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Stocks have recovered too quickly

SPY was up almost 2% today, erasing all of this weeks losses generated on Monday. Not only did SPY close the gap, but at this point we are up 36 basis points from last Friday’s close.

After a decline of nearly 7% off of its high, SPY has gained 4.2%.

We have exceeded a 50% Fibonacci retracement, and are very close to a 61.8% retracement from the all-time highs set in late-July.

Overbought conditions were reached on the RSI indicator, using 30 minute candlesticks as seen below. Peak overbought conditions were seen today around 12:30 pm.

SPY was moving sideways for a few hours later in the day, but broke higher in the final hour of the day.

In the last two days alone, from it’s bottom at the open yesterday, SPY has gained over 4%.

In my opinion, Monday was sold off too quickly and this recovery this week has also happened too quickly.

VIX hit the support level around 17 that I had set out in my post yesterday as a level to watch for. I think this line will continue to act as support and VIX will bounce going into close tomorrow.

VIX didn’t really sell off much on the 6th which surprised me. Some say that big money was picking up volatility options at this time.

If so, VIX getting sold off would make sense to me if options traders were taking profits on their trades Monday and Tuesday. The reason I think it makes sense is because when those market makers buy the puts, they are also going to have to buy the underlying stock to remain delta neutral.

I think you see adjustments from market makers impacting the markets. I also believe that today was more of a short squeeze combined with unwinding of VIX call option/SPY put option positions which jerked the market around in these past couple of days.

As those positions are done unwinding, which I think will happen in the next day or two, I think it’s likely that the market will continue to selloff and VIX will spike once again.

The risk hasn’t changed in three days

We’re still in a trade war with China.

Tariffs are still slapped on China.

China still isn’t buying US agriculture.

The yield curve is still very much inverted.

Central banks are turning to easy money policies.

Risk isn’t off right now. Have a small position in volatility and protect yourself against the turmoil.


Author: Trader Court

CPA first, pivoted to python programmer focused on data science which I apply to my own stock and options trading.

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