It’s hard to sum up a day like Thursday, November 5th. HOLY SMOKES! is about the best I can do while keeping things PG.
I put out a lot of content yesterday, including an entire 25-minute video explaining why caution was warranted at these levels and why things could get a whole lot more bearish if we closed back below the 100-day SMA on SPY.
Little did I know what was in store today.
It’s safe to say my “famous” green line got absolutely slaughtered, along with ALL of the bulls. The 200-day SMA on QQQ has once again proven that it’s not a particularly reliable level of support. Our official record since 2011 now stands at 4 bounces and 8 breakdowns. Those are pretty rough odds and just another reason I started to think we were heading lower.
SPY Daily Chart
Volatility Takes Hold
That’s the question on everyone’s mind. I, like you, don’t know, but I’ll do my best to use the same technical analysis that helped me navigate this selloff to figure out what might come next.
Keep in mind that when forced liquidations are happening, fear is skyrocketing, and stocks are plummeting, support levels, key moving averages, and even your favorite indicators become much less reliable. The selling doesn’t stop until the forced sellers are out, shorts start covering, and the first buyers begin stepping back in.
Following Friday’s 4% drop, I put together a QQQ study in my newsletter titled “AI Bloodbath” that is worth reading if you haven’t already. The takeaway is pretty interesting, and on point. Historically, when QQQ drops 4% in a single day, we have either been entering a bear market (which happened 4 times) or have seen a durable bottom form relatively soon (which happened 8 times).
The problem is that “soon” doesn’t necessarily without falling more. In some cases, the bottom took several more days to form, and prices fell as much as 17% lower before things finally turned around. Once volatility takes hold, the charts often get worse before they get better.
I’d say this selloff is right in line with those historical statistics. Assuming we’re not entering a larger bear market, we should start seeing some type of bottom form over the next couple of days.
The 2018 Analog Is Back in Play
A tremendous amount of technical damage was done to the charts on Thursday. It’s certainly conceivable, and perhaps even probable, that we’ve entered something similar to the 2018 selloff. After all, the similarities in price action, the election cycle, and interest rates are striking.
If that analog continues to play out, we could head lower toward the 100-week SMA and fill the gap from April 26th on QQQ. That would put us at roughly a 23% peak-to-trough decline right into a major area of support, just like in 2018.
If that happens, QQQ would have a massive double top. Technically, it already has one, but another leg lower would make the neckline retest in play. The neckline currently sits around $660, which would be the upside target if QQQ were to bounce and complete the move higher (B wave) before potentially rolling over again.
Knowing that a larger correction is possible, I always try to identify a scenario where we could see a bounce in both the bull and bear cases. If we continue moving vertically lower, I think the $600 level would be a major area of support, even if we were entering a larger bear market.
QQQ Daily Chart - 2018 Analog
SOXX Is in No Man’s Land
One reason I think we could have further downside is the chart of SOXX and its massive double top. Right now, it’s sitting in no man’s land.
Of course, Thursday could end up being a capitulation low, and perhaps NVDA saves the AI trade next week with its earnings. But from a technical perspective, there isn’t much reason to expect a durable bounce right here. The next meaningful support level is around $123.
I know that might sound strange if you follow SOXX closely, but keep in mind that it just underwent a 3-for-1 split. It has also experienced an organic 40% split over the last 4 months, so the current price levels can look a little different than what you’re used to seeing on the chart.
If SOXX moves quickly down toward $123, or the 100-week SMA at $113, it’s likely that we get a bounce back toward the $153 neckline before another leg lower completes the double top.
SOXX Daily Chart
There’s No Need to Rush
I think we’re getting close to a bottom and a potentially nice bounce, whether it’s a dead-cat bounce or a durable low.
That said, these moves are extremely difficult to trade. They often happen overnight and trying to catch the exact bottom can be a dangerous game. There’s absolutely nothing wrong with holding cash and waiting until the picture becomes a bit clearer or prices reach some of those lower support levels.
Here are some of the lower levels I’d like to see hit:
GOOGL: $266
NVDA: $175
MU: $550
INTC: $45
AMD: $360
SOXX: $122
QQQ: $640
GOOGL Daily Chart
Remember, I don’t have a crystal ball, and neither do you. The best we can do during these crazy market conditions is mitigate risk and protect our portfolios. We want to make sure we have the capital available to deploy when the dust settles, so we keep trading and making money after the picture becomes clearer.
There will always be another trade. Protecting your capital now gives you the opportunity to take advantage of it.