Weekly Market Overview April 25, 2021

As many of you know I spend a lot of my time writing about how incredibly bullish the US Equity markets are. On a few occasions I get cautious. Now is one of those times. 

When the conditions are met, my systems are about 80% accurate in getting out of the way of a risk event. A risk event by my definition are declines of 8% or greater, and that is a very broad range, "or greater".

The last time we had a risk event was the end of February 2021 when NASDAQ $NQ declined 12% in about two weeks. Prior to that we had an 11% selloff on $NQ in September of 2020, and yes the COVID Crash of February/March 2020 also met my requirements for a risk event. 

Most of these risk events are written off too easily because a 10% selloff is a little painful but nothing like a major market crash like COVID or the Global Financial Crisis over a decade ago. It doesn't matter the depth of the risk event for the sake of my analysis, just that 80% of occurrences are -8% (or greater).

The benefit of knowing this data is that as a more active market participant you can take advantage of these risk events either directly by getting short, going to cash, or hedging your positions. 

The benefit of knowing this data if you are a long term investor with no plan to ever sell, it provides you a way to add to positions at discounts, or even just the peace of mind in knowing that things are riskier now than normal. 

If you've been following along with my writing for very long you recall the warning I sent out at the end of August 2020 that a market event was imminent and on September 3rd, $NQ was down nearly 5% on that day alone after putting in an all time high the day before. 

In the Trading Lab we were already positioned for what was to come and when the risk event was over, we started buying again, over and over again. This is how we make very low risk high return gains year after year. 

This week in the lab we have been working on two main subjects, market incentives and market regimes. 

Identifying the incentive of an underlying asset (Equity Indices, Metals, Commodities, Currencies) determine a lot about the characteristics of how the underlying asset will trade over time. 

Market regimes help to categorize the life cycle of the underlying asset and if it is closer to the beginning of a move, or closer to the end of a move. The way we trade an asset within each regime and with the incentives understood we can apply the appropriate strategy and the appropriate risk parameters. 

We will continue to work on this all week long, this week in the Trading Lab is going to be important. Even if you missed our previous work, we record it all and have 100's of hours of videos so you can join and binge away!

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On to the overview...

Indices

We are currently at the point of HIGH PROBABILITY for a Risk Event in US Equity Indices ($NQ, $YM, $ES, $RTY) with the $SPX($ES/$SPY) the highest risk. The Dow $YM and Nasdaq $NQ are close but the Russell 2000 $RTY shows the least risk. 

S&P 500 $ES

The $ES has met all three conditions of a risk event. 

• Bull Quiet
• Above R3
• Parabolic 
  

When all three conditions are met, we prepare for a 8% or greater price correction. This happens 80% of the time, however there are some things to consider. It didn't correct 20% of the time, and when it didn't happen, prices go much higher and spend a lot of time going higher. 

The most recent example of it not bringing a 8% or greater down move the following month was December of 2019, of course it eventually happened starting in February of 2020 with the COVID selloff. 

Sometimes it happens immediately, other times it takes a few months. The End of 2017 we went parabolic numerous times, were in Bull Volatile regime and closed above R3 numerous times. It wasn't until the end of January that "Volpocalypse" hit and the market dropped more than 10% in a week. 

Another way to look at it is that once we are in Bull Volatile regime, a 10% move higher is typically the peak, then we see a drop. If we are looking at it that way, 4323 is 10% higher for $ES, 150 points or so higher. 

That's what we need for chaos to ensue, the promises of much higher prices and once everyone is long the market and there's no one else to buy, bad things happen. It's a tricky place. 

NASDAQ $NQ

The NASDAQ is right at the R3 levels, in bull volatile and is above the parabola area. The 10% move once entered Bull Volatile puts 4272 as the potential top. 

Dow $YM

$YM has moved into the Bull Volatile regime and only slightly parabolic, while not meeting the R3 resistance. The 10% move higher since entering Bull Volatile places the top at 35,713 which also coincides with being above the R3 levels.

Russell 2000 $RTY 

The $RTY closed above R3, went parabolic and entered Bull Volatile in December 2020 at the 1700 price level and then proceeded to close above R3, rise parabolically, and stay deep in Bull Volatile until topping (?) nearly 700 points or 41% higher (not 10%) in March. Since then price corrected over 10% and has traded sideways since. 

All the more interesting is this chart comparing the Russell 2000 Index to M2 Money Supply (RUT/M2). The current levels on this ratio chart have occurred in the past right before majore market events like Long Term Capital Management blowup, Dot Com Bubble, Global Financial Crisis, 2018 Melt Down and Covid. 

Summary of Equity Indices

While I'm not rushing out to short the $ES at the open, we are moving quickly into an environment that is friendly to a higher risk event. This could happen tomorrow or it could happen three months from now, but the higher we move up the riskier the event. 

I will be hedging my longs with some puts and more importantly waiting to see how it plays out so that I can step in when the time is right to buy. We will be tracking that daily in the Trading Lab. 

Gold

Gold continues to perform nicely, and trading EXACLY how an asset in a Bull Quiet regime would trade...except that it started trading that way in the Bear Quiet regime. This is by far my favorite type of swing trade. When the best looking sell setups fail, that's the market telling you that it's actually bullish. 

Since the initial entry back at the beginning of April we've added 3 more times to this long position with plenty of firepower to add to Gold if it continues to prove the hypothesis. If the hypothesis is proven we will see the price of Gold reach 2251 even up as high as 2505.

The key is to take low risk entries, letting the market prove itself by pulling you into the trade. Don't get greedy thinking you know the answer, let it prove itself to you. 

Forex Markets

Foreign Exchange markets since the COVID bottom in March have seen a few big trends emerge.

The Dollar ($DXY) has drifted lower, down about 10%, though that reversed a little bit in Q12021 and again has reversed back down to that 10% area. 

2021 has been far less decisive with a big change in direction for nearly all FX markets at the end of Q1 with a notable shift in late February about the same time the Equity Indices took a solid gut punch. 

As we dial in on trading since the new quarter we can see a very strong down trend for the US Dollar $DXY while every other currency has risen, as you'd expect. 

$EURUSD

In the Trading Lab we got long $EURUSD, like gold, continue to add to it when the best looking sell setups fail. Each time the Euro blasts up to a new level, consolidates and puts in a bearish candle that looks like an easy and completely obvious sell setup, we watch how price (truth) performs. If it fails to drop and reverses higher we get pulled ever so gently into the trade. 

Since our first entry in early April we've added twice and, like gold, will let the Euro pull us into the trade if it keeps proving our hypothesis. 

Historically 1.20-1.25 on EURUSD has been significant, with 1.25 as a guide we will expect to get further low risk exposure here. (This is a monthly chart)

For the rest of the currencies, our plan is to wait for clear low risk opportunities. There are plenty of low risk opportunities over the course of a year and a lot more high risk ones. 

My mission is to help people take advantage of a permission-less meritocracy, (that is you don't need permission you just need to be good) by getting traders funded at a prop firm, play the long term game, and meritocratic-ally succeed. Here's our framework to get millions of dollars in capital to trade for a prop firm.

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