Daily Analysis: Stocks, Cryptos Bounce Back Hard after Volatility-Driven Crash

Tuesday Market Recap

Asset Current Value Daily Change
S&P 500 2684 2.94%
DAX 12,392 -2.32%
WTI Crude Oil 63.92 -0.36%
GOLD 1326.00 -0.72%
Bitcoin 7800 9.71%
EUR/USD 1.2380 0.03%

The disastrous overnight session in stocks that drove the S&P 500 almost 100 points below even yesterday’s crash lows, saw the unwind of several short-volatility ETFs, with forced liquidations and VIX-buying pushing equity prices lower across the globe. While the crash caused severe technical damage, with the major indices entering correction territory, falling more than 10% top-to-bottom, as soon as the market opened the pressure eased.

S&P 500 Futures, 4-Hour Chart Analysis

While the move is likely not over, the oversold bounce led to lofty gains towards the end of the session, and the optimism sparked buying across asset classes, as the Volatility Index (VIX) normalized after a spike to 50. The major indices finished the session around 3% higher, although the support/resistance level in focus (2735 on the S&P 500) is still almost 2% above the current levels.

VIX, 4-Hour Chart Analysis

The chart of Credit Suisse’s XIV (short-volatility ETF) shows what exactly happens when a one-sided and trade that has huge “hidden” risks implodes. The recent stability in the markets led to a jump in the popularity of short-volatility strategies that work perfectly, delivering stable returns, until a sudden, but regular selling spree in stocks.

XIV, Daily Chart

Fiat currencies had a two-sided day, as the major pairs mostly followed equity markets, with the Dollar strengthening as stocks headed lower, while being sold when stocks bounced back. All in all, the damage to risk-on currencies is muted, although the Pound, the Australian Dollar, and the Canadian Dollar are all around 2% off their highs against the USD, while the Euro lost a tad more than 1%.

EUR/USD, 4-Hour Chart Analysis

Gold has been one of the losers of the day, as the risk-off sentiment that helped the precious metal eased towards the end of the day, and the Dollar strength also weighed on all commodities. Crude oil also finished lower on the day, despite the favorable US inventories data coming out in late trading, and the WTI contract is still hovering well below its recent highs, as the turmoil in stocks affected the market.

Cryptocurrencies

The major coins bounced back strongly today, together with stocks, although not just thanks to the same reasons. The positive divergences that we observed during this leg lower in the segment continued to give hope to crypto bulls that the selling pressure could be easing, and the less pronounced momentum of the sell-off was also an encouraging sign.

That said, a lot of coins plunged significantly below the Friday lows, and trading volumes in BTC and the other majors pointed to another wave of liquidations among the leveraged players in the segment. The US Senate hearing helped the rally in late trading as well, as the balanced tone of the event calmed regulatory fears which have been among the major drivers of the recent decline.

LTC, the strongest coin right now, 4-Hour Chart Analysis

The technical picture didn’t change significantly in the segment although the sizeable drop in the late leaders of the preceding rally, namely NEO and Ethereum, carried those coins to levels that might prove to be the final lows too, even if the move will could last longer than in the case of the rest of the majors.

Featured image from Shutterstock

Author:
Trader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.