Mixed Messages
Premium Section: How to Profit From the Bounce
Last week the S&P 500 (SPY) was down 0.83% and the Nasdaq 100 (QQQ) was down 2.83% in one of their worst weeks of the year. But wait…the Russell 2000 (IWM) was up 3.40%, while the Dow Jones Industrial Average (DIA) was up 0.75%. We have a “divergent” or “bifurcated” market on our hands! There is a rotation out of large and growth and into small and value.
Market Conditions
The SPY found support at the 55 EMA (green) and almost touched the 62% Fibonacci Retracement. It is now forming a 3 candlestick reversal pattern hinting at an upside reversal, but this is unconfirmed as price is still in a downtrend below the 9 & 21 EMAs. RSI is ticking up and appears to have broken the downtrend line. Meanwhile On Balance Volume (OBV) shows some buying interest, but is also unconfirmed as it is still below the 30 SMA (orange). The half-cycle bracket renews on 7/31, which is a Fed FOMC day. Perhaps the Fed will hint at a September rate cut and save the markets. Until then, a bounce to the 9 EMA around $548 could be a natural reaction, but positive Fed comments could be needed to move higher than that.
The QQQ fell to the 100 SMA (purple), which coincided with the 78% Fibonacci Retracement. The relative weakness is driven by institutional profit-taking in Semiconductors and the Artificial Intelligence theme. This is the last chance to salvage the uptrend. RSI did not break the downtrend yet and OBV does not show significant buying yet. Similar to the SPY, QQQ may bounce to the 9 EMA at $473 since it is stretched from this moving average and the 9 EMA tends to work like a magnet for price. However Dovish statements from the Fed may be needed to continue higher. Nonetheless remember the bigger picture…a bounce could occur but the 4-Year Cycle decline may have begun and the downside is not done yet.
The IWM pulled back to the 9 EMA, which coincided with the 38% Fibonacci Retracement. Moreover the RSI broke its downtrend line, as the OBV shows real buying interest. This has significant relative strength to the SPY and QQQ. IWM is configured bullishly and can make new highs, especially if the Fed speaks Dovishly on Wednesday and the TNX (10-year Treasury rate) drops.
The DIA is known as a value heavy index. This is outperforming at the moment as it is not overly weighed in tech and growth equities. The recent pullback only pushed the DIA to the 21 EMA and between the 38% and 50% Fibonacci Retracements, displaying it’s relative strength vs. the SPY or QQQ. The RSI broke its downtrend line as OBV shows buying interest. As DIA is configured bullishly look for it to retouch the previous high or make a new high in the days to come.
Smart Money appears to be betting on a Dovish Fed meeting on Wednesday as Smart Money were heavy dip buyers.
Smart Money put significant capital to work even as prices dropped and Fear grew in the market’s mind.
Breadth is advancing, which could provide a tailwind for equities next week.
Conclusion
The stock market is set to bounce off moving average and Fibonacci Retracement support. Some markets like the IWM and DIA have relative strength, while others like the SPY and QQQ are weighed down with profit-taking. There is the opportunity to make some money on the long side as a counter-trend rally appears to be setting up, but be quick to return to capital protection mode as the 4-Year Cycle decline has much more to go.
In the Premium Section we’ll go over some ways to play this upcoming bounce.
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