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The Knife Falls And The Rate Goes Up. This Week’s Market Volume.

ganzo knife stuck on wood stump

You’ve probably heard it said that one of the biggest rules of trading is “never try to catch a falling knife” as they will always get you into trouble. Well, when you look at “falling knives” or precipitous drops in the market from a volume perspective, they are clearly not all equal. And while they may all look equally scary on a price chart, there are signals in volume that are a pretty good tell that a subsequent bounce is in the works.

That said, this has been no ordinary market lately to say the least. When inflation hit a 40 year high last week, the knife began to fall, and upon hitting the ground on Monday, our Heat Gauge came in at a SCALDING 90.62, just 8 degrees shy of the hottest level ever recorded since 1978 (98.72). Overall volume was up 16% and down to up volume on the big board was a whopping 50 to 1, as investors who swore they would never sell, finally gave in just to put an end to the agony.

Considering the magnitude, the bounce (so far) has been surprisingly subdued. We caught Monday’s knife, but the trade only resulted in a +2% gain. This has been a recurring theme on the long side for quite a while, and has caused our system to tighten up as far as risk management. Recently, our Kelly Oscillator sank into the negative causing two out of four strategies to be taken offline from the overall system. The Kelly oscillator is our fail safe tool that keeps our account intact during market declines (the last time it kicked in was in the early part of the pandemic in 2020).

The Fed raised the rate today exactly as expected, and even though the market didn’t follow through with a long range session (another recurring theme), we did log a high volume accumulation day across the board. TVO, our volume oscillator, has shifted direction, however, the values are not deep enough into the negative to signal the classic “volume slingshot” that usually precedes a long term rally. Aside from the huge gaps overhead at SPY 385 and 400, there’s not much more helping this knife to get unstuck from the ground. – MD

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