Back to Turbulent Waters - More than 50% of the Bounce Wiped Out
Tech stocks broke key support levels, also SPX and Bitcoin. VIX jumped and it suggests continuation. Economic data does not help to improve the outlook
In just a week, the market fell back to turbulent waters. Is this a buying opportunity or a major top?
In the previous weekend's edition, we discussed Bitcoin's bearish outlook and relevance of the 40-week moving average (which was breached this week) and the subsequent risk of a significant sell-off. Today BTC is in the annual support/resistance zone with major risk if that level is not maintained (see chart below).
Last week also, the Nikkei was nearing the edge of its volume shelf, and the reversal potential at the point of control is always there for both bulls and bears. The risk materialized this week with a reversal doji on Tuesday (Tokyo time, hence the red futures on Tuesday morning U.S. time).
Regarding U.S. markets, the financial sector was a focus last week in this edition due to its potential for reversal. As anticipated by Bollinger Bands and previous occurrences highlighted, a reversal occurred, similar to past patterns. This pullback negatively impacted the Dow Jones, which was the major index with bullish weekly setup (no well formed hanging man candle).
Technology stocks exhibited weak setups across the board last week, as I posted last Saturday in the premium section: “None of the mega-caps stocks exhibit bullish weekly setups… All are currently undergoing potential reversal patterns that have yet to be confirmed”, META, NVDA, GOOG, and even AAPL anticipated a bearish move. The weekly support/resistance levels were tight, and the setups were unfavorable, creating a recipe for failure.
TSLA failed to break above the diagonal resistance back then charted, and the current weekly candle is unappealing. AMZN joined MSFT in breaking below key annual support/resistance levels and the 40-week moving average.
The S&P 500 was dragged down by the underperformance of technology stocks and reversals in overbought sectors like financials, consumer discretionary, and industrials. The setups for real estate and utilities appear overbought with formations suggesting a top.
Last but not least, the VIX, a major indicator that I always analyze and provide parameters in the premium content, did not break below 14.8.
Before starting, I want to emphasize two key elements: the use of support/resistance levels and the importance of understanding macroeconomic factors.
Support/Resistance Levels:
These levels serve as a safety net during rapid reversals. The S&P 500 breached the crucial and anticipated weekly level of $5620. NVDA started the week well below $122, and QQQ fell below $474, mirroring the weekly support/resistance levels published in Friday's edition for more than 15 securities. The updated levels were published yesterday.
Macroeconomic Factors:
In a previous study published in March, I discussed the concept of overextensions, analyzing seven occurrences over the past 50 years. A key finding was the very likely visit to the 40-week moving average. If you revisit the S&P 500 chart, you'll notice that the bottom of the sharp August decline aligns with this level. Charts do not repeat themselves, but technicals do.
That said, in recent weeks, I've published a special study on rate cuts, providing context for each instance since 1990 and drawing conclusions for the S&P 500 and bonds. Volatility is inevitable, and the key indicators to monitor were visually explained in that study. For premium/paid subscribers please print the last Wednesday’s edition with the macro indicators and have it at hand (link below). For free subscribers reading this introduction, that study alone is worth the upgrade for the subscription not to mention the educational content library including risk management and market breadth series published previously in the section “Level Up Your Trading”.
Macro Notes:
The U.S. labor market added fewer jobs than anticipated in August, according to a Labor Department report. Non-farm payrolls increased by 142,000 jobs, falling short of the estimated 160,000. Additionally, July's job growth was revised downward to 89,000.
Despite the weaker-than-expected job growth, the unemployment rate remained steady at 4.2%, matching expectations. However, this marked a decline from the previous month's rate of 4.3%.
Following the release of the labor data, the probability of a 25-basis-point interest rate cut by the Federal Reserve in September decreased from around 70% to 59%. Conversely, the likelihood of a larger 50-basis-point cut rose from 30% to 41%, according to the CME FedWatch tool.
John Williams, President of the Federal Reserve Bank of New York, suggested that the August hiring data was not unexpected given the current economic conditions. He emphasized the importance of lowering interest rates to maintain a balanced job market.
Returning to technical analysis:
The Japanese yen has been bolstered by investors seeking safe havens and anticipating tighter monetary policies from the Bank of Japan. This is a key element to track given the inverse relationship that this chart has with stocks.
Indexes & Stocks - Is This a Buying Opportunity or is There a Major Top In?
That’s what will be studied today with the measurement of potential reversal levels, and this Wednesday will kick off a series of Fundamental analysis for stocks.
SPX - Analysis and Support Expected