Hello everyone,
What a day. The market unfolded the move that has been brewing for recent sessions in a rapid fashion. We first saw the warning signs when technology began diverging from other sectors, the SPX was grinding higher while tech megacaps showed underlying weakness.
Over the past few weeks, I have occasionally shared free articles demonstrating how technical indicators validate momentum and anticipate reversals. We’ve covered NVDA, SPX, TSLA, and QQQ so far. My next free post will focus on Crypto, showing how technical analysis remains highly effective for Bitcoin (stay tuned).
Given today’s volatility, tonight’s update will break down the market move and the support/resistance levels modeled for this week. I will also conclude with a note on the macro drivers behind the selloff.
Volatility Spike
We have been tracking the VIX closely, and the series of higher lows over the last few weeks warned of an imminent spike. Today, the VIX jumped above key thresholds we analyze in the Weekly Compass, but at the same time it’s overheated already with a gap.
While the context is bearish, there are signs of short-term exhaustion given the velocity of the move:
Bollinger Bands: The SPX breached its lower Bollinger Band on the daily timeframe today (Same for the NDX).
Gap Magnets: Keep an eye on the gaps at $6,925 (SPX) and $25,444 (NDX); these often act as bullish magnets for a relief bounce.
Oversold Conditions: The move was violent and fast, reaching oversold conditions on the daily Williams%R.
The “Crowded Trade” Unwind
The velocity of this drop was fueled by extreme positioning. Last week we highlighted that 70% of S&P 500 stocks were above their key moving averages on Thursday, and on Jan 9th, 90% of the stocks listed in the Dow Jones were above their 200DMA. While broad participation is generally healthy, these extremes signaled a crowded trade. When everyone is on one side of the boat, it doesn’t take much to tip it over.
Key Levels & Tickers
The mood remains bearish until proven otherwise, but we must manage risk carefully. These notes are related to some of the setups shared using the levels posted last Friday.
TSLA: Surpassed our extension target of $421 posted in the weekly compass. This level is now a key benchmark to manage risk for shorts; some traders could use it as reference to manage stops on short positions. (And locking gains is always welcome).
AAPL: Extended as expected and found temporary support at the annual level of $243. Don’t get greedy with shorts; if profits are not locked, $246 can serve as trailing stop reference for some traders who don’t want a higher jump to consider closing a short.
NDX: The 100DMA is the next major support, currently at $24,979. Bears need to see a break of that line along with $24,949.2 (find it on weekly levels). Or in the case of QQQ, bears want $606.5 breached to open the door to 598.4. However, a bounce is possible here considering the 100DMA and the Bollinger breached even if the primary trend remains down.
COST showed impressive resilience today validating the bullish thesis. Conversely, Crypto and AVGO lost their Central Weekly Levels (CWL) in the pre-market. When that happens, the rule is simple: Step aside. We do not touch long positions until the CWL is reclaimed.
GOOG: Declining as expected, following its weekly setup and reaching the extended target of $323.5 with precision.
Conclusion:
Price action continues to move between our anticipated levels with high precision. In addition to the examples above, note today’s low for JPM at $301 (versus our $303 target) and PLTR bottoming at $166 (versus Saturday’s bearish target of $166.5). Having these levels in advance helps you anticipate potential destinations and reversal points.
When a move happens too fast at the start of the week, we often see reversals. Be mindful of a potential technical bounce; while not a guarantee, it is a high probability when monitoring the VIX and today’s overextension.
The market structure has sustained major damage. As mentioned in my previous publication, the 20-week moving average (WMA) was the likely target for this bearish move in the Nasdaq 100 (NDX), that level has now flipped from support to resistance. Any spike from here must prove its strength by recovering levels progressively.
How to validate a bounce?
For tomorrow, a potential bounce must first recover $6,819.0 on the SPX, ideally followed by $6,836.8 flipping back to support. Similarly, for QQQ, bulls need to see a first sign of a bounce consolidating $610.1, followed by a recovery of $613. These are not yet the Central Weekly levels, but rather previous supports that have flipped to resistance. (Note: The first two figures for SPX and QQQ are CDLs ;).
And the primal milestone is the recovery of the CWL.
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The Macro Catalyst: It’s Not Greenland only, It’s also Japan
Is this selloff about the headlines regarding Greenland? Not necessarily. That is a very important situation, and the mechanics of this drop point to similarities with the August 2024 selloff: Japan.
Japan’s 10-year bond market recently experienced extreme volatility, a rare “six-standard-deviation move”, driven by concerns over large fiscal spending plans and persistent inflation. This has forced aggressive selling from domestic insurers and banks.
Why This Matters for the SPX (The Carry Trade Unwind)
For those who remember the 10% drop in August 2024, the mechanic is identical. For years, global investors used the “Carry Trade” borrowing Yen at near-zero costs to buy US tech stocks.
When JGB yields spike (as they are doing now), that cheap funding evaporates.
Yields Spike in Japan → Yen volatility increases.
Margin Calls Triggered → Funds are forced to sell liquid winners (US Tech) to pay back Yen loans.
SPX Sells Off → The “unwind” hits the US regardless of earnings.
This fundamental catalyst aligns perfectly with the technical cracks mentioned recently. Until the Japanese bond market stabilizes, the SPX remains vulnerable, and as usual, let’s focus on price action.
See you this Wednesday with the Mid-Week Update. Like for more occasional notes like this one.
Have a good night everyone.
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The content provided on SmartReveals.com is for educational and informational purposes only. All analyses, research, commentary, and other materials are intended to help users understand financial markets, investment concepts, and company fundamentals. This content does not constitute investment or any type of advice. The support and resistance levels are modeled references to manage risk and anticipate potential reversals, each investor must assess their own risk tolerance to set their own stops.