Admit When You're Wrong: Know When to Exit

Every successful trader and investor I've encountered over my years in the financial industry has one key trait in common: they know how to admit when they're wrong. Let that sink in for a moment.

The ability to recognize and accept when a trade or investment isn't working out as planned is crucial for long-term success in the markets.

As a technical analyst, I firmly believe that charts hold the key to making informed decisions. Learning to read and interpret charts is relatively straightforward; the real challenge lies in actually following through with what the charts are telling you. This is where the concept of risk management and exit strategies comes into play.

Approaches to Exit Strategies

There are three primary ways to think about stops or exit strategies from a technical perspective: a correction in price, a correction in time, or something more advanced based on factors like volatility. Most approaches fall into the first two categories, with price-based stops being the most common.

Price-Based Stops

The simplest form of a price-based stop is a percentage stop. Take the legendary investor William O'Neil, for example. He advocated for a flat 8% stop, meaning that if a position moves against you by 8%, you exit without question. This approach is effective because it's easy to understand and follow, and it helps limit losses. Remember, all large losses begin as small losses.

How To Avoid Confirmation Bias

Using Technical Levels as Stops

Another price-based approach is to use specific technical levels, such as swing lows or Fibonacci retracements. By placing a stop at a recent swing low, you can ensure that your position remains intact as long as the uptrend continues. Fibonacci retracements, like the 38.2% level, can also serve as potential exit points if the price breaks below them.

Moving Averages as Exit Signals

Moving averages, like the 50-day or 200-day, are also popular among technical traders. If a stock that has been in a consistent uptrend falls below its 200-day moving average, it may be time to consider exiting the position.

Advanced Price-Based Stops

More advanced price-based stops include indicators like the parabolic SAR system or the chandelier exit strategy. The latter, developed by Chuck LeBeau, uses average true range (ATR) to adjust the stop dynamically based on volatility. As the price moves higher, the stop is bumped up accordingly, helping to lock in gains.

How to Design a Market Trend Model

Time-Based Stops

Time-based stops, on the other hand, focus on the duration of a trade rather than the price movement. If a position hasn't moved in the expected direction within a certain number of price bars, say 12, it may be time to exit. This approach, popularized by Tom DeMark, is based on the idea that if a signal hasn't played out as anticipated within a specific timeframe, it probably wasn't a great signal to begin with.

Listen to the Charts

Ultimately, the most important thing is to listen to what the chart is telling you. As Justin Mamis once said, "If the stock isn't doing what you expect it to do, sell it." Technical analysis is about identifying patterns and configurations; if the chart indicates that your thesis isn't working out, it's crucial to acknowledge it and act accordingly.

The key to successful trading and investing lies not in being right all the time, but in knowing when to admit you're wrong. By employing a well-defined exit strategy, whether based on price, time, or a combination of factors, you can effectively manage risk and preserve capital. Remember, the markets are always sending signals; it's up to you to interpret them and make informed decisions based on what the charts are telling you.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

August 2024 Market Update: Sentiment Indicators Point to Extended Decline

The equity markets are experiencing a choppy August 2024, leaving investors uncertain about the future. Are we headed for further declines, or will we see a recovery from recent pullbacks? Today, we’re looking into three crucial market sentiment indicators, each suggesting potential weakness.

Setting the Stage: Understanding Market Sentiment

Market sentiment plays a pivotal role in determining the direction of equity markets. By analyzing various sentiment indicators, investors can gauge the collective mood and potential future movements. Let's explore three key indicators that currently suggest caution.

A personal favorite workshop that has been a huge help in understanding the shifting leadership trends in 2024: Five Favorite Breadth Indicators

The VIX: A Classic Volatility Measure

Our first indicator is the VIX, which reflects market volatility derived from options markets. This week, the VIX spiked over 65, marking the third-highest reading since the Great Financial Crisis of 2009. To put it in perspective, the COVID low in 2020 saw the VIX in the mid-80s, but readings above 60 are rare and typically signal significant pullbacks.

• VIX Insights: A VIX above 15 implies a shift from bullish conditions to a slight pullback, while readings above 20 suggest a 5-10% corrective phase. The recent climb above 60 could signal a more substantial and prolonged market decline, indicating that investors should brace for potential turbulence ahead.

The AAII Survey: Individual Investor Sentiment

Next, we consider the AAII survey, a critical gauge of individual investor sentiment. This weekly survey measures opinions on whether respondents are bullish, bearish, or neutral about the market for the next six months. Historically, a bullish reading above 50% indicates euphoric optimism, often preceding a market pullback.

• AAII Survey Dynamics: About four weeks ago, bullish sentiment spiked above 50%, serving as a red flag for potential corrections. Currently, bullishness has dropped from 52% to 40%, while bearish sentiment has risen from 22% to 38%, suggesting a growing pessimism. This shift indicates that investors are becoming more cautious, hinting at a potentially tradable low. However, it’s essential to wait for signs of accumulation before making any decisive moves.

The NAAIM Exposure Index: Professional Insights

Finally, we turn to the NAAIM Exposure Index, which tracks sentiment among professional money managers. Unlike the AAII survey, this index gauges how aggressively professionals allocate to equities.

• NAAIM Exposure Trends: Just like an AAII bullish reading above 50% signals euphoria, NAAIM readings above 100% indicate excessive leverage and optimism among money managers. Five weeks ago, this index was just over 100%, suggesting extreme bullishness. Since early July, however, there’s been a noticeable shift, with money managers reducing their equity exposure from leveraged long positions to more neutral or slightly underweight stances. This pivot toward a defensive posture suggests professionals are preparing for further declines.

Conclusion: Cautious Optimism or Further Decline?

In summary, the three sentiment indicators we examined—the VIX, AAII Survey, and NAAIM Exposure Index — each suggest potential market weakness ahead. Elevated VIX readings, shifting sentiment among individual investors, and money managers lightening their equity positions all indicate a possible extended pullback. While these indicators provide valuable insights, it's crucial to watch for signs of accumulation and a break above key levels to confirm any market recovery.

Check out our Community Board Discussions on the current market shift.

What market sentiment indicators do you follow and use? Do you rely on any of those discussed here, or are there others you consider essential? Share your thoughts in the comments below! Also, feel free to suggest any other technical indicators, market sentiment gauges, or behavioral or technical ideas you’d like me to explore in future posts.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Insights on the VIX and Market Trends

I've got some pretty wild news to share with you about the VIX. This week, the VIX shot up past 65, a level we've only seen twice in the last two decades. Can you believe it? Let that sink in for a sec. This is a big deal, and it's telling us that investors are seriously on edge about where the market's headed in the near future.

Historical Context: Lessons from the Past

Now, as a market technician, I always like to take a step back and see how things compare to the past. The last couple of times the VIX hit these crazy high levels were during the COVID crash in 2020 and the financial crisis back in 2008-2009. In both cases, the S&P 500 took a serious beating before eventually hitting rock bottom and bouncing back.

Sure, the VIX has cooled off a bit since then, settling below 40 and hanging out in the low 30s as of now. But here's the thing: when the VIX is above 20, that's a red flag telling us that fear and uncertainty are running high. And when it's above 30? That's when we know we're in the middle of a full-on correction, just like those nasty drawdowns I mentioned earlier.

Other Key Indicators to Watch

But wait, there's more! The VIX isn't the only indicator that's waving red flags at us. I've got my eye on a couple of other key indicators, like high-yield option-adjusted spreads and how defensive sectors are performing.

High Yield Spreads

When high-yield spreads start widening, it's a sign that bond investors are getting cold feet and becoming more risk-averse. And guess what? When you plot the VIX and high-yield spreads together, it's like they're dancing the same dance - when spreads widen and the VIX spikes, the S&P 500 usually takes a tumble.

August 2024 S&P 500 Outlook: What Lies Ahead?

Defensive Sectors

On top of that, defensive sectors like utilities, consumer staples, and real estate have been killing it lately. This tells me that the big money managers are bracing for impact and shifting their portfolios to safer bets.

What This Means for the Market

So, what does all this mean? Well, when you put all these pieces together - the spiking VIX, widening credit spreads, and defensive sectors outperforming - it paints a pretty clear picture of a market that's hunkering down for some rough times ahead. These are the classic signs of a potential market top, which I talked about in one of my recent videos.

Check out our workshop: Momentum Matters: How the Pros Use RSI

Navigating Options Market Changes

Now, I know the options market has been through some changes lately, with things like zero-days-to-expiration options and crazy liquidity shaking things up. That's why we can't just rely on one indicator like the VIX - we've got to look at the big picture and stay on our toes.

Based on what I'm seeing and how things have played out in the past, I wouldn't be surprised if we see the market take a few more punches, possibly hitting a major low in September or October. It's like déjà vu because we've seen this movie play out so many times in the last 5-10 years.

Join Our Community for More Insights

Listen, if you're feeling a bit lost in all this market craziness, I've got your back. Come check out my Market Misbehavior Premium Membership, where I'll give you the inside scoop on how to spot market tops and bottoms, and how to position your portfolio to come out on top.

Until next time, keep your head up and your eyes on the charts!

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

August 2024 S&P 500 Outlook: What Lies Ahead?

It's time again for a choose-your-own-adventure style analysis of the S&P 500!

The S&P and Nasdaq have experienced one of their worst weeks in 2024. What happens next? Let's break it down with four probabilistic scenarios — an exercise I recommend doing quarterly to stay ahead of market shifts.

Here's a look back at what happened in late April when we last did this exercise. We considered four scenarios: super bullish, mildly bullish, mildly bearish, and very bearish. Interestingly, scenario one, the super bullish, perfectly matched the S&P 500 movements. Growth returned to a leadership role, with the strength in the Magnificent Seven stocks leading to a rise in the major benchmarks. Now, will something similar happen in August? Let's examine.

Scenario One: The Super Bullish

In this scenario, much like what we saw from late April to early June, things start dire but ultimately head upward. The Magnificent Seven stocks, like Meta, Alphabet, Amazon, Apple, and Microsoft, would need to reinitiate their trends. Dip buying would have to come into play, especially for semiconductors like Nvidia and AMD. Technically, this could mean a new all-time high in August and talk of the S&P 500 surpassing 6000 by year-end.

Chech out our webcast on Three Steps to Every Signal.

Scenario Two: The Mildly Bullish

This scenario suggests we don't lose more ground or gain significant levels. Mega-cap names like Amazon and Alphabet hold their ground but don't return to leadership roles. Other sectors, such as industrials, materials, and financials, do the heavy lifting. The market would remain in a choppy sideways range between 5400 and 5650.

Scenario Three: The Mildly Bearish

Here, the pullback isn't over, and we see an eight to ten percent correction down to the 5100-5200 range. The Fibonacci support level holds, and while sectors like energy and materials might do well, big tech and consumer discretionary names struggle, but it's not a full-on risk-off environment.

Scenario Four: The Super Bearish

This involves a severe market deterioration. The downtrend accelerates, gaps down continue, and there’s no substantial buying of weakness. Investors sell strength, pushing markets lower and triggering more selling — a waterfall decline. This could lead us to break below the 200-day moving average, trending towards 4700.

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Think about these scenarios and the macroeconomic factors at play, especially with the Fed's upcoming decisions. A rate cut could provide upside, but inflation concerns could bring bearish actions. Also, remember the seasonal patterns. Historically, August and September aren't the best months for the market!

Which scenario do you see as the most likely? Watch the video, then drop a comment and let me know!

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Anatomy of a Market Top: Lessons from Domino's Pizza

Let's dive into an intriguing case study to kick things off—Domino's Pizza Group (DPZ). It's a stock that's recently made headlines for all the wrong reasons, gapping lower this past week and serving as a textbook example of a distribution phase. But why is this case so enlightening, and what can it tell us about the broader market trends, particularly the S&P 500? Stick with me, and we'll break it down.

What Is a Market Top, Anyway?

Before we jump into the specifics of Domino’s, let's make sure we’re all on the same page about a market top. Essentially, a market top is where a stock transitions from an upward trend (accumulation phase) to a downward trend (distribution phase). This is more than just a temporary dip; it's a significant shift signifying that the buying power is dwindling and selling pressure is taking over.

Check out our recent discussion on what should be included in your Market Top Checklist!

Why Domino’s Pizza?

So, why focus on DPZ? Domino's hit a peak in April this year, driven initially by what can be described as an "exhaustion gap." After a remarkable run, the stock surged up one final time, much like a marathon runner gasping for that final breath at the finish line. Unfortunately, while we retested those April highs in June, we never actually moved higher. In fact, things started to fall apart in late June and early July. Domino's ended up gapping lower this week, plummeting below its 200-day moving average, and dropping around 13.5% on Thursday alone.

Now, was this surprising? Not if you've been paying attention. The signs were all there. Let’s dissect the anatomy of this market top to uncover those telltale signals.

The Transition from Accumulation to Distribution

First, recognize the phases. An accumulation phase is marked by higher highs and higher lows, showing that buying power is outstripping selling pressure. On the other hand, a distribution phase is characterized by lower lows and lower highs, indicating that selling pressure is taking over.

In the case of DPZ, the accumulation phase was visible all the way through the start of this year. Higher highs, higher lows, prices comfortably above upward sloping moving averages, and strong momentum—all checked out.

Around late April, however, a different picture began emerging. We saw the first red flag: Domino's failed to make a new high. Then came the next crucial indicator—the breakdown below the previous swing low. By early July, it was evident that the pattern had shifted. The stock dipped below its 50-day moving average, which started to slope downwards. These were clear signals that the accumulation phase was over, making room for the distribution phase.

When looking at the current top, we should consider the Ten Questions Every Investor Should Ask before changing strategy!

Momentum Makes Its Move

Another critical factor to examine is the momentum. During the accumulation phase, the RSI (Relative Strength Index) for DPZ showed consistent strength, rarely dipping below 40. But in early July, we saw the RSI fall under 40, confirming the change in momentum. Essentially, when the RSI drops from above 50 to below 50, it tells us that down days are starting to outstrip up days. And in a distribution phase, that’s a sign of investors starting to sell off.

Connecting the Dots: The S&P 500

So, why should this DPZ lesson matter to you? Because it could offer a preview of what might happen to the S&P 500. Right now, the S&P 500 hasn't yet shown the exhaustion gap or the significant breakdowns that DPZ has, but certain conditions appear worryingly similar. We're potentially at the end of an upward phase. To keep an eye on broader market indices like the S&P or QQQ, ask yourself: Is the index failing to make new highs? Is it breaking below recent swing lows? Has the 50-day moving average started to trend downward? Is the RSI weakening?

The Bottom Line

Understand these indicators, and you'll put yourself in a much better position to navigate market tops, whether you're looking at individual stocks like DPZ or broader indices like the S&P 500. The clues are there—start watching for them.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Price Patterns: A Case Study on Amazon's Breakout

Before we get into the nitty-gritty, let's set the stage. Amazon, synonymous with innovation and global reach, has been a titan in the stock market. Just recently, we discussed Amazon alongside Meta and Alphabet as key stocks to watch in July. But the big question is, how can one accurately play the patterns these stocks exhibit? Here's what you need to know about the three steps to every price pattern, using Amazon as our prime example.

Identifying the Setup

The first step in any price pattern is called the setup. Picture yourself scanning the chart of Amazon. Over the past twelve months, it's been generally bullish, staying mostly above two upward sloping moving averages. However, from April to June, the stock stalled out around $190 per share—a key point we'll revisit. This is the setup phase.

Notice that the price hovers around $190 multiple times—in April, May, and June. Such repetitive touchpoints, known as pivot points, help in establishing a resistance level. The setup phase, therefore, is when your eyes tell you there's a pattern forming. For Amazon, repeatedly testing the $190 share price hinted at a potential ascending triangle pattern.

Getting to the Trigger

This step is where many novice analysts falter. Impatience often leads them to bet immediately on a suspected pattern, risking false breakouts. The trigger, the second step, is the confirmation moment—the point at which the pattern proves its validity. In classic technical analysis literature, this is essential.

In Amazon’s case, the trigger happened when the price finally closed above the $190 resistance level after multiple touch attempts. This breakout was pivotal, turning the "potential ascending triangle" into a confirmed pattern. This step guards against making premature trades triggered by mere speculation.

Waiting for the Confirmation

Here’s where the rubber meets the road: confirmation. Many traders jump the gun after seeing the trigger, but experienced analysts understand the importance of waiting for follow-through.

Post-breakout, observed in Amazon's price crossing $190, the final step is to look for continuous momentum. What we saw was reassuring—additional buyers came in after the breakout day, pushing the price upward to around $200 per share. This follow-through confirmed the breakout wasn’t a fluke but a solid upward momentum.

Why Following the Three Steps Matters

Think of these three steps—setup, trigger, and confirmation—as a foolproof way to navigate stock trading, especially for those just dipping their toes into technical analysis. Practicing patience and waiting for all three steps can safeguard your capital from hasty decisions. Ignoring any part of this trifecta can lead to false assumptions and financial pitfalls.

So, the next time you analyze a chart, remember to identify the setup phase first. Don’t rush; wait for that trigger moment to validate your suspicion. And finally, look for the necessary confirmation that the movement is here to stay. These steps can transform your approach to technical analysis, turning mere speculation into informed trading.

Investing is not just about finding patterns—it’s about understanding them. Be well, stay safe, and happy trading!

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

How the S&P 500 Could Continue Higher Without NVDA

Before diving into this analysis, let's pause and consider a highly pressing question: Can the major equity benchmarks move significantly higher in July without Nvidia? The intuitive answer might be "no" given Nvidia's phenomenal performance, but let's dig a bit deeper.

We'll explore why I believe the answer is "yes." We'll also delve into the roles of some other top-performing names like Super Micro Computer and the importance of breadth conditions as we move into one of the seasonally strongest months of the year.

Nvidia and SMCI have both had impressive runs this year. Super Micro Computer, for instance, saw gains of almost 200% year-to-date, and Nvidia wasn't far behind, up 150%. These are incredible numbers by any measure, but neither stock is indispensable to the broader market's upward trajectory. Even as these stocks pull back from their all-time highs, the S&P 500 is testing new peaks.

Now, you might assume that such stellar performers would continue to lead the charge, right? Well, not so fast. The reality is that many top-performing names have shown signs of weakness. For instance, although Super Micro Computer made its all-time high in March, it has pulled back since then. Similarly, Nvidia experienced a rough couple of weeks recently, shedding about 17% from its peak over just a few days. This volatility underscores that even top names can face significant pullbacks.

So, how do we make sense of a market where the big guns are faltering but benchmarks continue to rise?

The answer lies in the broader breadth conditions. While long-term breadth indicators like the McClellan Summation Index remain bullish, there's a mixed picture in the short term. Approximately 70% of S&P 500 members are above their 200-day moving averages, indicating a general primary uptrend. However, the percentage of stocks above their 50-day moving averages is essentially a coin flip at around 50%. This dichotomy reveals a market that is at once robust and fragile, presenting both opportunities and risks.

What should you do in such a mixed environment? My advice is to stick with strength. Focus on stocks that are still trending upward and maintain their constructive patterns. As you assess market conditions going into July, it's essential to keep an eye on three leading mega-cap names. I call these the MAG stocks: Meta, Amazon, and Alphabet.

Meta

Meta has had its ups and downs but hasn't yet broken its highs from Q1 2024. The stock tested its peak around $525 in early March and retested it in April, but it hasn't broken through. The question for Meta in July is simple: Can it break above $525 and sustain that level? It’s not enough to flirt with resistance; Meta needs a decisive and sustained breakout to fuel further gains.

Amazon

Amazon presents an optimistic picture. It had a strong run through April 2024, consolidated around $190, and then broke out. However, the real test will be whether Amazon can hold above the $190 level. If it can, this could signal a sustainable uptrend.

Alphabet

Alphabet, or Google, stands out for its consistent performance, much like Eli Lilly. The key for Alphabet is to continue making new all-time highs and higher lows. This consistency is critical for maintaining investor confidence and driving the stock higher. Watching its RSI levels above 50 will give additional assurance of its bullish momentum.

To wrap up, the S&P 500 can indeed move higher without the sole reliance on Nvidia. The key lies in a diversified approach, focusing on other strong performers and analyzing breadth conditions. Do you agree with my assessment of the MAG stocks as bellwethers for the market in July? Let me know in the comments below, and share which of these stocks you think has the best potential.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Mastering Fibonacci Retracements: Analyzing Support Levels with Precision

Let's talk about one of the most intriguing aspects of technical analysis – Fibonacci retracements. This powerful tool, rooted in the famed “golden ratio”, can help traders identify potential support and resistance levels in stock prices. If you've ever looked at a seashell or a sunflower, you're already familiar with the beauty of Fibonacci sequences. Now, imagine applying that to your trading strategy. Excited? Good. Let's dive in.

Fibonacci Across Different Time Frames

When analyzing support levels, it's crucial to consider multiple time frames. For instance, take a look at the chart of the Nasdaq 100 ETF (QQQ).

You’ll notice a low in April, followed by a substantial rally to 460 in May, and then a rotation lower. In this scenario, recognizing potential support levels on the way down, such as the 38.2% level around $442, becomes indispensable for making informed trading decisions.

Fibonacci retracements aren't just a one-time application. You can and should use them across different time frames. Whether you're a day trader focusing on shorter terms or a long-term investor looking for broader trends, adjusting Fibonacci levels based on your time horizon is a must. Always consider combining multiple time frames to get a more comprehensive view of potential support and entry points.

FIBONACCI AND RISK MANAGEMENT

Why do Fibonacci retracements work? Is it magic? Not quite. These retracements align with market trends and investor sentiment. They're not a magical formula but a way to understand market psychology. When combined with other technical indicators like RSI, MACD, and PPO, they provide invaluable insights and confidence in identifying support and entry points.

Fibonacci retracements, similar to support and resistance levels, are leading indicators. This means they help anticipate potential price movements rather than reacting to what has already happened. For instance, consider the head and shoulders pattern in IBM. Accurately drawing necklines and interpreting these retracements can give you a heads-up on significant market shifts.

It's not just about identifying support levels but also about managing risk. Set a stop-loss strategy to limit downside exposure. For instance, if you detect potential downside for IBM, wait for a change of character before adjusting Fibonacci levels. Patience is key – wait for good setups and don't force trades.

Chart Analysis with Fibonacci Retracements

Major growth stocks like Apple, Microsoft, Nvidia, and the S&P are in a primary uptrend. Using Fibonacci retracements, you can assess potential support levels and downside targets once a peak is established. For example, by analyzing QQQ stock from the 2020 low to the late 2021 peak, you'll notice that the Fibonacci framework worked effectively. Extend these levels further to analyze potential downside targets during market downturns.

Always look for how Fibonacci retracement levels align with previous swing lows and other technical indicators like the 200-day moving average. This adds another layer to your analysis and helps validate potential trends. The fractal nature of Fibonacci retracements means they work just as effectively in both longer and shorter time frames.

The Perfect Marriage of Music and Psychology

Interestingly, Fibonacci relationships aren’t limited to trading. They’re prevalent in music composition, architecture, and nature, constructing a unique intersection of art, science, and psychology. The golden ratio (61.8%) and other secondary ratios like 38.2% are pivotal in this technique. These relationships, deeply embedded in our natural world, offer a structured approach to analyzing financial markets.

I first learned of Fibonacci retracements as an undergraduate music major at The Ohio State University. Little did I know I’d be using the same mathematical foundation to analyze stock prices!

Interactive Learning and Community Engagement

If you’re looking to upgrade your use of technical analysis tools like Fibonacci retracements, consider joining us as a Market Misbehavior premium member (and use the promo code FIBONACCI to receive a 20% discount on your first twelve months of membership!). Not only will you leverage tools to refine your trading strategies, but you’ll also be part of a community driven to enhance their understanding of market dynamics.

Remember, Fibonacci retracements are not a standalone tool. They should be part of a holistic approach to technical analysis. With the combination of various indicators, a good money management strategy, and a solid understanding of market psychology, you can transform your trading journey from being mindless to mindful.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Evaluating Trends in Semiconductor Stocks: NVDA & MU

Let's take a look at the market dynamics we observed last week, particularly focusing on the recent formation of bearish engulfing patterns on some key tech stocks like Nvidia (NVDA) and Micron Technology (MU).

Bearish Engulfing Patterns: What & Why

A bearish engulfing pattern is a technical chart pattern that indicates a potential bearish reversals in stocks. In simple terms, it means that the bearish sentiment is overtaking the bullish, which suggests that sellers are beginning to outweigh buyers.

Take Nvidia, for instance. Nvidia has shown an incredibly persistent uptrend, largely spurred by the AI-driven market frenzy we've seen throughout 2024. But last week’s sudden drop suggests something different. We observed a bearish engulfing pattern, which means the potential for a downtrend over the next one to three days is quite likely. This is somewhat concerning given Nvidia’s recent performance as a leading stock in the sector.

Similarly, Micron was down about 6% on Thursday, highlighted by a bearish engulfing pattern as well. Yesterday, Micron displayed a shooting star candle, a precursor to today’s engulfing pattern. For those new to candlestick patterns, a shooting star candle is an indication that the next couple of days are more likely to trend downwards.

Why Should We Care?

When stocks like Nvidia and Micron show these patterns, it's a signal that we need to start paying attention. These are not small players; they are barometers for the broader tech sector’s performance. As the Chief Market Strategist at StockCharts.com, I often remind investors that market behavior is a confluence of patterns, trends, and psychology. The emergence of these bearish patterns on tech giants means that a short-term cautious approach might be prudent.

The Broader Picture

Looking beyond individual tech stocks, the overall market trend remains compelling. The S&P 500, for instance, is still in an uptrend, marked by higher highs and higher lows, despite last week’s red ink. It’s essential to understand that one day of market movement doesn't spell doom, but it's a signal to watch for potential changes in trend.

There is also interest in how the different market cap tiers are performing. While mid caps and small caps managed to outperform the large cap indexes, there still remains a huge performance gap between mega cap leadership (“the generals”) and everything else (“the troops”). While the market can go higher driven by narrow leadership, a more sustainable advance would usually be marked by stronger breadth.

To Sum It Up

Bearish engulfing patterns on key tech stocks like Nvidia and Micron point to short-term caution but don't necessarily spell long-term disaster. The overall market remains robust, but various sectors are showing divergent trends. As always, the key is to stay informed, stay vigilant, and make decisions based on a comprehensive view of market indicators.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Forecasting the QQQ: Bullish or Bearish Paths?

The Nasdaq 100, represented by the popular QQQ ETF, has been on quite the journey so far in 2024. But the big question remains: what’s next? Will we witness a continuation of the aggressive bull phase that kicked off in April, or are we on the brink of a bearish rotation driven by lackluster breadth support and narrow leadership plaguing our major equity benchmarks?

When we last did a “choose your own adventure” style analysis for the QQQ in late February, the mildly bullish scenario was a nearly spot-on prediction. We projected a higher but slower rise for the QQQ, which indeed matched the reality almost perfectly up until mid-April. Following that, we closely aligned with our third scenario, hitting around the 410-415 range.

Now let's dive a little deeper and examine the potential scenarios for the QQQ over the next six to eight weeks.

Scenario 1: The Super Bullish Scenario

Imagine a scenario where the Nasdaq 100 continues its relentless climb from April with a steep and uninterrupted ascent. Key to this trajectory would be consistent growth led by the giants of tech—what I like to call the Magnificent Seven. We're talking about Amazon, Alphabet, Google, Meta, Microsoft, and Nvidia. These names, especially with the AI boom, need to maintain their impressive upward swing. For this scenario to manifest, we'd also need a dramatic improvement in breadth indicators, meaning a larger participation in the rally across various sectors.

Scenario 2: The Mildly Bullish Scenario

In this scenario, the Nasdaq 100 would still be moving upward but at a more tempered pace. The QQQ would aim to crawl toward but not surpass the 500 level. We maintain the leadership of the major tech names and continue asking questions about the Fed’s next moves or the implications of weak breadth support, but overall, the market inches higher. Here, the breadth conditions may still remain weak while the market is lifted primarily by mega-cap growth stocks.

Scenario 3: The Mildly Bearish Scenario

Picture this: we're at or near the peak for this cycle. Historically, summer months can often trigger major market tops, and this year could be no different. We see a drift higher in the QQQ, but the lack of breadth support catches up, and the leading tech names might start to take a breather. This scenario suggests a stealth correction where benchmarks appear weaker because of the pullback in dominant names. Stock pickers looking into industrials, energy, and healthcare sectors might find more appealing charts compared to the mega-cap tech stocks that have driven market sentiment in recent months.

Scenario 4: The Very Bearish Scenario

This is the scenario you probably don't want to consider but must. Here, we not only halt our upward momentum but break key support levels, undercutting the May low, and moving perilously close to the April low in the range of 410-415. This scenario depicts a deteriorating market, spurred by weak breadth conditions, negative economic indicators, and big tech names taking significant pullbacks. If June’s CPI numbers come in hot, sparking fears that the Fed hasn't tamed inflation as expected, the market could indeed spiral into a bearish phase.

So, which of these four scenarios do you see as the most likely? Will we see a tech-driven rally, or are we facing an inevitable correction?

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.