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MarketSmith powers the charts in this video

I don’t remember the last time the Fed chairman spoke and the market didn’t tank. Turns out Powell is seeing and acknowledging the same thing the market is – inflation might be slowing down so there are enough reasons to slow down the pace of hikes as soon as December. The market liked what it heard and staged a massive rally on Wednesday. 

The S&P 500 is less than 2% from its 50-week MA, which has been a major resistance during the correction this year. Going and starting to trade above it would be a significant event from a technical and psychological point of view. Obviously, we are not there yet and this bounce might turn out to be just another shorting opportunity, especially if the Fed is hawkish during its last FOMC meeting for the year on December 14. What matters right now is that we see more stocks from various industries break out and set up for potential breakouts. The dip buyers seem in control. Even the strong payroll report last Friday was insufficient to stop the bull run. 

Here are a few industry themes that are currently standing out:

Solar stocks continue to show notable relative strength. ENPH tested its 10 and 20-day EMAs multiple times in the past few weeks, only to finally break out on Friday. If it doesn’t fail next week, other solar stocks are likely to join the rally – SEDG, SPWR, RUN, ARRY, etc.

The sentiment towards Chinese stocks might have changed. All the news about protests in China and Chinese ADRs have been gapping up almost every day last week. It could be just a temporary short squeeze or the foundation for something bigger. The Chinese tech ETF, KWEB is back above its 50-week moving average for the first time since April 2021.

Speaking of 50-week moving averages, the biotech ETF $XBI  is finally back above it. This is an important indicator of risk appetite and can have significant implications for fear of missing out in December. Some biotechs to keep an eye on: AXSM, PRTA, MRTX, VRTX, REGN, NBIX, AMLX, HRMY, HALO, etc. 

One of the factors that might cool the market enthusiasm down is the potential escalation of the war in Ukraine. The market is expecting that something might happen as defense stocks broke out across the board on Friday – BA, LMT, NOC, etc. Steel names have been rising too – STLD, NUE, X.

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MarketSmith powers the charts in this video

The market had its bounce in October and so far in November and SPY is back to its declining 200dma. Can we see some chasing and FOMO in December or will more selling follow? No one really knows. There are good arguments for both scenarios. I want to remain open-minded and trade the setups that show up instead of guessing the market direction. 

Most breakouts have not been following through lately unless there is an immediate earnings catalyst. Such price behavior reveals a lack of urgency to own and chase in this market. In the meantime, some strong stocks have consistently accumulated on dips to potential support areas. The solar stock ENPH is a prime example. Every single breakout attempt has been met with fierce resistance, yet every pullback to its 10 or 20-day EMA has been scooped up. 

My philosophy is that the market is forward-looking. It constantly tries to look 6-9 months ahead in the future and imagine what could happen. Take for example the price action in Zoom (ZM) – it has been declining for many months while its earnings and sales have been still impressive. Just now, we are starting to see a slowdown in their growth. The market anticipated that and acted accordingly. Price action has been a good leading indicator. Or take into account the market reaction in retailers this earnings season. The vast majority of them reported dismal numbers and yet, we saw rallies that seemed a bit counterintuitive. The market is seeing the potential for a recovery that is not reflected yet in those companies’ earnings. The former are forward-looking, and the latter are backward-looking. I rather trust price action than current earnings growth.

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MarketSmith powers the charts in this video

It seems the market is worrying about something different every week. Three weeks ago was about high inflation. Then after the lower-than-expected CPI print, about missing out on a potential rally. Last week, it seems the new worry was about the implications of a potential recession in 2023. We went from “bad news for the economy is good news for the stock market mantra” because it means the Fed might pivot earlier to “recession might not be fully priced in the stock market yet”. None of these things are relevant if you are a short-term trader.

Large caps QQQ and SPY tested their 10-day EMA and bounced. Small caps IWM tested their 20dEMA and bounced. It is normal to see some form of consolidation after the post-CPI ramp. The pullback in the past week has helped many stocks to form setups with better risk/reward entries. I see some intriguing setups in biotech and energy. That’s what matters. We don’t know if those setups are going to work but at least they exist. Most breakout attempts didn’t work last week, probably because of the general market weakness. Buying pullbacks have worked a lot better lately.

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary and actionable swing, intraday, and position trade ideas, the Momentum 40 list of market leaders, and much more. See some of the recent testimonials.

PERFORMANCE

Here’s a Google spreadsheet tracking all closed options and stock ideas shared on my private Twitter stream and emails for subscribers.

Check out my free weekly email to get an idea of the content I share with members.

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