‘If This, Then That’ Battle Rages In Stock Market

There is an ongoing battle for the direction of the stock market and traders need to pay attention to the “if this, then that” dynamic at play.

The stock market spiked higher to close the first week of the year with a positive position, but early jumps in price across the board today faltered into the close. The market continues to battle over direction as outside influences pepper the decision making of stock market participants.

Simpler’s traders are diving into internal signals to determine market movement while keeping a watchful eye on economics and financial markets across the world.

‘If This, Then That’ dynamic stalls market rally

Equities spiked higher on Friday and that momentum continued into this week before stalling late in the session on Monday.

In the market today, the Dow closed at 33,517.65 points to drop .34% (dropping 112.96 points on the day). The Nasdaq jumped to 10,635.65 points for a .63% gain while the S&P 500 slipped by .08% to 3,892.09 points.

Anyone working bullish market positioning needs to track some key price levels in the SPDR S&P 500 ETF Trust (SPY), according to Sam Shames, Vice President of Options at Simpler Trading.

“If the SPY holds $385, then we look for a battle higher at $390,” Sam explained. “If the SPY holds $390, then we look for a battle higher at $400. If the SPY loses $380 on weekly close, then we look for a max short situation.”

Bulls must keep up the pressure to maintain upside movement.

“From here on out the bulls must continue to press the short squeeze they started on Friday,” Sam said. “It doesn’t have to be straight up, but they have to hold key levels.”

Traders need to watch key signals as this market reorganizes.

“The put-call ratio remains high and that can act as the fuse for a continued short squeeze,” Sam said. “The put-call ratio alone is not enough, but as long as price continues to inch

higher and hold pullbacks that will encourage the shorts to look for the exits.”

Staying on top of ‘fear’ index influence

There is no one signal that is guiding traders in this ever-changing market environment.

“The internals are vibing with the bull case as well with VIX and VVIX showing bearish patterns, especially VVIX with a new low,” Sam said.

The Chicago Board Of Exchange (CBOE) Volatility Index (VIX) anticipates market volatility over the next 30 days. The VVIX is essentially the “fear index” of the fear index that measures volatility of price in the VIX.

“The internal breadth readings also held key levels for the first time in a long time, so the breadth implies rallies should be relatively broad based and could be led by laggards like tech and semiconductors,” Sam said.

Stock market breadth is a measure of the number of stocks engaged in a move within the market. Traders tend to follow breadth when there is a gap down or spike up in the stock market.

Outside these signals, traders can look to other assets as movement indicators.

“The dollar potentially breaking down further and bonds holding also help bulls,” Sam said. “This is the best chance the bulls have to run for a while. Know your levels and your plan on what to do above and below those key SPY prints.”

Far East economy affecting U.S. stock trading

In a stock market environment that is moving rapidly, the team at Simpler Trading watches for “outside the box” scenarios that may lead to plays as the market changes.

Mary Ellen McGonagle, Senior Managing Director of Equities at Simpler Trading, is looking at the Far East for insight into stock plays.

“Among other market moving news last week was China’s faster-than-expected January 8 reopening amid an easing of Covid policies after three years of restrictions,” Mary Ellen said. “The news pushed Chinese stocks up by 10% for the week on heavy volume with room for further near-term upside.”

The Chinese economy and financial markets have proven to influence worldwide markets.

“Due to China’s dominance in importing commodities such as copper, steel, gold and lithium, stocks in these areas were among the biggest gainers on Friday following the news,” Mary Ellen pointed out. “The shift in China’s restrictive lockdown measures isn’t the only area where the country has eased, as earlier in the week government officials signaled a softening of regulations against financial tech companies. The move was marked by Alibaba’s (BABA) green light to raise funds which had been blocked two years ago and this stock, as well as many others, rallied.”

Traders can look for trading opportunities as the Chinese market changes play out in the near term.

“We anticipate the reopening of China to have a continued positive impact on select areas of the markets,” Mary Ellen said.

The caution this week for any trader is keeping an eye on economic news events that could impact the stock market.

Various U.S. central bank leaders have speaking engagements this week, including Federal Reserve Chairman Jerome Powell on Tuesday. On Thursday the U.S. Consumer Price Index (CPI) report is set for release, followed by the University of Michigan Consumer Sentiment Index report on Friday.

Anyone of these events could override the impact of China’s new-found market environment.