Traders are expecting massive volatility in the markets this week due to the CPI and PPI reports coming out on Tuesday and Wednesday. The markets remain in Extreme Fear. And while the next two weeks might be green in a bit of a relief rally, history shows what comes next could be devastating. A 50% drop in the stock market is not out of the question. For a more in depth analysis of what happened over the past few weeks, watch Sunday’s video here: https://www.youtube.com/watch?v=T26cCHSuoM8&list=UULFxFRGG-_23Kqxe0YexDc1eg. For now, let’s discuss what’s happening this week.
Last Week Recap
I was camping last week and missed the massive sell-off and subsequent rebound. Last week saw the largest one-day drop in global stocks since 1987. The VIX skyrocketed to levels not seen since 2008 and 2020, and fear gripped every stock market in the world. US stocks fell 3% on Monday alone, and the NASDAQ entered correction territory. But then the markets rebounded.
The sell-off was due to carry trades, which resulted in margin calls. Essentially, investors borrowed trillions of dollars in Japanese Yen, backed by Japanese stocks, to buy US tech stocks such as Nvidia. When earnings started coming in showing a worldwide slowdown and possible recession, stocks in both the US and Japan fell. Japanese stocks fell into a bear market, and that triggered margin calls world-wide. Those margin calls forced traders to sell US stocks to cover their Japanese margin calls. That in turn caused stocks to fall further, which in turn triggered more margin calls, which in turn caused stocks to fall further. Within a short 3 week time frame, 6.4 trillion dollars in borrowed money had been wiped out of the global stock market.
Last week’s rebound appears to be nothing more than a dead-cat bounce, or bull trap. Right now, the markets are following the 2007 stock market perfectly. And if the trend continues, the rest of this year and next year could be just as devastating as 2008. Below is a chart of 2024 in blue, and 2007-2008 in red, to show you what I mean.
Market Sentiment
The CNN Fear and Greed Index (https://www.cnn.com/markets/fear-and-greed) finished the week in Extreme Fear, despite the rebound in stocks Tuesday – Friday last week. This was mostly due to the bond markets though, as the Stock Market by itself finished in Fear. Options markets are still in Extreme Fear though, and typically options traders have a pretty good grasp on where the market will go in the future. It looks like the market sell-off will continue in the future, although what happens over the next few weeks is less certain.
The VIX went haywire last week, spiking to an insane 65.73 on Monday. It then fell, finishing the week at 20.37. That number is still above the 20 threshold for bearishness though, so the VIX is still indicating bearishness. The 65.73 number was very concerning, as the only two other times the VIX got that high was in 2008 and 2020. So investors have been warned… this sell-off in stocks appears to be far from over.
Technical Analysis
The daily technicals remain 100% bearish on all 4 major indices. The relief rally Tuesday through Friday wasn’t enough to bring the candles above the 21 day EMAs, although they did land right at the 10 day EMAs. This shows uncertainty for the week ahead. Stocks might continue higher and break above the 10 day EMAs, or they might bounce off of the 10 day EMAs and continue lower. So unfortunately while the daily technicals are extremely bearish, they aren’t giving clear guidance on the week ahead.
The weekly technicals are in agreement on all 4 indices – they are all 60% bearish. it’s looking like the bearishness is just starting, and while we may or may not have a green week this week, the future looks bleak. On all 4 major indexes, the RSI is neutral, the MACD is bearish, the candles are bearish, and the EMAs are bullish.
The biggest concern is that the candles fell to their lowest levels compared to the EMAs since November 2023. To find support, the DOW would have to fall another 10%, the S&P 500 would have to fall another 13%, and the Russell 2000 would have to fall another 16%. Interestingly, the NASDAQ actually fell down to support on Monday. If that level breaks though, we could be looking at another 36% drop in the NASDAQ before it finds strong support. YIKES!
Economic News
Major volatility is expected in the markets this week thanks to the inflation data being released. On Tuesday, we get the Producer Price Index (PPI) data, and on Wednesday we get the Consumer Price Index (CPI) data. Both are expected to show an increase over last month, which could cause more fear in the markets, but neither is expected to derail the Federal Reserve’s expected rate cut in September.
Regardless of what the inflation data actually shows, it is expected to cause a lot of volatility in the markets this week, leading to huge opportunities for day traders.
Here’s the full list of all of the economic news coming out this week as well as the time each report is being released: https://www.marketwatch.com/economy-politics/calendar
Here’s what time each Fed member is speaking this week: https://www.federalreserve.gov/newsevents/calendar.htm
Earnings
While there are some large companies reporting this week, none are expected to have a major impact on the markets. Some of the companies reporting this week you might want to watch out for include Cicso Wednesday after the close, Alibaba and Walmart Thursday before the open, and Applied Materials Thursday after the close.
Crypto
Crypto followed the stock market last week, but then started selling off on Sunday as stock futures rose. It still looks quite bearish for crypto, although some short term trading opportunities are definitely there as volatility persists. Bitcoin did have a bounce off of support at $50,000 last week, but that was already a lot lower than I would have like to seen it go. So despite the rally Tuesday through Saturday, Bitcoin remains bearish, and I would not buy the dip yet. Bitcoin has fairly strong support around $43,000 – $45,000, and that is the level I’d be more comfortable buying at.
Below that, Bitcoin has strong support at $36,000, and then extremely strong support at $25,000. If by some miracle Bitcoin dropped down to $25,000, I would put all of my cash into it and load the boat. What an opportunity that would be!
Other Things to Know
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Wishing you the best of success trading this week,
Stock Curry