Stock Market Warning: The Bounce Is Coming To An End Based On Technical Analysis, Here Is The Trade

Key Concepts

• Big Short: A significant downward move in the market.
• Fibonacci Retrace: A technical analysis tool used to identify potential support and resistance levels based on Fibonacci sequences.
• Gap Fill: When a price moves to fill a previous price gap on a chart.
• Risk vs. Reward: Evaluating the potential profit of a trade against its potential loss.
• Trend Line: A line drawn on a chart connecting a series of data points to indicate the general direction of movement.
• Support and Resistance: Price levels where a trend is expected to pause or reverse.
• VIX (Volatility Index): A measure of the expected volatility of the S&P 500 index, often referred to as the "fear index."
• ETFs (Exchange Traded Funds): Investment funds traded on stock exchanges.
• Reversion Trade: A trading strategy that bets on prices returning to their historical average.

Market Outlook and Trading Strategy

Gareth Soloway, Chief Market Strategist at Verified Investing, anticipates a significant downward move in the markets, referring to it as the "big short." He outlines a trading strategy based on technical analysis of the S&P 500 and Nasdaq 100 (QQQ), supported by observations of the Japanese 10-year bond yield and the VIX.

S&P 500 Analysis

• Major Cycle Tops: The S&P 500 has encountered major cycle tops in 2021, with recent lows aligning with a critical trend line. This suggests the current high is significant and potentially the beginning of a larger downturn.
• Potential Downside Target: Soloway projects a potential decline to the 5300-5500 range on the S&P 500, which would represent a 22% drop from all-time highs.
• Fibonacci Retracement: A daily chart analysis using Fibonacci retracement from the all-time high to recent lows shows the market currently testing the 78.6% retracement level.
• Gap Fill and Limited Upside: Above the 78.6% retracement, there is a gap fill. The thesis is that the market may experience a slight upside move to touch or slightly pierce the 78.6% level and fill this gap.
• Specific Price Targets: As of Wednesday's close (6813), the maximum upside is estimated to be around 6850, a mere 37-point move. This would solidify the 78.6% Fibonacci retrace and fill the gap.
• Risk-Reward Calculation:
  • Risk: If shorting at the gap fill (around 6850), the risk is approximately 1.5% to 2% if the price confirms above a parallel trend line.
  • Reward: A move back to recent lows represents an almost 5% gain. Soloway's estimation is a drop to former 2024 highs, resulting in an 8-10% drop.
• Trend Line Support: The analysis highlights a parallel trend line dating back to the 2020 COVID lows, adding further technical conviction to the potential downside.

Nasdaq 100 (QQQ) Analysis

• "Scene of the Crime" Retracement: The QQQ, which has led the market due to the AI trade, is exhibiting a pattern where price is testing a resistance level that was previously support. This area, after being broken and confirmed, is expected to act as resistance.
• Technical Pattern: The current price action mirrors a pattern where a trend line is repeatedly tested before a breakdown, leading to a retest of the former support level as resistance.
• Risk-Reward Calculation for QQQ:
  • Risk: Even shorting at Wednesday's close, the upside risk is about 1% if the price confirms above the identified trend line.
  • Reward: A drop back to recent lows (around 6.5% decline) is anticipated. Soloway's estimation is a move to former 2024 highs, representing a 13% drop.

Catalysts for the Downturn

• Valuations: Soloway reiterates his concern about market valuations.
• Japanese 10-Year Bond Yield:
  • Correlation: An observed inverse correlation exists between the Japanese 10-year yield and the S&P 500. When the Japanese 10-year moved up, the S&P 500 fell. When the Japanese 10-year stabilized, the S&P 500 rallied.
  • Current Situation: The Japanese 10-year yield is at an unprecedented 1.8%. A break above this level could trigger significant market fear and a sharp decline.

VIX (Volatility Index) Analysis

• Sharp Decline: The VIX has collapsed by 40% in five trading days, indicating a significant decrease in expected volatility.
• Trend Line Near Support: Charting the VIX from recent low pivots reveals it is approaching a trend line around 16.70-16.65.
• Expected Bounce: If Soloway's prediction of a slight upside in the market holds, the VIX could touch this trend line and then bounce.
• VIX as a Fear Indicator: An increase in the VIX signifies rising fear and volatility, which typically accompanies market downturns. A bounce on the VIX would suggest the market is poised to fall.

Trading Strategy and Execution

• Instrument Selection: Soloway plans to play this trade by shorting the S&P 500 using ETFs and buying a significant amount of VXX (an ETF that tracks the VIX).
• Time Horizon: These are explicitly short-term trades, focusing on opportunities within the next one to two weeks, not long-term investing.
• Trade Rationale: The strategy is based on a "reversion trade," utilizing Fibonacci retracements, gap fills, the "scene of the crime" pattern on QQQ, and the VIX nearing major support.
• Timing: Soloway anticipates a potential slight upside on Friday or Monday of the following week, followed by the expected downside move.
• Institutional Return: The return of institutional investors after the holiday week is expected to bring more significant market forces back into play.

Educational Promotion

Soloway promotes Verified Investing's courses, highlighting a 50% discount through Sunday. He emphasizes that education is crucial for financial freedom and that his "Winning Trader Series" helped him transition from a losing trader to a successful one.

Conclusion

Gareth Soloway's analysis points to an imminent "big short" in the market. His strategy involves shorting the S&P 500 and buying VXX, based on technical indicators like Fibonacci retracements, gap fills, and trend line analysis on both the S&P 500 and QQQ. The Japanese 10-year bond yield and the VIX's sharp decline and proximity to support further bolster his bearish outlook. He stresses the importance of risk management and a short-term trading approach for this opportunity.