended up helping cause the creation of the WTO.  The U.S. has brought many trade disputes to the WTO with very little results.  The fact is the U.S. has the freest trade policies in the world.  It is not unreasonable for the U.S. to desire more fair trade terms.  If the WTO is not willing to help what else can we do except take matters into our own hands.  With any luck the threat of a true trade war might get the WTO to actually do its job.  I won't hold my breadth though.  At any rate the market might be unsettled for a while.

This is an interesting article.  There is a section on Quant funds I found particularly interesting.
STA Weekly Report – Volatility: A Useful Signpost


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