Bearish Engulfing Fed Day
RLT Newsletter
Wednesday certainly did not disappoint if you’re a fan of volatility. QQQ went from taking out Tuesday’s low in the morning, to taking out Tuesday’s high in the afternoon, then reversing hard to close well below Tuesday’s low before gapping down again after hours. This created a bearish engulfing candle on the QQQ that broke the 100-day SMA. Once volatility enters the market, it usually expands before everything is said and done.
At this point, it looks increasingly likely that QQQ is headed for its 200-day SMA, while SPY looks destined to test either its AVWAP from the March lows or its 100-day SMA. SPY could very well open right at the AVWAP near $723. If that happens, I wouldn’t be surprised to see another round of selling push it down into the 100-day SMA before we get a short-term bottom.
SPY Daily Chart
SPY held its support for the last four days while QQQ went lower and now that it’s joined the selling, I think it’s another sign this pullback isn’t quite finished. DIA also printed an ugly reversal candle and looks ready for further downside. Semiconductors (SOXX) broke below their 100-day SMA today and are gapping lower as selling intensifies across the AI trade.
During periods like this when uncertainty is high and earning season is in full swing, I prefer to focus on trading the major indices. For me that means QQQ, SPY, and TQQQ. I feel like I have a pretty good read on the broader market, and while the indices are certainly affected by earnings season, they tend to be less volatile than individual stocks and are simply easier for me to trade.
Key Levels on QQQ
The next buy zone I’m watching on QQQ is the 200-day SMA. After that, I’ll be watching the prior all-time high around $637.
If QQQ breaks below the 200-day SMA, I’ll get much more aggressive with hedging, because the odds of a much larger correction go up significantly. If QQQ falls quickly into the 200-day SMA, I’ll be an aggressive buyer with an aggressive hedge level below the 200-day SMA . A quick drop into a major moving average often leads to a sharp relief rally, and with so much of tech already beaten down, I think there’s a good chance we see sustained buying carry into mid to lateAugust.
QQQ Daily Chart
Software Setups Worth Watching
One area that continues to stand out in this tech sell off is software. There are a surprising number of solid-looking double bottoms developing across the holdings in the IGV ETF.
Microsoft has held up remarkably well over the past month, partly because its already taking a considerable beating over the past year. However, in a market where most tech stocks are getting sold, Microsoft is holding up and actually gapping higher following earnings. As I write this, it’s trading just above $400. If it can open around that level and hold its 100-day SMA on any retest, I think it has a good shot at working its way back toward $421 and potentially higher. Pay close attention to where it opens. An open just Wednesdays high would trap a lot of bears and could set the stage for a sizable move higher.
MSFT Daily Chart
We’re also seeing attractive double bottoms developing in CRM, ADBE, NOW, and a handful of other software names. Of the group, ServiceNow is still my favorite.
I like NOW because it’s reclaimed its large bearish earnings candle, pushed back above both its 100-day SMA and 100-month SMA, and reclaimed the point of control from its all-time highs. The first major resistance overhead is the 200-day SMA near $125, 10% higher from its current price. It’s still a choppy, volatile stock and remains in a longer-term downtrend, so I think the best approach is to accumulate slowly and keep adding on bearish days rather than chasing strength.
NOW Daily Chart
