MarketSurge powers the charts in this video.
The long-expected FOMC July meeting came and went. The Fed didn’t cut rates but hinted that it’s getting close to the beginning of a cut cycle. Most stocks sold off heavily after the event. The market believes that the Fed is too conservative and lagging again. It’s the typical Fed – never forward-looking, always too late to act and when it finally decides it’s time, it overreacts. The economy might be close to a recession, yet the Fed stubbornly keeps interest rates high to ensure inflation is defeated. Being too late and then overreacting is exactly the behavior that caused the high inflation post-Covid.
Anyway; we are here to trade and manage risk, not to discuss the Fed. All major indexes are now in a downtrend. They experienced multiple distribution days in the past few weeks. Distribution means institutional selling. Any slight hiccup in tech earnings caused a massive pullback. It’s as if the market is looking for a reason to sell. To top it off, the Japanese Yen has been rallying, causing a reverse carry trade and pressuring US stocks.
Small caps were hit hard too. IWM is sitting at its 50-day moving average and its July CPI gap near 208-209. It’s a make-or-break moment. A weak bounce towards 215 or its declining 20-day moving average is likely to set up a short setup. The premise behind the rally in small caps, biotech, regional banks, and home builders was that the Fed is ready to cut rates. At this point, the market believes that the Fed will cut too late when the economy might be already in a recession – September. Let’s see if buyers start to step up in those sectors next week. The mortgage stocks showed notable relative strength last week, which only makes sense with rates pulling back.
Is the liquidation in tech done or there’s more to come? I don’t know. The correction in the space has already been significant. One of the supposedly new AI- leaders, MU (Micron) went from 160 to 90 in a few weeks. You don’t see such fast drops in a bull market. SOXL (which is a 3x long semis ETF) is down 60% in four weeks. FNGU (which is 3x long tech mega-caps) is down 40%. This doesn’t mean that we should buy blindly the dip. There has to be some sign of seller exhaustion (bullish reversal candles) and a spot we can enter with a relatively tight stop. If the downtrend remains intact, rips to major declining moving averages (10. 20, 50) are likely to be shorting opportunities – we saw it last week in NVDA and QQQ near their 20dEMA and many others. The important levels for QQQ (Nasdaq 100) are 450 (previous resistance that might turn into support), 443 (YTD VWAP), 430 (200dma).
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