Volatility has entered the market. Pretty much all of tech gapped down hard at the open on Wednesday, with QQQ opening near the 100-day SMA, just as I speculated in last night’s newsletter.
The QQQ opened in the sketchy zone, far enough below the 100-day SMA that things could have gotten dicey for the bullish fade higher. However, buyers stepped in shortly after the open and relentlessly bought stocks throughout the day.
QQQ Daily Chart
I think there were two big reasons for the reversal. First, a lot of stocks were gapping directly into key support levels. Second, many tech names were simply extended to the downside and due for a bounce.
XLK gapped right into its 100-day SMA and the point of control from the March low, where there is a massive volume shelf. It bounced off that level and held up throughout the day. Like much of tech, XLK printed a large bullish candle off key support.
The low of Wednesday’s candle is now the key level to watch. Those lows should hold if we’re going to get at least a several-day bounce from here. I am long XLK and looking for the bounce.
XLK Daily Chart
The Rotation Trade
Thanks to the rotation we’ve been seeing, SPY is holding up extremely well. In fact, I expect SPY to make a new all-time high if we get a sustained bounce from here.
That would likely correspond with a lower high in QQQ, followed by potentially one more rollover to a new low. If that happens, it could create a very buyable dip.
SPY Daily Chart
IWM: Small caps remain within the buy zone I laid out and bounced off the prior all-time high. While IWM is below its 200-day SMA and risk is elevated, as long as it holds Wednesday’s low, I see potential for a move toward the 200-day SMA and the $280 gap fill.
XLI: Industrials came down and filled the gap below that has been looming on this chart since March. It then gave us a large bullish hammer candle, with plenty of room to move higher before reaching the 200-day SMA.
Once again, below that hammer candle, things get really dicey. However, as long as the hammer holds, I could see XLI pushing toward the 200-day SMA or even the 100-day SMA. That would also bring the $176 area into play for a potential double-top neckline retest before another rollover.
XLI Daily Chart
Semiconductors
SMH has been the main source of weakness in the market lately. Thursday’s sell-off was large, but buyers did step in.
The volume on Wednesday’s SOXX candle suggests we may have a short-term low in semiconductors. A bounce toward the 100-day SMA from below would make sense before another potential move down toward the 200-day SMA.
Could a durable bottom already be in? Absolutely. However, the pattern is now moving vertically lower, followed by choppy price action to the upside. From a technical perspective, I have to err on the side of caution and expect further downside until we either hit our downside targets or start seeing those sharp, vertical moves higher.
SOXX Daily Chart
Individual AI Names
MU: Micron filled its August 12 gap and then ripped higher, actually closing green on the day. Despite that massive candle, I think MU could still have a little more downside in the larger pattern.
It formed a choppy rising wedge, which it recently broke below, and then gapped under the 100-day SMA. Stocks don’t go straight down, so I think we’re seeing a retracement of some of that weakness. However, another rollover toward the 200-day SMA and the July lows remains possible.
If that happens, I would consider it a buyable drop.
MU Daily Chart
INTC: Intel has a similar setup in play. If it drops into the major gap below, it could present a stellar buying opportunity. There are tons of other AI names setting up in a similar fashion, some further along in the pattern and others holding up for now.
INTC Daily Chart
AMD and NVDA: On the relative-strength side, AMD and NVDA bounced nicely on Thursday off their 100-day SMAs. Their charts look a little different from the broader semiconductor and AI group, which is worth paying attention to.
However, if we get another leg down in the market and AI names, I don’t see them holding on to today’s support. Both names still offer solid setups for a move higher, and are in the select few that have actually pushed to new all time highs recently.
AMD Daily Chart
SIMO, ARM, AMAT, and AAOI: On the relative-weakness side, these names are further along in their corrective patterns and are getting very close to their July lows. If we see another push lower, these ultra-volatile names could get hit hard one more time.
The Big Picture
Overall, I think semiconductors should bounce here. If they don’t, and Wednesday’s lows break over the next week, I would be watching for a waterfall move lower.
Longer term, this is developing pretty much as expected. If we can get one more meaningful sell-off in tech while the rest of the market continues to hold up, it could set us up nicely for a stronger run into the final two months of the year and into 2027.
Historically, the third year of a presidential term has been the strongest of the four-year cycle, although that is a seasonal tendency, not a guarantee.
For now, I’m watching Wednesday’s lows, the key moving averages, and whether the rotation trade continues to hold up. There are some great opportunities setting up, but patience and risk management matter even more when volatility picks up.