Volatility Is Gaining Steam Again — Here’s What The Charts Say…
Last week was volatile, and much of the volatility was driven by news from the White House.
The chart below shows 15-minute bars for the SPDR S&P 500 ETF (NYSE: SPY). The week began with weakness and a 1.6% drop from the previous Friday’s close to the Tuesday low. But the most exciting part of the week came on Thursday afternoon.
At about 1:00 p.m. Eastern, the market stared selling off, and SPY lost 1.4% in a little over an hour.
Selling was sparked by news that the White House would propose increasing taxes on capital gains. Bloomberg noted:
President Joe Biden will propose almost doubling the capital gains tax rate for wealthy individuals to 39.6% to help pay for a raft of social spending that addresses long-standing inequality, according to people familiar with the proposal.
For those earning $1 million or more, the new top rate, coupled with an existing surtax on investment income, means that federal tax rates for wealthy investors could be as high as 43.4%. The new marginal 39.6% rate would be an increase from the current base rate of 20%, the people said on the condition of anonymity because the plan is not yet public.
A 3.8% tax on investment income that funds Obamacare would be kept in place, pushing the tax rate on returns on financial assets higher than rates on some wage and salary income, they said.
When state taxes are considered, wealthy New Yorkers could face a rate of more than 52%. California residents could be taxed at 56.7%.
This news came after a proposal to increase the corporate income tax rate to 28% from 21% while paring certain deductions.
Stocks recovered on Friday and ended the week almost unchanged. This is shown in the next chart which uses weekly data in each candlestick.
I used candlesticks in this chart to highlight the pattern in last week’s price action. When the close is almost equal to the open, the candlestick is called a doji. The next chart highlights previous doji patterns in blue.
What This Means
In general, dojis have marked brief pauses in the trend.
That also ties in nicely with what my personal indicators were showing last week. My short-term Profit Amplifier Momentum (PAM) indicator showed a bearish divergence, which predicted falling prices. Just like I suggested, we saw a short-term pullback within a longer-term uptrend — the exact kind of “pause” that the dojis typically represent.
Once the pause ends, we should see a return to the existing trend, which is currently heading upward. That points to additional gains in the coming weeks.
My Income Trader Volatility (ITV) indicator confirms this. This week, the indicator is still nearly equal to its moving average (MA), which is shown as the blue line in the bottom portion of the next chart. But the indicator is still below its MA. ITV is similar to VIX in that it rises as prices fall. Its current position is bullish.
Our last chart this week shows my Profit Amplifier Momentum (PAM) indicator, which remains slightly bearish. However, it looks like PAM may have bottomed on Thursday, and it is likely to confirm a bullish outlook later this week. PAM is shown on the daily chart of SPY below.
Bringing It All Together
Last week, things were starting to look bearish. This week, my indicators are flipping back to bullish.
Talk about volatile! It’s a good thing my followers and I have a whole toolbox of put and call strategies at our disposal. With short-term option trades, we have the flexibility to profit off an uptrend one week and a pullback the next.
As always, I remain focused on protecting wealth in this volatile market environment. And so is my colleague Robert Rapier…
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