Top Ten Charts for October 2024: What I'm Watching and Why You Should Too

I’m going to walk you through my top ten charts to watch for October 2024. We’re covering a mix of sectors, investment ideas, and chart patterns—all of which, I believe, present compelling opportunities this month. Make sure you hit the video below for all the beautiful charts to support the discussion! Grab a coffee, settle in, and let’s explore some charts together.

1. Comcast (CMCSA): A Rounded Bottom Worth Watching

Starting with Comcast, which, to be frank, has been a "nothing burger" for much of the past six months. (Yes, that’s a technical term.) However, recently, this chart has started to look a lot more promising. Comcast is showing signs of forming a rounded bottom, meaning it’s transitioning out of a downtrend and stabilizing.

For several months now, it’s been hovering around $37, bouncing every time it tested that level. The big move recently was when the stock broke above its 200-day moving average. A sustained move above $41.50 would confirm that buyers are truly stepping in. If that happens, Comcast might finally be ready to start climbing.

2. AT&T (T): Consistent Uptrend

Next, we have AT&T—a chart that has made my top ten list consistently. AT&T is a classic example of a steady uptrend: higher highs, higher lows, and consistent performance. With a dividend yield of around 5%, it also offers income potential, which can be particularly attractive in a choppy October market.

The price remains above two upward-sloping moving averages, a good sign for continued growth. For anyone looking for stability, AT&T has been an excellent candidate, providing a strong backbone to portfolios during uncertain times.

3. Baidu (BIDU): A Revival with Chinese Internet Stocks

Baidu is next, and it’s a particularly interesting one given the recent policy changes out of China. With the Chinese government implementing easing measures, many Chinese internet stocks, including Baidu, have experienced an impressive rally. Baidu recently broke above its 200-day moving average—a significant event, as it had struggled to do this for over a year.

When the Relative Strength Index (RSI) moves above 80, we call it "the good overbought"—an indicator that the trend is still in play. Baidu is giving off those signals now. If it manages to hold above $100, this could continue to be a solid opportunity moving forward.

4. Spotify (SPOT): Riding the Uptrend

Spotify is another chart worth your attention. Unlike many other big names, Spotify has largely ignored broader market volatility and maintained a strong uptrend throughout 2024. It consistently bounced from its 50-day moving average, making it a great candidate for a "buy the dip" strategy.

If we see a pullback into the $320–$340 range, it might present an appealing entry point. Spotify’s chart resembles that of a bouncing ball—every dip is met with renewed buying enthusiasm, reinforcing its steady trend.

5. Meta Platforms (META): Assessing a Breakout

Meta Platforms is an important chart to monitor this month, especially considering its position within the broader "Magnificent Seven" tech names. After months of resistance around $540, Meta finally broke above this level, making a new all-time high.

Now, the real question is whether it can sustain that breakout. Holding above $540 will be key for continued gains. If it does, the uptrend could very well continue. However, if it falls back below this level, it could indicate a failed breakout, requiring a reassessment.

6. VF Corp (VFC): A Transition from Weakness to Strength

VF Corp is a compelling story of turnaround—a textbook example of moving from a distribution phase (decline) to an accumulation phase (buying). For much of the year, the stock was in a downtrend, but after hitting a low in April, we started seeing higher highs and higher lows. The breakout above the 200-day moving average and the subsequent strength have signaled a potential long-term accumulation phase. VF Corp is now innocent until proven guilty; as long as it remains in an uptrend, it deserves a spot on the watchlist.

7. Lennar (LEN): A Strong Case

Lennar represents an entire group that’s interesting to watch—the homebuilders. Lower interest rates are generally good for homebuilders, and Lennar is no exception. After a notable decline in 2022, Lennar has rebounded and maintained an impressive uptrend, bouncing from its 200-day moving average multiple times.

Recently, we’ve seen Lennar hit new highs above $170 and then use that level as support—a classic case of resistance becoming support. This sector might benefit further if interest rates continue to decrease, making Lennar a notable chart to watch in October.

8. Dentsply Sirona (XRAY): Bullish Divergence

Dentsply Sirona presents an example of a bullish momentum divergence, which is essentially a fancy way of saying that even though price was falling, momentum indicators were improving. This divergence often signals an impending reversal, much like when you try to hold a beach ball underwater—it eventually pops back up.

The stock has now moved back above its 50-day moving average and looks poised for further gains. The next step is to see if it can break above its July highs and its 200-day moving average, which would confirm a strong trend reversal.

9. Freeport-McMoRan (FCX): A Reversal After a Head and Shoulders Top

Freeport-McMoRan recently completed a classic head and shoulders top pattern, which initially suggested a decline—and that’s exactly what happened. The stock hit a target near $40, then rebounded. It’s now making higher highs and higher lows, indicating the potential for a new uptrend.

This is one of those textbook rotations that trend followers love to see. If we get a pullback and then a continuation higher, it could present a great entry opportunity.

10. Gold Miners (GDX): A Reliable Hedge

The last chart to discuss is GDX, the gold miners ETF. Gold has been a go-to hedge in times of uncertainty, and gold miners often perform well when the metal itself is in an uptrend. GDX has repeatedly found support at its 50-day moving average, making each pullback a buying opportunity.

If October proves as unpredictable as it often can be, GDX might be a great place to allocate some capital. As long as the uptrend remains intact, gold miners look like a solid bet.

Final Thoughts

These charts include a mix of long-term trends, potential breakouts, and interesting turnarounds, each offering unique opportunities depending on your risk appetite and investment approach.

One thing to keep in mind is that trend-following is all about observing where the momentum is and riding that wave for as long as it lasts. Like my mentor always said: "In an uptrend, you know we’re going up—just make sure we make a higher low." It’s about staying nimble, managing risk, and letting the charts tell the story.

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.

The Relationship Between Rate Cuts, Yield Curves, and Stock Prices

The Federal Open Market Committee (FOMC), commonly known as the Fed, made headlines last week with a 50 basis point cut to their target rate. This marked the first rate cut in several years and sparked one central question: is this move good or bad for stocks?

To be clear, it's a bit of both, depending primarily on your investment timeframe. Let's delve into historical trends, patterns, and the broader implications of such a rate cut on stock performance.

Understanding Historical Context and Market Reactions

First off, it’s essential to acknowledge that rate cut cycles are rare, happening only four times in the past 25 years. This rarity alone makes each cycle a significant event worth scrutinizing. These cycles correspond to prolonged economic periods and are secular in nature, rather than cyclical or tactical reactions. For long-term investors and institutions with extended timelines, understanding these patterns becomes crucial. So, what happens after the Fed's initial rate cut?

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Looking at past data, the S&P 500's response to initial rate cuts shows a mixed bag. In the long run, markets often rally, but the short-term scenario frequently portrays volatility. For instance, after the first rate cut in July 2019, the market continued its upward trend despite some turbulence and the subsequent chaos brought by the COVID-19 pandemic. This pandemic period was exceptional and disrupted many typical financial patterns, making it an unreliable reference for drawing long-term conclusions.

Earlier instances provide a clearer picture. Take the Great Financial Crisis of 2007-2009, for example. The initial rate cut in September 2007 signaled the start of a downturn that saw significant market weakening until the March 2009 low. Similarly, the tech bubble burst in early 2000 followed a different script. After the first rate cut in January 2001, the market held relatively stable initially. Still, subsequent rate cuts hinted at a deeper downturn, exacerbated by events such as 9/11, leading to an October 2002 low. These examples underline that while rate cuts might bode well for long-term growth, they often bring short-term instability.

Another critical factor in this equation is the yield curve. A normalized yield curve, where long-term yields exceed short-term ones, signals robust economic health. In contrast, an inversion (where short-term yields surpass long-term yields) indicates skepticism about future growth. Interestingly, the transition from an inverted to a normalized yield curve often precedes market sell-offs and potential recessions, as seen in 2001, 2007, and briefly in 2019.

Yield Curve Dynamics: A Double-Edged Sword

Is a normalized yield curve purely positive? Historical data suggests otherwise, at least in the short term. Each time the yield curve has normalized post-inversion, it has been followed by market downturns before economic stabilization. For instance, in 2001, the yield curve normalized only to see stocks sell off and a recession to follow. The same pattern occurred in 2007, and even in 2019, the brief normalization period preceded a market downturn driven by the pandemic.

So, normalization of the yield curve may seem bullish, but it often signals an impending turbulent period for the market. While long-term outlooks remain positive, with stabilization and growth expected after the recessionary phases, the short term is characterized by volatility and uncertainty.

An Eye on Long-Term Performance

So, whether Fed rate cuts are bullish or bearish for stocks is a nuanced issue, highly dependent on the investment horizon. Long-term portfolios stand to gain from a low-rate environment that fuels growth and profitability. However, the near-term outlook is much more complicated. Historical patterns suggest that the short-term may face volatility driven by economic projections and yield curve adjustments, implying a period fraught with risk and uncertainty.

Understanding the complex relationship between Fed rate cuts, yield curve dynamics, and stock performance equips investors better to navigate these uncertain waters. As we analyze historical data and patterns, it's clear that while the long-term effects of rate cuts can be positive, short-term volatility is almost an expected fallout. The Fed's decision is but one puzzle piece in the intricate market dynamics.

So, what’s your take on this analysis? Drop a comment below to share your insights or questions.

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.

Dow Theory and Market Momentum: What Recent Charts Reveal

It was a tough end to the week for risk assets as the major equity indexes finished lower on Friday. Before we look at the charts, it's crucial to understand the broader context influencing these movements. September has historically been a weak month for equities, a period often characterized by inflection points and heightened volatility. Today, we are reviewing three specific charts signaling potential market tops: the S&P 500 on weakening momentum, the surge in volatility, and key insights from Dow Theory.

Chart 1: S&P 500's Weakening Momentum

To kick things off, let’s take a look at the S&P 500. The index finished about 4.25% lower for the week. This decline reinforces the idea that the late-August peak was a failed attempt to reach new all-time highs. Revisiting the foundational work of Charles Dow from the early 1900s, his insights on trend following and the behavior of market peaks and valleys remain invaluable. The S&P closed below the 50-day moving average for the first time since late July. What's concerning here is the momentum picture.

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In mid-July, as we approached 5650, the RSI indicator showed momentum over 80. Fast forward to late August, and the RSI stalled around 60, indicating a bearish momentum divergence. Characteristically, for a robust bull market, we want the market to move higher on increasing momentum. However, the recent momentum signals reveal weaker conditions, not supporting a move to new highs.

Chart 2: Rise in Volatility (The VIX)

Next, let's look at volatility, a critical data point that has been particularly telling. The VIX, often dubbed the "fear gauge," finished above 38 on a closing basis, reaching an intraday peak above 65—one of the highest readings historically. A VIX below 20 generally indicates low volatility and constructive conditions. Conversely, a VIX above 20 signals elevated uncertainty and potential drawdowns in equity prices. What's perplexing is how quickly the VIX tumbled to the mid-teens soon after its spike, only to surge back above 20 this week.

This rapid fluctuation in the VIX underscores the elevated uncertainty in the market. Each day the VIX remains above 20, the likelihood of further market volatility and drawdowns increases. This volatility is a significant red flag for risk assets, making it a critical element to watch going forward.

Chart 3: New Dow Theory

Finally, we evaluate the new Dow Theory. Charles Dow's original work on indexing and market behavior remains foundational. Traditionally, Dow theory compares the Dow Industrials and Dow Transports. However, I lean towards a more modern take, comparing the equal-weighted S&P 500 with the equal-weighted Nasdaq 100. Recently, the S&P reached a new all-time high in late August, whereas the Nasdaq 100 did not achieve a new high, resulting in a bearish non-confirmation.

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This divergence suggests a market inflection point. Typically, market tops are characterized by such non-confirmations—one segment of the market breaking out while another lags. Currently, industrials, financials, healthcare, and materials are leading, whereas growth sectors like technology and communication services are lagging.

Forward Momentum

In this seasonally weak period, these charts should be front of mind for making informed decisions. For those seeking a deeper dive, my premium members at Market Misbehavior benefit from a closer look at these signals, tracking market moves in real-time. Members get actionable insights to navigate this volatile landscape.

These three charts—the S&P’s weakening momentum, the elevated VIX, and the new Dow theory divergence—are flashing warning signs. While September often brings challenges, it also offers unique opportunities for those prepared to act. For a more detailed exploration, including macro indicators like the Hindenburg Omen, check out our Premium Memberships.

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.

Semiconductor Trends and Their Influence on Equity Markets

Nvidia epitomizes the heart of the AI theme, and its strength over the last six to 12 months has been astounding to witness. But are we seeing signs of a potential top in semiconductors, and what could that mean for the equity markets? Before exploring the charts, there's an essential technical analysis tool I'd like to introduce.

The head and shoulders pattern is based on classic trend reversal dynamics, and represents a shift from a bullish phase to a bearish phase. Lately, there's been a buzz about whether the chart of the VanEck Vectors Semiconductor ETF (SMH) exemplifies a head and shoulders top. My quick take? Not yet. Price patterns like the head and shoulders top, triangle pattern, and others have three phases: setup, trigger, and confirmation.

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The setup phase is where a pattern starts to take shape. Currently, the SMH chart shows a potential head and shoulders setup, with a clear head formed by a double top in June and July, a left shoulder in March, and a probable right shoulder in August. Every peak (head and shoulders) has been marked by a bearish engulfing pattern—a strong indicator of short-term sentiment change. But for a head and shoulders top to be confirmed, two phases need to follow: the trigger and the confirmation.

The trigger occurs when a pattern breaks a crucial level, called the neckline. For the SMH chart, using intraday lows as discussed in Edwards and Magee's classic book on technical analysis, the neckline runs around $200. A break below this would complete the pattern. The confirmation phase requires a follow-through to avoid the dreaded whipsaw—when the market fakes out traders by reversing direction shortly after a signal.

So, while we might be in the setup phase, a clean break below the $200 neckline would be the trigger. For those preferring a more conservative approach, using closing prices, the neckline moves up to $215, aligning with the 200-day moving average. Thus, holding above the 200-day moving average signifies the market's resilience.

What does this imply for semiconductors and the broader market? Let's compare the year-to-date returns of semiconductors against major equity ETFs. From end-2023 to now, SMH is up 38.1%, whereas the S&P 500 is up a modest 18.7%, and the Nasdaq 100 by 16%. Meanwhile, the equal-weighted S&P 500 is up just under 12%. Interestingly, since the market peaked in July, semiconductors have underperformed. While the S&P 500 nearly rebounded to its peak, the equal-weighted S&P surpassed it. Conversely, semiconductors trailed, underscoring a sectoral shift away from AI-driven stocks.

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So, what does all this mean? If the SMH forms a head and shoulders top, it suggests semiconductors are in a vulnerable position. This vulnerability could drag the Nasdaq 100 and S&P 500. However, the equal-weighted S&P remains robust, indicating that other market areas continue to break out and show strength. Diversification into other sectors such as industrials, materials, real estate, utilities, and consumer staples might be a prudent strategy, given the current market dynamics.

As we move into September, it's crucial to reassess portfolios and consider areas with emerging strength outside the semiconductor space. For Market Misbehavior, I'm Dave Keller, and we'll connect again soon.

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.

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.

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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.

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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.

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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.