Summer Hints Of Tricky Stock Market Setups


Simpler Trading Team

May 31st 2022  .  7 min read

In this article:

  • Four signals to watch in during a bounce
  • Patches of positive market sectors
  • Key calendar events this week

There is no holiday from this see-saw market.

Following consecutive rally days to close last week, the stock market dropped out of the gate following the long holiday weekend. All three major indexes closed down heading into June.

This reveals an ongoing strain in the stock market between pockets of positivity and a negative long-term outlook.

(Check out the free video, above, for insight into trading this changing market.)

Watch for tricky stock market setups

Anyone believing that consecutive sessions of rallies showed the stock market is on its way back to all-time highs is in for a rough ride this summer.

Shorts are in play while the rallies may dictate a change in trading strategy.

The market has revealed many short setups in the market. These can be found in stocks with large market caps, such as technology. If these tickers continue to be squeezed out on bounces, this market move will likely force traders working these shorts to become buyers on the rally.

This is a tough market with tricky setups in play. What qualities can help traders trust a rally enough to hold through the shift?

Simpler’s traders are keeping an eye on these signals:

  • U.S. Dollar Index (DXY) – This measures the value – rise and fall – of the dollar relative to a collection of foreign currencies related to U.S. trade partners. If the dollar gains strength against this “basket” of foreign currencies the index rises and if the dollar weakens the index falls. Comparison currencies include the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The Index was formed in 1974.
  • Treasury notes – The 10-year U.S. Treasury Notes (ZN) or “T-bond” is based on the U.S. government borrowing money by issuing bonds for the 10-year term and at fixed interest rates. In the current market, this signal supports trust in a rally when these notes are holding stable, and as long as the notes trade “flatish to up.”
  • “Fear Indexes” – The Chicago Board Of Exchange (CBOE) Volatility Index (VIX) has been extremely high in recent weeks along with the VVIX. The VIX index anticipates market volatility over the next 30 days. The VIX has been high, peaking above 30 last week (it topped 26 today and above 20 is considered high volatility – more fear in the market). The VVIX – essentially the fear index of the fear index – measures volatility of price in the VIX.
  • High-yield bond – Checking the iShares IBoxx $ High Yield Corporate Bond ETF helps track investment results of an index composed of U.S. dollar-denominated, high-yield corporate bonds. Holdings include finance, healthcare, energy, and communications. This represents higher income potential and portfolio diversification, although at a higher risk, and can be a leading indicator for stocks.

Sam Shames, Vice President of Options at Simpler Trading, shared how he is watching these signals.

“When all of these things are working in concert, we can trust the rally,” Sam stated. “No previous bounce attempt during the down move has exhibited these qualities before.”

In terms of price, these signals are behaving as well as possible in the short term, he explained.

“The implications of the chart structures this week imply any pullback will hold and bounce higher, but we want to actually see this dynamic play out,” Sam stated.

He isn’t planning on chasing swing entries in this environment, understanding that the buy is on the first retest of rising intraday support.

“The real tell, as always, when prices go vertical is how they handle a pullback to intraday support – usually the hourly 21 exponential moving average or 50 simple moving average,” Sam stated.

The expectation at this point is to watch for a large short squeeze potentially lasting into June.

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Indexes stumble while oil rises

Is this market in the first stage of a near-term uptrend?

The opening session this week bucked that thought with losses across all three major indexes.

The Dow closed at 32,990.12 points to slip .67% (dropping 222.84 points on the day). The Nasdaq dropped to 12,081.39 points for a .41% dip while the S&P 500 stumbled .63% to 4,132.15 points.

Despite the down day to wrap May, the S&P 500 gained 6.6% last week which pushed the index above its 21-day moving average. With internal chart signals aligned, there is anticipation of an upside move.

Simpler’s traders are cautious about gaining exposure in this see-saw environment as many key sectors and industry group stocks remain below key areas of upside resistance. Take note of growth stocks which are beaten down.

Growth stocks – technology, consumer discretionary, and internet-related – could be setting up for a short-term rally. Simpler’s traders are watching to determine if these tickers can break back above their 50-day moving averages.

Other stocks worth watching include energy, commodity, and utilities. All have so far outpaced the markets and these sectors may be poised to trade higher.

As an example, OXY outpaced peers last week and oil prices today spiked above $125 per barrel before closing just below $123.

These are positive positions within a market that is not inclined to be bullish, but caution remains.

“While the short-term outlook is now positive, the intermediate and longer term outlook for the markets remains negative,” stated Mary Ellen McGonagle, Senior Managing Director of Equities. 

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What events to follow this week

Traders should consider “keeping their powder dry” and calendars updated this week. Excess exposure remains risky with various news events ahead.

Federal Reserve actions continue to be a hot topic with the Fed involved in multiple speaking events throughout the week. Last week, during the rallies, the Fed signaled flexibility in rate hike moves through the end of the year.

Release of more economic and inflation data this week will be a focus for traders. May employment data will be released and closely watched as a sign of economic strength. Projections are for 325,000 jobs added in May and any lower number could be a negative jolt in the market.

Updates for the calendar:

  • Wednesday – The Federal Reserve releases the Beige Book – a survey of U.S. economic conditions drawn from the 12 banking districts. It focuses on economic growth, job hiring concerns, the status of U.S. businesses, and more.
  • Thursday – The ADP® National Employment Report™ releases its employment report showing non-farm private sector employment based on payroll data.
  • Friday – The Non-Farm Payroll (NFP) report is released and measures U.S. workers outside farming. This report focuses on employees in construction, goods, and manufacturing.
Cross-checking market signals

A day of mixed positive chart signals doesn’t establish a long-term trading strategy.

Simpler’s traders will continue watching market volatility, cross-checking multiple internal signals, and managing risk.

This summer in the market should produce a wild ride for traders.

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