One week ago, in my piece “Rotation,” I wrote:
“I know that some of the charts I have been mentioning all week, like IWM, RSP, XLF, KRE, XLU, and DIA, look like they are trying to put in bottoms, and Thursday’s candles are even more proof of that.”
One week later, that thesis looks like it is starting to play out. XLU was a solid one-day trade up to the gap fill, and XLF looks like it wants to put in a bottom just in time for bank earnings next week.
Bank earnings kick off earnings season, with JPM, GS, WFC, and C reporting Tuesday, followed by MS, BAC, PNC, BK, and SCHW later in the week. Assuming earnings don’t disappoint, WFC and JPM look like two of the better technical setups right now.
WFC dropped right into the gap fill from its June gap, filled it with some long lower wicks, and is now bouncing off the 100-week SMA. The risk/reward on this setup is solid. The one wrinkle, of course, is earnings right around the corner.
WFC Daily Chart
A gap down across the banks isn’t my base case, especially with analysts expecting third-quarter earnings growth at some of the major banks, driven in part by investment banking and trading activity. The higher interest rate environment could also help net interest income. However, higher rates can slow lending, and bond portfolios continue to face pressure. The charts are setting up for a bullish reaction, but how the market responds to earnings is still a coin flip.
Key Levels To Watch
XLF is bouncing right at the 200-day SMA. If it loses that level, the 100-week SMA is the next area I’m watching for support, especially after the waterfall selloff we saw in August.
XLF Daily Chart
I’m long XLF and will look to add if it drops to the 100-week SMA. That level is my line in the sand. Any close below it, and I think we’re likely heading toward the gap fills below. If that happens, hedging and risk management will need to kick in.
IWM also gave us another Thursday candle worth paying attention to.
Last Thursday, I highlighted the bullish candle off the 200-day SMA, with a buy zone extending all the way down to $271.69. Today’s candle wicked below last Thursday’s low and then closed back above the 200-day SMA. Even more interesting, it came on the highest volume of any candle in the past 100 days.
That’s a signal worth watching.
I think a quick trade up to Wednesday’s gap is a high-probability setup, and the larger pattern is starting to look like a double bottom. If buyers can follow through, IWM could be one of the names that benefits from a rotation away from tech.
IWM Daily Chart
What a Rotation Away From Tech Could Mean
If we do get a rotation out of tech, many of the names and non-tech sectors I’ve been discussing could finally get some relief. These areas sold off throughout September, and several are now showing signs of trying to put in bottoms.
Meanwhile, tech and the AI trade could see another round of selling. That would likely leave us in a market similar to June through September, where SPY moves sideways to lower while QQQ and SOXX show some weakness.
That doesn’t mean the tech trade is dead. Far from it.
It could simply mean we get another opportunity to own some of the best stocks in the market at Black Friday discount prices. A healthy pullback in the leaders, combined with improving breadth and money flowing into beaten-down sectors, could create some excellent setups for position traders.
For now, I’m watching the levels, respecting the risk around earnings, and looking for confirmation that this rotation has legs.
One can only hope things play out the way I’ve outlined above. If they do, there could be some great opportunities ahead.
QQQ Daily Chart
