Sell the rumor buy the news

This is really a very unusual week with some extreme volatility not often seen. I guess it is somewhat related to the fact that several major tech companies like GOOG, FB, MSFT, AMZN, APPL etc were all reporting their earnings this week. Since extreme disappointment and negative reactions had been seen for a few used-to-be high flying darling stocks like NFLX and GOOGL, traders were quite nervous about their earnings and their future expectations. This has caused a lot of panicky selling and buying alternated within days. I tried to decipher the underlying tone of the market and here are the notes I sent to my DW Family during the week. I tried my best to help my Family to navigate this challenging time period with an aim of gaining some. Ultimately, I'm more bullish than bearish right now, betting on a more sustainable rally after seeing a more solid bottom base been made. My hunch tells me that the real turnaround may come when the second rate hike is announced on Wed afternoon next week. 

Monday/Apr 25

Today's selloff has made the market decline to an extreme oversold status not often seen based on various TA indicators. One thing to note for today's 70 points tank is a declining VIX and increasing junk bonds, which suggests no further panic added for the strong decline. This is usually seen during the bottom. I'm willing to bet we will see a huge turnaround soon, if not today. So I'm adding more SPX/SPY gradually today.  

Tuesday/Apr 26

I know it is a bit painful to see a wipeout of all the paper gains from yesterday's SPY calls and even some losses. But technically today's decline is not only expected but also bullish to shake out those weak hands and set up a more strong base for the next leg up. With today's move down, I think we can expect a more sustainable rally in the days ahead. So keep the SPY calls. I even added a bit more to increase my positions. That's how I see this near term bullish trend.

Wednesday/Apr 27 

Poised for a "rip your face off" rally

It was another brutal day yesterday and the decline was much more severe than I expected. But here is the thing: Now… technical indicators are in an even more extremely oversold condition than they were intraday on Monday – before the big reversal. The VIX is higher. The McClellan Oscillators are lower. The S&P closed yesterday 170 points below its 9-day EMA – which is an absurdly oversold condition. VIX put options that expire next week are trading at a 100% premium to the value of the equivalent call options..............

The bottom line is this…

Technical conditions, and investor sentiment, are at levels that usually occur near bottoms in the stock market. So, it seems to me the short term setup is more bullish than it is bearish. 

On the upside, my minimum expectation for a rally is towards 4340ish. But, if we get the sort of "rip your face off rally" we saw in the back half of March, the S&P could pop back up towards 4500. Back then we saw a 400 points jump for S&P within 2 weeks. Maybe it is too much to ask this time, but I cannot say it is impossible. After all, the market has the habit of surprising everyone in either direction.

Thu/Apr 28

If you follow my posts in the past few days and dared to buy SPY calls during market panic selloffs, the SPY calls should have very nice paper gains by now.

If doubled, sell half to lock in the gain and leave the rest for more gains. Or add a protection arm.......... Below is just an example. I will not track this as it is too complicated for me to do so.

Given today's rather panic buying, we may see some selloff overnight or tomorrow. But I still think more gain is possible. If S&P can overcome 4300, it may very well shoot up towards 4500. However, it won't be a straight line up. So let's play safe.

Apr 29/Friday

The S&P 500 managed to rally all the way up to its major resistance at 4300 and falling back 20 points in the final hour. Still, the index held onto a 103 point gain – which is an impressive one-day rally.

Futures are down 30 or so points as of now – which is somewhat less impressive, but not entirely unexpected. After all, the traditional pre-FOMC pattern is for the market to decline on the Friday and Monday before a meeting. The weakness is further strengthened by the disappointing earnings from both AMZN and AAPL. That's the most challenging part for this week as nearly all the heavy weighted stocks were reporting earnings this week, which has driven traders crazily in either direction.   

 So… the most bullish setup we could get today, which would set the stage for a multi-session rally, would be for the S&P to decline modestly today – not giving back more than 50% of yesterday's gains – while the VIX declines slightly.

The most bearish setup would be for the market to give back everything it gained yesterday, and for the VIX to rally back above its upper Bollinger Band.

I of course don't know exactly how the market will play out as of now but I'm leaning more towards the bullish side, given how depressing the market is in general. Glad we have either sold some or added short arms to hedge the nice gains seen yesterday. 

Friday afternoon: 

Well, we definitely see the most bearish case today. However, I still see a good sign. Not only SPY is back to the extreme oversold condition rarely seen, the momentum MACD is showing positive divergence for many timeframes, suggesting this selloff is near its ending and we may see another "Rip your face off" rally soon. Maybe another Monday turnaround? No one knows but I won't rule this out. My gut feeling tells me the most likely strong rally may be come with a "Sell the rumor buy the news" moment. That's Wed when the Fed announces its next rate hike. People are extremely nervous at the moment heading into this meeting but as soon as it is done, maybe we will see a huge relief rally as long as there is no further surprise. I doubt we will see more surprises at the moment.