Hey Market Pilot,
The markets are feeling pretty precarious lately. We know growth is out and the small caps are in trouble with the Russell 2000 ETF (IWM) looking like it wants to break down after going sideways for nearly 11 months. With interest rates going up in 2022, tech is experiencing headwinds. But we have seen an inflow into defensive sectors such as commodities, financials, and oil.
It’s questionable how the bullish sectors will fare if the general indexes roll over, so I am being extra sensitive about clues as to when that weakness may really show up. Right now, the S&P 500 (SPY) has been maintaining support at the weekly 21 exponential moving average (EMA), but its energy and momentum have seriously slowed. While the market is chopping like this and not giving very good insight into its next move, I have been using other tools, like the Ultra VIX Short Term Futures ETF (UVXY), to determine when the market will weaken.
The UVXY is the leveraged exchange-traded fund (ETF) of the Volatility Index (VIX). If interpreted correctly, it can give clues and timing as to weakness in the market. So what I am doing right now is watching for signs of the UVXY wanting to transition into an uptrend, which would in turn, mean weakness for the SPY.
The screenshot above is of the UVXY 15-minute time frame. I drew yellow lines to highlight price following the 15-minute 50 simple moving average (SMA) down, which means volatility (or fear) is declining and the SPY is moving up or sideways. UVXY down is good for the market and since it has most recently broken below the 15-minute 50 SMA, the SPY has been moving to the upside.
As long as this UVXY decline persists, we can be bullish with the index. But if it starts to change, you better prepare for the market’s tone to shift as well.
Dips in the market have been playable, but they seem to be getting riskier. I won’t short the index until I see the UVXY set up in such a way that I would want to buy it like I would buy any other long ticker.
Your Profit Pilot, TG