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MarketSurge powers the charts in this video.

Last week, we talked about the likely possibility of a follow-through. It happened and was much stronger than even the biggest bulls have imagined. It seems that the quick 16% drop in the Nasdaq 100 and 42% decline in semiconductors ETF, SMH was strictly related to a Yen Carry Trade reversal, which blew up a few highly leveraged market participants and now things are back to normal.

I hinted that this might be just another garden-variety correction last week for two main reasons. First, there were plenty of favorable reactions to earnings during the drawdown. And second, an increasing number of stocks showed relative strength and were setting up. We had our bounce. I participated mainly through SOXL. Now, what’s next? New all-time highs or more elevated volatility ahead of the elections? Maybe, a little bit of both. I wouldn’t be surprised to see new all-time highs but also be prepared for big short-term shakeouts. The market hates uncertainty and those elections seem to have very even odds.

The market bounce was so quick that it caught many market participants unprepared. So many still live in the past believing that a big three-week drop will take many weeks to heal. Today’s tape is much faster, and the drops and the recoveries happen much quicker. What is the next most logical move in the market? Granted the indexes and many stocks are extended in the short term. Those on the sidelines are afraid to chase here and for a good reason- the risk to reward is not optimal. But everyone is waiting for a dip to enter. A dip that would form a higher low and give us a level to trade against.

If you are eager to short this bounce, I’d wait for a move below the previous day’s lows first, at the very least. I am open to any scenario but focused on the long side right now.

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MarketSurge powers the charts in this video.

Last week started with a big downside gap. Buyers stepped up immediately and the gap was erased by the end of the week. Many stocks, especially from the tech sector, remain in a pattern of lower highs. This is why I view this bounce as a short-term trading opportunity. The beauty of corrective markets is that they are very volatile and provide ample intraday and swing trade setups. For example, the semiconductors ETF, SOXL was up 36% from its opening print last Monday to its weekly highs. 

What are the chances for a bounce follow-through next week? Given the price action on Friday – a tight-range inside day for the indexes and many major stocks, we might see a continued push toward their declining 20-day moving averages or the VWAP since their July highs.

The tape remains better suited for nimble trading and quick profit-taking. The silver lining is that last week we saw plenty of stocks reacting favorably to their earnings reports and holding well. This is the foundation for great future setups.

If the correction resumes at some point next week, the first sign would be a move below the previous day’s lows.

I recently published a few children’s books. Check them out if you have kids or friends who have kids: Investing for babies, Trading for babies, Meditation for babies. You can find my other trading books on Amazon here.

Try my subscription service which includes a private X feed with option and stock ideas, emails with concise market commentary, real-time market education, the Momentum 40 list of market leaders, and much more. See what subscribers say about my educational service.

Check out my free weekly email to get an idea of the content I share with members. How my ideas/alerts did.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice. Read my full disclaimer here.

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).

I recently published a few children’s books. Check them out if you have kids or friends who have kids: Investing for babies, Trading for babies, Meditation for babies. You can find my other trading books on Amazon here.

Try my subscription service which includes a private X feed with option and stock ideas, emails with concise market commentary, real-time market education, the Momentum 40 list of market leaders, and much more. See what subscribers say about my educational service.

Check out my free weekly email to get an idea of the content I share with members. How my ideas/alerts did.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice. Read my full disclaimer here.