Right now, ALGOs rule the fucking world, right? So I spent months learning a thing or two to try to figure out how I can get better informed on understanding where markets would go
Since April we have been going through volatility boxes where SPX pings from one point to the next. Markets are experiencing sector rotations where one day Financials go up and tech goes down, next day vice versa.
This is a list I compiled:
- Linear regression lines: 3 main “channel” lines that have shown support/resistance over the last 2 years: ~3200, ~2990, ~2700. Just look at the SPX chart and draw a horizontal line at the multi-week clusters and bisect them.
This means: Below 3200 and above 2990, 3200 is resistance and 2990 is support. Should we break above 3200, 3400 is very likely. Should we break below 2990, 2700 is the next support floor. Should we break 2700, we will probably stop at 2500
- Bear Case: You need a LARGE red candle (like 100+ point movement) that is supported by a subsequent red candle on the daily chart. Bull Case: you need a LARGE green candle supported by another green candle
- Market Breadth: this is obtained by the Advance – Decline line for SP100 in ToS. Stocks have shown great correlation, meaning usually there are 80-90 stocks up or down out of sp100. If we are to break up. Bear Case: violate 2990 and 80-90 stocks going down. Bull Case: violate 3220 and 80-90 stocks going up
- VIX must have VERY VERY large movement. Bear Case: VIX gains 30-40% in a day and/or VIX 42 and above and stays there for more than 3 days. Bull Case: VIX drops under 20
- High volume. Using relativevolumeSD study in ToS, it looks at the last 60 days of volume and makes a dashed line at 2 standard deviations above this average. You MUST have large enough volume to penetrate the dashed line for both bull/bear cases
- Moving Averages: This is the most important factor for understanding algos. Some MMs use 50 day, others 100, and others 200. Algos are computers that are set to buy / sell based on certain metrics. Best case is to use the 100 MA as that will include the algos that use 50 MA. Disparity Index indicator (study in ToS) gives you the % above or below the MA. Bear Case: SPX breaks below the 100 day MA. Bull Case: any negative day does not violate the 100 day MA. 100 day MA is currently 2960
- RSI: This shows relative strength. It is currently showing a bearish divergence (SPX is trending higher but RSI is trending lower). RSI should be verified with the WillamsPercentR study to see if the market is truly overbought or oversold. WilliamsPercentR closer to 0 shows overbought (currently -21) and -75 is oversold territory. These are 2 bearish divergences
- Formulaic trendline: 2956- 2898. This forms one of the 3 ‘safety zones’ for algos to prevent a sell off, the other 2 being the linear trendline and 100 day MA. If we cross below 2960, we have lost 2 of the safety lines … if we break below 2898, algos will start to sell like crazy and GAME ON!
- MACD: must show divergence, it must be large, and the histogram must support sell side activity for a true second leg down. Anything outside of that is Bullish. Set up zone for a second leg down: SPX is consolidating + MACD histogram is showing strength + divergence is high + it crosses below zero
- Money Flow indicator: AccDist study shows institutional money and is showing that smart money is not selling off. Why would they? Earnings for q2 and guidance is coming up this month and we are above the 3 safety zones. Smart money still believes we are in a V shape recovery until companies give them a reason not to. This can be verified with OnBalanceVolume study. This indicator is showing a bearish divergence because, although we are near Feb ATHs, there is about 40% less money in the market.
TL:DR a big bullish move will happen if VIX drops under 20 and we break the 3220 resistance on HIGH volume
a big bearish move will happen if VIX jumps 30-40% intraday (or above 40) on HIGH volume with multiple daily red candles, where we violate the 2960 and 2898 support levels that can be verified with drop in money flow and RSI/MACD
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.