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Thin markets can move fast. We saw it last week. Quite a few stocks went up 10-15% on little volume only to give most of it back. The few stocks near 52-week highs that tried to break out failed, only to find support near their rising 10 and 20-day EMAs. Typical bear market action.
The indexes had a good run since the last CPI was released about ten days ago. Now it’s time to test the validity of this rally. If QQQ cannot hold 295, this rally can be considered over. The same can be said if Russell 2k IWM doesn’t hold 175. I’ve believed all along that the latest move higher was just a bear market rally. I played it as such and made sure to limit my position size and take frequent profits on strength.
The next week is likely to bring extra volatility to the tape. There’s an FOMC meeting on Wednesday. The Fed is expected to raise interest rates by 75bps. Anything more or less would be considered a surprise that it is probably not priced in. The market will also pay attention to Fed’s future intentions. We also have earnings season which has just begun. Snapchat fell 40% after missing estimates and citing that the margins in the advertising business are starting to shrink due to companies cutting their marketing budgets. Will find out if this was just a Snapchat problem or something much more widespread. Big Tech reports next week and everyone will be paying attention. If Apple, Google, Facebook, Microsoft, and Amazon mention troubles and cutting costs, it will be felt everywhere. What will matter the most is the market reaction. When sentiment is improving, the market is looking for the slightest reason to go up and vice versa. If people want to put money to work, it will be seen in the price action – stocks will have high-volume breakouts and low-volume pullbacks that will resolve higher. Downside gaps won’t last long and they will be faded as we saw in financials in the past week or so. If the market has further to go down, the good news is not going to bring a sustained move higher. Our job is to find the current trend and to participate in a low-risk manner.
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