1/ How Much Volatility is Too Much Volatility?
2/ Key Support Levels for QQQ as Tech Breaks Down
3/ Countertrend Rally in Play for Energy Stocks?
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1/
How Much Volatility is Too Much Volatility?
The VIX uses trading activity in the S&P 500 index options market to imply volatility for the S&P 500 index itself. Up until mid-July, the VIX has remained firmly in a “low volatility” range below 20. In fact, much of the first half of 2024 saw the VIX remain below 15.
A spike in the VIX, as we saw in early August when the VIX reached one of its highest levels in history, suggests elevated uncertainty and therefore elevate risks. For me, 20 is the key level to watch. Anything below 20 is probably noise, but anything above 20 means I sit up in my chair and take note.
Courtesy of StockCharts.com
Since popping above 60 on an intraday basis in early August, the VIX has settled back between 15 and 20 for most of the last six weeks. But as we head into October, usually one of the weakest months based on seasonal trends, I’m watching for the telltale sign of a VIX spike above the 20 threshold.
The last two times we spiked above 20, in early August and early September, the S&P 500 experienced a brief pullback before retesting all-time highs. But all major market corrections in modern history have been marked by a spike in volatility. My mentor Ralph Acampora loves to refer to a famous market maxim, saying, “Markets go up the escalator and down the elevator.” A VIX over 20 means the elevator is most likely going down!
2/
Key Support Levels for QQQ as Tech Breaks Down
The first trading day of Q4 saw the technology sector drop over 2%, causing the tech-heavy Nasdaq 100 to underperform both the S&P 500 and Dow Jones Industrial Average. But how much downside would we need to see to label the QQQ as something other than a bullish trend?
As a trend-follower, my goal is to define trends and also to identify what signals would cause me to confirm a change in that trend. For the Nasdaq 100, a simple trendline off the recent swing lows could provide an easy way to identify a downside reversal
Courtesy of StockCharts.com
Using the August and September lows as a starting point, we can draw a trendline which lines up quite well with the 50-day moving average. So as long as the QQQ remains above trendline support, then any sort of pullback is just “noise” within the context of a primary uptrend.
I’d encourage you to avoid the temptation of labeling this chart as a head and shoulders topping pattern, because one of the key aspects of this pattern is a symmetry between the two halves of the pattern. For the QQQ, I wouldn’t consider the highs to the left and right of the July peak to be similar enough to label this as a head and shoulders top. However, a neckline based off that pattern would indicate potential support around the 200-day moving average.
3/
Countertrend Rally in Play for Energy Stocks?
One thing I’ve learned over my career is that when crude oil prices are heading lower, energy stocks tend to be a pretty bearish trade. And 2024 has played out pretty much exactly as you’d expect given the weakness in the chart of crude oil.
But at some point, energy stocks in primary downtrends often flash some contrarian bullish signals, as we are noting this week on the chart of APA Corporation (APA).
Courtesy of StockCharts.com
In February of this year, then again in June, we noticed a bullish momentum divergence. This is when the price makes a lower low but the momentum indicator, in this case RSI, makes a higher low. This divergence implies that downside pressure is alleviated and an upswing may be imminent.
Previous signals in February and June resulted in a brief upswing to test the 200-day moving average. As we’ve seen a similar bullish divergence in September, APA may be setting up for a countertrend move in the coming weeks. As the two previous upturns ended with the RSI reaching the overbought level, the RSI indicator could provide an effective way to track any upside reaction to the recent bullish signal.
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Originally posted 2nd October 2024
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