Final Flush
RLT Newsletter
Ever since the June 5 bearish candle, the market has shifted from a bullish, trending, risk-on environment to a much choppier, corrective structure. Many high-flying momentum names have been crushed since then, and now semiconductors, the leaders of the April/May bull run, are finally starting to break down too.
For the past six weeks, SPY and QQQ have been consolidating inside triangle patterns, with price going virtually nowhere. Beneath the surface, though, there’s been significant sector rotation: money has flowed out of AI and semiconductor names and into financials, industrials, transportation, and software. Even within tech, capital has been rotating from semiconductors into software, which is one of the main reasons QQQ has underperformed SPY.
We’re now approaching the apex of these triangle patterns, which means the market should reveal its next major move before the end of July.
SPY Daily Chart
Given the recent price action, I think there’s a reasonable case the market resolves lower first. My ideal scenario is a swift flush lower that spikes fear, traps the bears into chasing the breakdown, and then reverses higher just as quickly. That’s my primary thesis and how I plan to approach the market over the coming weeks.
If you’ve been reading this newsletter for a while, you know I’m currently sitting on a large cash position while I wait for a better opportunity to deploy capital. Maybe that biases me a bit, but when I look across semiconductors, AI, and many of the larger tech names, another leg lower would make a lot of sense before a more sustainable rally begins.
Where should we bounce?
For QQQ, the first major support sits at the open gap fill around $683. At a minimum, I think any meaningful pullback should reach that level. Below that, the next major support is the 100-day SMA near $666.
SPY has shown considerably more relative strength than QQQ. The first significant support sits near $725, but ideally I’d like to see price briefly undercut that level and push into the $720-$712 area before buyers step back in.
It probably feels impossible today for SPY to fall that far, but it’s worth remembering it made a very similar move in just three trading days at the start of June. A quick volatility spike like that could easily happen again.
If we do get those pullbacks in both SPY and QQQ, it would represent a very healthy correction in both time and price. More importantly, it would reset sentiment and lay the foundation for another push to new all-time highs.
QQQ Daily Chart
It would also set up nicely heading into earnings season. I much prefer seeing stocks weaken before earnings, since that gives companies room to surprise to the upside and kick off new bull trends, rather than reporting after already extended rallies, which tends to invite “sell the news” reactions.
Semiconductors
SOXX, the semiconductor ETF and the market leader over the past several months, has formed a textbook head-and-shoulders pattern and looks like it is gapping below its neckline in Thursday’s after-hours session.
If SOXX ultimately flushes down toward its 100-day SMA, that would mark roughly a 30% correction from its highs, which is a decent reset. If we truly are entering another powerful bull market, I’d want to see semiconductors stabilize and start pushing higher once again.
I have no interest in catching falling knives. I want to see buyers actually step in at major support levels and key moving averages before I get aggressive, but I will start adding small size as strong names pull into their 100-day SMA.
So far, several AI names have sliced right through their 100-day SMAs, including AAOI, COHR, and LITE. Now I want to see whether the larger semiconductor leaders, SNDK, MU, and AMD, can hold their own 100-day SMAs and attract buyers.
AMD, in particular, continues to be one of the strongest semiconductor names right now. If it does pull back all the way to its 100-day SMA, I will be very interested. Strong stocks pulling back to major support often provide some of the best risk-to-reward opportunities, especially if buyers step in and defend that level.
Also, if AAOI reaches its 200-day SMA, I think the risk/reward becomes very attractive. The stock managed to hold and bounce for three days at its 100-day SMA before ultimately breaking lower. Maybe the 200-day SMA and horizontal support will prove to be the stronger level that finally draws in meaningful buyers.
SOXX Daily Chart
