Markets continue to test near the highs

The markets tested for the third day as investors continue to test the move higher. The move is still reasonable to the overall outlook for the broad markets. Mr. Powell testified before Congress reiterating the need to hike interest rates in order to control inflation, noting we have a long, long way to go. The indexes held above the 10-day MA showing we are still in a position to bounce from the test of the highs. The S&P 500 and the NASDAQ were lower on the day. The SOXX closed below the 10-day MA but held support at the $486.87 level… watching how that unfolds as one of the key leading components of the broad market. The challenge for investors remains the data and with the second quarter coming to an end the attention will turn to earnings… and based on expectations it could be a bumpy ride. The last three days show a topping on the chart and we will see how this unfolds near term. Keep your stops in place and let it unfold one day at a time.

The day showed some volatility intraday as headlines and nerves pushed some money to the sidelines. The weakest sectors were IYZ, XLK, and XLY. The upside was led by XLU. We continue to see the jockeying of money as rotation remains in play. Bitcoin was a big benefactor again on the news that Blackrock and Greyscale are pushing for the SEC to allow for a benchmark ETF based on the spot price. ETHE was up 3.6% following a 16.5% move on Tuesday. Six of the eleven sectors closed in positive territory on Wednesday. The S&P 500 index closed down 0.5%. The NASDAQ was down 1.2% with SOXX down 2.4%. Small Caps (Russell 2000) were down 0.2%. The ten-year treasury yield closed at 3.72% flat on the day. Crude (USO) was up 1.7%. (UGA) was up 0.2%. Natural gas (UNG) was up 4.2%. The dollar was down 0.4% as pressure remains on the buck. We are focused on managing the risk and seeing how investors respond to the revised outlook from the Fed.

ONE Chart to Watch: QQQ – 1) Moved below $366.14 negating the break higher. 2) Short-term trend is UP… starting from the January low. 3) Testing the 10-day MA. $357.44 is the level to hold near term. 4) Mr. Powell’s testimony to Congress again on Thursday 5) TQQQ $37.15 Monday. Stop $40.29 (Hit Stop) took a nice gain. 6) Watching for the new opportunity as it unfolds.

Additional Charts to Watch: SPY – Moved to new highs from March lows and tested at the 10-day MA. Manage your stops as the index tests the current move. IWM – broke from the trading range moving higher with entry at $178.95 (stop $184.45 adjusted)… need to clear $188.58. SOXX – moved back below the $497.61 level watching the near-term opportunity. Entry $492.65. Stop $510 (Stop Hit). USO – oversold… bottom reversal confirmed entry at $63.10… volatility on speculation about consumption. China’s usage of oil rises surprisingly considering the economic data… Supply and demand at work… watching how it unfolds.

Interesting Charts: UNG double bottom reversal?

ON TAP TODAY: 1) Overbought conditions seeing a test near term… looking for the upside to resume. 2) Mr. Powell testimony to Congress. 3) China was expected to provide stimulus and all that was offered was lower interest rates on borrowing… watching how that music plays out. FXI dumped 4.3% on Tuesday.

Previous Charts of Interest – Still in Play: AAPL (reversal confirmed). Added 5/7. Holding. AMZN (bottom reversal) Added 5/7. LABU (break up from bottoming range). Added 5/17. FNGU (breaking out). Added Tuesday 5/8. GOOG (Channel breakout). Added 5/9. Added to position 6/6. MSFT (break from flag pattern). Added 5/18. CSCO (bottom reversal… good earnings). Added 5/19. NFLX (test to $350 and bounce?). Added 5/24. AMD (consolidation top from a move higher). Added 6/6. AI (on test move lower). Added 6/6. DIA (break from consolidaiton). Added 6/8. HON (trading range breakout). Added 6/13. FCX (bottom reversal). Added position 6/13. KSS (breakout above resistance). Added 6/15.

Stops Hit: SOXX, TQQQ, ARKK, AMD, AI, all posted solid gains.

Quote of the Day: “Time is a great teacher, but unfortunately it kills all its pupils.” – Louis Hector Berlioz

The S&P 500 index closed down 23 points to 4365 the index was down 0.52% with below-average volume on the day. The index moved back below 4400 and watching how the test unfolds. Managing the risk of extended move near term. SIx of the eleven sectors closed higher on the day with utilities as the leader up 0.5%. The worst performer of the day was telecom down 1.8%. The VIX index closed at 13.2 as it inched lower despite the downside move in the index. The uptrend from the October low remains in play.

Sector Rotation and the S&P 500 Index:

XLB – Basic Materials ‘V’ bottom on the chart trying to break above resistance $81.75. Solid week for the sector up 3.5% for the week. Testing the move higher.

XLU – Utilities Bottom reversal in play with the downtrend as the next resistance. The sector was up 1.7% for the week.

IYZ – Telecom downtrend from the February highs and moved higher from the bottoming range. The sector was up 3.1% for the week. Down 3.4% last two days and testing previous lows.

XLP – Consumer Staples broke up from the bear flag pattern and posted a solid week. The sector was up 2.1% for the week. Down and testing support.

XLI – Industrials The trend broke to the upside breaking above resistance at the $102.40 level. The sector was up 3% for the week. Big test and bounce.

XLV – Healthcare Bottom reversal in play $130.68 level cleared The sector was up 1.3% for the week. XBI, IHE, IHF, and IHI all bounced. Tried to break higher through resistance… patience. Held $130.68 support.

XLE – Energy bounced at the lows along with crude. The sector was down 0.5% for the week. The downtrend is in play from the November highs. Needs to clear $82.70 on the upside. DO, RIG, PTEN, SWN, RRC to name a few movers.

XLK – Technology The sector broke from the trading range clearing the $154.42 resistance and going vertical climbing to new highs. The sector was up 4.3% for the week. Providing leadership for the broad index.

XLF – Financials cleared $3350 resistance and trying to clear the 200-day MA. The sector was up 1.3% for the week. The trend is down from the February highs. Banks are the key to the outlook.

XLY – Consumer Discretionary Broke higher and continues to trend higher as one of the key leaders. The sector was up 3.2% for the week. Topping?

**Citigroup warned that credit card spending trends are slowing… they noted that travel and entertainment are slowing more than other areas. That is something to watch in the trendlines of those sectors. PEJ.

IYR – REITs the trend is sideways with an attempt to break higher. The sector was up 1.8% for the week. The negative influence of interest rates and reports of vacancies in commercial rentals are rising but money flow has increased to other areas of the sector.

Summary: The index continues to see some profit-taking as investors eye data points on the economic outlook and earnings. Six sectors closed higher on the day… breadth contracted again as the laggards pulled back to their respective support levels. Remains a sector-driven market. The broad index remains in an uptrend from the October lows with some interim testing currently. Taking what is offered near term and letting it all unfold. Remember two things; first, the trend is your friend, and second, don’t fight the Fed.

(The notes above are posted at the end of each week based on activity from the previous week’s trading. The BOLD/ITALIC comments are the current-day changes worthy of note.)

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

The NASDAQ index closed down 165 points to 13,502 as the index was down 1.2% for the day. The index remains in the uptrend with some testing near the highs. Support is 13,274. Watching how the trend unfolds short term. SOXX was lower on the day breaking the 10-day MA. IGV fell testing the $335.68 support. Taking what is offered long and short.

NASDAQ 100 (QQQ) was down 1.36% with the mega caps lagging on the day. Some testing at the near-term highs. The move is overextended plenty of chatter in the headlines about being overpriced. The sector had a negative bias with 30 of the 100 stocks closing in positive territory for the day.

Semiconductors (SOXX) The sector moved higher the first three days of the week and took a break. The sector was up 4.2% for the week. Watching how it unfolds and the next opportunity. Broke support $497.61 watching $473.23 as support.

Software (IGV) Broke above the $336 resistance adding to the uptrend. Added IGV $291. Stop $335.90 (adjusted). The sector was up 5.1% for the week. Impressive week for the large-cap portion of the sector. Testing support at $336 level. Topping patterns in the underlying stocks… looking for a bounce back to the previous highs and what opportunities are presented. NVDA, AMD, AMAT, TSM, MCHP…

Biotech (IBB) The sector moved back above the $128.35 level. Attempting to break the downtrend from the January highs. The sector was down 0.4% for the week. Fell to support.

Small-Cap Index (IWM) lagging overall but did manage to break from the trading range… only to start a new one. Looking for follow through to the move. The sector was down 0.8% for the week. Letting it unfold. Testing near term.

Transports (IYT) Made a break higher from the trading range and cleared the $234 resistance. The sector was up 4.4% for the week. The end of the port strikes on the west coast offered some life. Watching the test.

Thursday: Tentative agreement on the west coast port stoppage and strikes. The challenge is getting $5.2 billion of backed-up cargo in containers and trucks to start moving again. 14 days doesn’t sound like much but to clear the backlog it could take months. IYT was up 1.2% on the news. Watching the break higher.

Friday: UPS is going on strike if they don’t get a new contract by July 31st.

The Dollar (UUP) The dollar remains volatile and turned over on comments from Treasury Secretary Yellen. What is on the horizon? Weak dollar policy from the current administration. The dollar was down 1.1% for the week. More chatter about losing dollar status globally.

Yellen says to expect a gradual decline in the dollar’s share of global reserves… amazing how between Obama and Biden the dollar has deteriorated.

Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.76% up from 3.74% last week. Rates are reacting to the FOMC meeting and how the Fed acts in the coming month. TLT was up 0.6% for the week.

Crude oil (USO) Remains in a short-term downtrend but it did manage to bounce off the lows. The pressure will be on the upside longer term… watching how the short term unfolds and what opportunities are offered. USO was up 1.4% for the week. Wednesday bounced on demand rising in China.

Gold (GLD) The commodity is moving sideways with the dollar down on the week. Letting this unfold and watching for some upside in the metal. The metal was down 0.2% for the week. Broke support on Tuesday and watching how it plays.

Questions to Ponder: Navigating Uncertainty

Stagflation – is defined as persistent inflation combined with stagnant consumer demand and relatively high unemployment. Do we have this situation currently in the US economy? If it doesn’t exist in a purely technically defined way, it is creating the same economic environment currently in the US, and the current administration is in denial. Thus, we will continue to feel the effects of this until we change course. Layoffs from early 2022 to current continue… Bankruptcy filings are not slowing as the hit the fastest pace since 2010. War – Costs… Ukrain/Russia endless war isn’t good for the US economy. Inflation is here 1970’s style. Markets are giving the Fed cover to hike again with the surge in technology stocks. Although the leadership is narrow. Things are not as good as they seem on the surface.

Port of Los Angeles and ports up the west coast staging strikes… watch the supply chain issues this creates looking forward… that will equally impact inflation. Strikes were settled on Wednesday… now we see what ramifications it will cause from the stoppage.

Janet Yellen has been on the financial stations talking about more “consolidation” in the banking sector. Under normal circumstances we would view that as mergers and acquisitions… but, it seems like she is talking about a takeover relative to the failure of more banks. Despite that outlook, banks have rallied more than 12% in the last week. Take what is offered but manage your risk accordingly.

FINAL NOTES:

Our longer-term view is still negative, but nothing goes straight down or up… there are always positive and negative swings in a longer-term trend. A look at the daily chart from the October lows validates exactly that premise with the trend higher overall but plenty of volatility along the way. With the trend higher for more than six months it puts the broad indexes in intermediate uptrend… this is a positive overall for the broad markets. We remain focused on short-term trades based on the short-term volatility and until there is longer-term directional clarity we remain with our current approach. Trading the volatility has performed better than holding through the cycle. Sector-driven activity is in play short term with broadening leadership. The breadth did improve over the last few weeks and that supports the current trend continuing. News has been in the driver’s seat as we take positions that are technically moving and offering opportunities. The key remains, know where you are now, know what is happening now, and know what is on the horizon… act accordingly. The goal now is to manage the risk of positions, take what is offered… short or long, and then manage your money.

Wednesday: The charts show some topping last three days. Technology remains the leader along with consumer discretionary. Six sectors managed to close in positive territory. Bitcoin was the story again gaining more than 3% on the ETF news from Blackrock. Trading the trends on sectors showing strength and weakness… We see the overall trend is still up from the October lows. Major indexes have moved higher on the mega-cap moves and technology. Watching where money is going near term for clues of what is on the horizon. Watching how that unfolds going forward. Manage the risk that is and let the current trend play out.

What I am watching on Thursday: 1) Continued test of the recent move higher. 2) SOXX testing lower… 3) Leadership lagging… how long, how much? 4) GLD, SLV, lagging… weaker dollar on the chart could spark an upside in the metals. GLD break of support? Downside in play or temporary? 5) Crude moved higher… watching resistance. XLE moved higher as well.

Decide what you’re doing before the market opens based on your beliefs. Entry. Exit. Target. Define the risk of the position. Nothing more… Nothing less.

“Vision without action is a daydream… Action without vision is a nightmare.” Japanese proverb

The goal of these notes is to allow you, the investor, to learn how to see the market development as the progression through the sector develops based on news, speculation, and data. Data drives long-term results and develops trends… speculation and news are short-term drivers and offer higher risk trading opportunities. Through the use of both technical and fundamental data, we can have greater confidence in our trading strategies with a disciplined approach to investing and managing the risk of our money.

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