Disclaimer- I am not a finance perfessional or expert. Use this info as entertainment purposes only.The markets were on a tear but to the downside this week. Dow drop from a high near 29,500 to now close to 25,000. Over a 4,000 point drop in little more than a week. So now what?
VolitilatyThe VIX has recently rose to a high of 50 which exceeds the spike of late 2018 drop. Yet the rise of the VIX has only abated on Friday where it closed at 40.11. There is still a lot of fear in the market and since VIX all time high is in the 80s we should still be cautious with what is to come in the next few sessions. If VIX remains high stocks will be unable to rise.
TimeframesWith the quick price correction there has been many assumed support values broken. For instance the spy started out on Monday around 323 and only to close near 296 on Friday. I had assume 310, 304, 300 would be decent suppprts but they did not hold. so clearly short time frames from 1 minute, 1 hour to daily are not useful since supports did not hold. Looking on weekly may give better support values.
The weekly spy looks to show a resistance/support near the 50 day moving average. Furthermore the weekly volume is significantly higher this past week. Where daily volume has risen so much that That is leading to daily gaps on session openings. This makes it difficult to find support lines as some gaps leaves the lines untouched. Pulling out to longer timeframes would lower the volume candle and hence allow more chances to compare similar stock routs. The weekly spy chart allows us to see how far down the past 2018 correction was and held up near 230. Although I am not guessing spy would hit 230 but as we move forward it should be something to keep in mind as a weekly support. Before that 254.56 is the 200dma as another battle ground if we go down that far.
Limit Trade Sizes
Risk versus reward in trades should be adjusted during high volatile sessions. The main reason is big swings in price will need to be adjusted to cope with the price unless trader accepts getting knock out of the trade in a very short time.
A very tempting trade would be in options where big price swings should become multiplier in profits. The risk is paying too much in premium as high volitilaty pushes premiums. But the more risk is if trader is on the wrong side of the trade and will likely sustain large % of lose as prices depreciate quickly. A small potion with high price swings will capture similar profits as a large position with small price swings. The smaller position allows trader to limit risk.
What to expect next week<\h3>
With the covid19 becoming a everyday news and more cases pop up the fear with remain elevated in markets. There is potential for a bounce if central banks intervene but if they do not intervene it looks likely markets will continue its downward drop. I personally closed out my bond holdings and am mostly in cash. The swift prices are just too much for me as I am not always in front of the screen to make a trade. The bond yields are at record lows and could to drop which will keep stocks down. Keep an eye on the 10year bond to see how market sentiment is feeling. Lower rates means low appetite for risk. Bottom line is only risk what you are willing to lose .