The price action has been wild and crazy over the past couple of weeks, trapping both bulls and bears with some massive swings during overnight sessions. Tuesday night looked like the entire market was going to gap down, with everything deep in the red. But by Wednesday morning, nearly everything outside of the AI suppliers had clawed back their losses and were positive. On Wednesday’s open most of the market including the hyperspenders absolutely rampaged higher.
QQQ Daily Chart
The speculation on Big Tech is that if the Democratic election wins slow or stop the data center buildout, the Big Tech names could pull back on CapEx spending, which would boost free cash flow. They are also the only players with existing data center infrastructure at scale, meaning those assets could become even more valuable and in demand.
AAPL and MSFT both made new all-time highs on Wednesday with massive moves. Something to keep in mind with MSFT is that it’s forming a large wedge pattern near its highs, with bearish RSI divergence on each successive move higher. I’ll get interested in MSFT again if it pulls back toward $469.
MSFT Daily Chart
AMZN gained 6.51%, which is a monster move, especially considering that following its earnings report, the stock wicked all the way down to $215 in after-hours trading. Just four days later, it was trading around $270, roughly 25% higher.
The gap AMZN just printed will eventually fill. For anyone buying that Wednesday gap higher, the risk/reward was already gone. Those entries were driven by FOMO rather than solid setups and analysis.
GOOGL also had a very solid day but gave up much of its intraday gains, just like QQQ did late in the session. It barely managed to close above its earnings candle and all that accompanying bear volume. I still think the better trade in GOOGL would be to see it falter once again and drop toward $265. The current move looks like a fourth wave within a larger correction.
GOOGL Daily Chart
The Rotation Trade Is Alive and Well
Unlike the hyperscalers, which continued higher throughout the day and held up fairly well, most of the semiconductor names continued to get absolutely wrecked. SOXX closed down another 3.14%, with names like MU, SNDK, STX, AAOI, MRVL, ARM, and SIMO all closing down more than 5%.
SOXX Daily Chart
The rotation trade is clearly still alive and well, which is why the bigger story of the day was actually the strength outside of tech.
DIA closed up 3%, while XLC, IYT, XLF, XLY, XLB, XLP, XLV, and XLRE all had some of their best days of the year. Wednesday’s candles have created a solid line of support and some important levels on which to base trades.
XLF made a new all-time high, while JPM gapped over a whole month of price action and bounced off its 100-day SMA following a gap and go. JPM has now closed above its larger bearish earnings candle and looks like it wants to go higher. As long as it holds the 100-day SMA and Wednesday’s low, the bull thesis remains intact.
If Wednesday’s candles start getting taken out across the board, however, the bulls could have a problem.
JPM Daily Chart
The 2018 Analog Is Still on the Table
If we look back at the 2018 analog, there are still some striking similarities. Back then, the day after the midterm elections produced a 2% up day and a gap above the 200-day SMA on SPY. Price then moved sideways for three days before breaking back below the 200-day SMA and eventually cratering lower into the end of the year.
What this tells us is that just because we had a bullish day on Wednesday doesn’t mean it’s time to chase price higher, ignore risk management, and assume the low is in.
What it does tell us is that Wednesday’s candle and the key moving averages are now more important than ever.
If SPY starts losing its 100-day SMA over the next week, that’s a huge warning sign that something similar could be playing out. We already have a rate hike cycle that is lining up remarkably well with the 2018 comparison, including the potential for another December hike. If we get an election pop followed by another leg lower, that would be a nasty trap for the bulls and could send price significantly lower.
SPY Daily Chart - 2018 Analog
The other key level to watch right now is the 200-day SMA on QQQ. The bulls absolutely do not want to see a daily close below that level. If QQQ loses its 200-day SMA, there is serious trouble afoot once again.
Wednesday didn’t necessarily give us a clearer picture of what comes next, but it did give us much clearer lines in the sand for managing risk and protecting the downside.
I’m more bullish now after seeing Wednesday’s price action. But any close below the key levels mentioned above, and I’ll go right back to being extremely cautious.
Otherwise, as I laid out in Monday’s newsletter, a bottom should be forming over the next week or so. If it doesn’t, risk is quite elevated.
Bitcoin Sends a Bullish Signal
Another bullish signal worth watching is Bitcoin, which printed a large vertical bullish candle off its 100-day SMA and the 120-SMA on the 3-day chart. That 120-SMA is my Bull/Bear Line for the Bitcoin chart.
The continuation of these strong vertical moves higher, followed by choppy corrective moves lower, tells me that BTC is now in a bull market.
It also gives us an even clearer line to use for risk management. Any close below Wednesday’s candle on BTC, and I think it’s likely heading toward the low $70,000s and maybe lower.
As long as that level holds, the next target is the 100-week SMA around $89,000.
BTC Daily Chart
TL;DR: Constructive, But Key Levels Matter
Overall, Wednesday’s candle was constructive for the bulls. QQQ bounced right where it should have, and we saw some massive moves higher across the broader market. This doesn’t look like the price action of a market entering a much larger correction.
However, if we see an immediate close below the key levels outlined above, that will tell us Wednesday was a bull trap. That will be the time to hedge and protect capital, because things could get quite volatile very quickly.
The charts look considerably better than they did Monday afternoon, but some of the double tops are still looming, and the AI trade remains out of favor.
For now, it looks like any bounce in AI will once again be part of a larger rotational market. The other sectors are getting quite heated, and a cool-off in those areas could send money rotating back into AI stocks.
This is not a market to chase moves, though. Wednesday’s intraday price action was a perfect reminder of that.
I’m more optimistic than I was on Monday, but I’m not ready to let my guard down. The bulls have some work to do, and those key moving averages are the line in the sand.