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MarketSmith powers the charts in this video.

Market breadth has been deteriorating. 10-15 large-cap stocks account for the majority of the indexes’ gains year-to-date. Typically weak market breadth precedes market weakness but not always. The last time rally participation was small back in March/April, we saw an expansion into more sectors. This time we have weak seasonality so things might play out differently.

The Nasdaq 100 and S&P 500 held above their 20-day moving averages. If they lose them, we will probably see an acceleration in selling. A lot will depend on market rates. The 10-year rates are hovering around 4.3%. A breakout there will weigh down on tech stocks. We are already seeing some of them breaking down. If NVDA loses 450, it can pull back to 435. 

AAPL was under significant pressure last week on news that China doesn’t allow Federal government employees to use iPhones at their workplace. The China/U.S. relations seem to be souring. The rally in Chinese ADRs lasted a blink of an eye. It failed quickly just like it did many times this year. U.S. officials keep saying that doing business in China is not possible for Western businesses anymore. Deriving a significant income from China is turning into a liability again. Just look at the price action in SBUX, NKE, AAPL, WYNN, LVS, and many semiconductors. 

One has to remain nimble and tactical in this choppy environment. There are decent opportunities on both the long and short side but if you don’t stay in them for too long. Stocks like ABNB, UBER, GOOGL, and AMZN are building new bases. Cyber security stocks like CRWD, ZS, OKTA, PANW, ANET are setting up for potential breakouts. September is seasonally weak so most breakouts are not likely to last for too long. It is a scalping market environment. If the indexes lose last week’s lows, I will go heavier on the short side for a quick trade.

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MarketSmith powers the charts in this video.

All major indexes closed above their 20 and 50dma. Breakouts are following through for the most part – especially after earnings gaps and in high-momentum stocks. This is bullish. Nothing goes straight up. It is completely normal to see some backing and filling, some consolidation or a pullback after Labor Day weekend. As long as the indexes keep closing above their 50 and 20dma, the bulls are in charge which means that dips in strong stocks are likely to be bought.

Tech stocks started to move in tandem with interest rates again. As rates pulled back in the last couple of weeks, tech stocks rallied. As rates bounced on Friday, tech stocks faded. Even if tech takes a break here, it seems the market is more likely to correct through sector rotation as opposed to a wide-spread selling. The slack in tech on Friday was picked up by energy and metal sectors, which perked up. When those sector rally, tech is typically under pressure.

Chinese ADRs rallied again as China is injecting liquidity to jump-start its economy and stock market. It seems they are not worried about inflation over there at all. The China Internet ETF, KWEB is still a mess technically speaking but it is something I am keeping a close eye on. I traded FUTU, XPEV, BIDU during the week. FUTU weekly Calls went up 11x. 

In the meantime, high-yield stocks are getting smoked. Consumer staples and utilities are having one of their worst year in a while. People are not searching for yield in stocks anymore as Treasuries and shorter-term government bonds offer plenty of yield currently.

Try my subscription service which includes a private Twitter 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.

I published a new trading book recently (2023). Check it out on Amazon.

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

MarketSmith powers the charts in this video.

The S&P 500 and the Nasdaq Composite rallied to their 50 and 20-day moving average where they were rejected. This could be the beginning of a new leg lower or at the very least more choppiness in the coming days. The gap and fade in Nvidia are not helping the Bulls’ case either. They just had one of the best earnings reports in their history and couldn’t hold their gains. Many stocks tend to top when they sell on good news. I am not looking for a top in Nvidia. The stock is still above its 20 and 50-day moving average and it is still in a clear uptrend but I am not looking to enter it right now either. 

A major source of active traders’ edge comes from using tight stops. Tight stops allow for small losses and winners that are much bigger than the losers. It is challenging to swing trade stocks with tight stop losses during volatile, choppy tapes. It is almost guaranteed that you will get shaken out. Small losses can accumulate fast even if you use a relatively small position size. Drawdowns lead to frustration and a loss of confidence. This is why it is so important to be aware of the market environment and what works in it. Keeping a large cash position, trading less, and using a smaller position size is not a bad approach for many here. If you have to trade, intraday makes the most sense currently because it is easier to find tight-stop entries and good risk-to-reward setups. If you prefer swing trading, consider using options to buy premium. The beauty of options is that you know exactly how much you have at risk – usually the entire premium. This provides you with staying power – you are less likely to get shaken out. It doesn’t matter if the market gaps against you. The most you can lose is the size of your premium. This is why you manage risk in options via proper position sizing. If you assume your risk is x, you will either lose x if wrong or make multiples of that if right. 

The tape remains volatile with a clear distribution under the surface. Most of the momentum stocks that had held relatively well in the past few weeks are getting hit one by one. If you are hiding in names showing relative strength, it hasn’t been working that great in this choppy tape which tells me that this correction might have more downside room. The stocks that are outperforming on green market days tend to be the ones from the bottom of the pit or highly-shorted names. We should see leaders starting to outperform if the correction is coming to an end. Many of the leaders are usually on my Momentum 40 list.

Try my subscription service which includes a private Twitter 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 have done.

I published a new trading book recently (2023). Check it out on Amazon.

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