Hi YXI friends,
I am meant to be packing for my flight right now. However, given the extent of the selloff, I feel compelled to refresh some key charts one more time so you are best prepared for what could come.
Please review today’s chart analysis of SPY, QQQ, BTC, ETH, High Yield Spreads.
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DISCLAIMER: This newsletter is intended for educational purposes only. Any information or analysis in this note does not constitute an offer to sell or a solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice, nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.
Table of Contents
0) The Everything Selloff
While the market opened with high hopes, risk assets began selling off around 10-10:30 am.
1) S&P 500 (SPY ETF)
A gap up followed by a 3% intraday decline is a very unusual pattern, which resembles the October 10th selloff and the April 8th. On both occasions, the market rallied thereafter.
SPY’s Thursday decline fell into my wave (c) target zone of $650-657. Therefore, reaching the level itself was not a big surprise and the structure is still well within our wave 4 decline expectations.
I will be concerned if SPY can’t bounce from here and instead drops below $646 in the coming week. In that scenario, my three-wave decline expectation may have to swap for a 5-wave instead, while wave (c) could instead be wave iii of a larger wave (a) decline structure that takes us to $630.
We have not crossed the bridge yet - we reasess after Thanksgiving if we get there.
The NFP was a set of strong numbers, but is both subject to large revisions and also irrelevant as the September numbers would be 3 months old by the December FOMC. The street did not really expect a December cut going into the numbers anyway.
The market initially kept its rally after the numbers until an hour after the open, with yields hardly moving. This suggests to me the NFP was not the culprit of this selloff. It was likely a liquidation event at some point that cascaded and rippled across the pond. This type of unwinding event - whether due to quant hedge funds misfiring on their momentum algos or a tactical decision by a big shop - does happen during market weaknesses, and no one could point to a singular reason until a while after, by which point everybody would have moved on anyway.
2) QQQ
QQQ falls into a similar pattern to SPY. It has now entered our pullback target zone for wave (c), with $579 as the deeper end. If we get a bounce before breaching the zone, we can start thinking about wave 5 going into the year-end.
Going below $574 raises caution, and we may need to reassess.
3) Watch the Credit Spreads
The High Yield spreads are widening quickly. While we are not at the April turmoil levels, there is a lot of trouble circling both public and private credit companies. If the investor anxiety cannot cool down, we could see the firesale deepen.
4) BTC
I had previously expected Bitcoin to hold the $90k level (with small breaches), but the latest price action has definitely invalidated that thesis.
A reassessment of the chart (hindsight is a wonderful thing), the rally off the April low appears more of a completed, diagonal structure (3 subwaves in all 5 waves). The latest decline takes us down to the 0.786 retrace of the April-October rally, and the new wave c is just beyond the 100% extension of wave a. This could be a new 1-2 setup if the April low holds, meaning that the next rally, wave 3, is also much, much higher than I had initially expected.
I need to warn that this interpretation is a best-case scenario.
In a more bearish scenario, we could be in the middle of a 5-wave sell off that is only completing its 3rd wave down. We could challenge the wave (4) low or even worse ($74k), which marks the cycle top in October. If that does happen, I apologise in advance for not foreseeing it coming.
Our ML models have been on Risk Off for a while. They assess risk one day at a time and do not “buy-the-dip” that gets dippier and prefer to buy the rebound. It’s such a vital risk control tool against drawdowns, because technical analysis itself is subjective and probabilistic in a dynamic market. The ML models incorporate vastly more cross-asset information without the hope or the gloom to arrive at a more objective assessment.
5) My Analytics In One Place
Please do check out my central page on Stan Store. Here I have put together all the tools and analysis I’ve developed since starting YX Insights.
There is a lot of free stuff there, especially the indicators on TrendSpider. You can also sign up for my ML models via the links.
6) ETH
One must remember - each chart to their own. While cryptocurrencies do highly correlate within a cycle, they can be at different stages of the trend.
I am keeping the same ETH chart as before for now, marking the current selloff as a steeper wave v of (c) down. There should be some strong support at the current levels as volume profile increases substantially.
Best of Luck
As I am about to leave to the airport, I wish everyone the best of luck for next week, and happy Thanksgiving!
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