EB Daily Market Report - Special Report - Wednesday, April 17, 2024

I've been following the action fairly close throughout the day. There've been a few surprises - like watching the 10-year treasury yield ($TNX) drop continuously over a 24-hour period, while the Russell 2000 (IWM) remained flat:

I have certainly expected a reversal in the TNX to benefit the IWM. Why? Well, look at the relationship between the TNX and IWM since the October 2023 low:

There has been positive correlation, mostly during February. So this isn't a slam dunk, but clearly the "norm" has been for these two to move opposite one another. It's disappointing to watch the TNX drop without a corresponding rise in the IWM since about 1:30pm ET yesterday. The bond market closed as I'm writing this, so we'll see if there's any change in the final hour. For now, however, the IWM has been disappointing.

I mentioned in today's Live Trading Room that I was looking for a potential bottom to form here on the IWM, so I've been building a position in the TNA, the leveraged ETF that tracks the IWM at a 3 to 1 clip. I took my 3rd and final position just a few minutes ago just below 33.00. First, if the IWM closes beneath gap support from February 13th (194.12), I will exit its leveraged ETF, the TNA at market. So this is a "work RIGHT NOW or I'm out" type of trade. If the IWM rallies back above 194.12 at the close, then the TNA should be somewhere close to 33.30.

The Volatility Index ($VIX) has been down most of the day, but it still remains quite elevated at 18.22. I will feel much better when the VIX subsides and closes back beneath 17. The 17-20 range is "who's gonna blink first" range. A break and CLOSE above 20 on the VIX and I'll be 100% cash, even out of my ETFs like SPY, QQQ, and IWM. It's not that I've changed my bullish opinion. That's not the case at all, but I RARELY trade a high VIX environment. I need to see things settle down after a VIX close above 20. It might mean I re-enter at higher prices. I'm fine with that. I just don't want to be in if the VIX accelerates higher from 20, because history tells us that our major indices tend to fall rapidly during such an environment.

Listen, I AM 100% BULLISH LONG-TERM. The current action doesn't change a thing in terms of my long-term stance on U.S. equities. But I'm a SHORT-TERM momentum trader and I HATE volatile market environments. I'd rather sit on the sideline and wait things out.

There is one other positive right now on the IWM. It has an hourly positive divergence. As prices have fallen, the hourly PPO has been on the rise:

I've spent a lot of time above discussing the IWM, because that's an area I've had a lot of interest in, but all of our major indices are continuing to be under pressure today and weakness has been felt the hardest in technology shares (XLK). Semiconductors ($DJUSSC, -3.60%) are primarily responsible for the underperformance of the XLK.

As far as the Beige book goes, it was released at 2pm ET this afternoon. I thought news was mostly neutral. On the positive side, wage pressures have continued to ease and we're continuing to see modest growth. Many firms acknowledged difficulty in passing through higher costs to the consumer, as consumers have tightened their purse strings.

Let's see how we close today, but I'm prepared to move more into cash today (if the IWM doesn't recover enough). And then, if the VIX closes above 20, I'll be entirely in cash.

Happy trading!

Tom