The Summer High?
The S&P 500 (SPY) was down 1.96% for the week, while the Nasdaq 100 (QQQ) was down 3.96%, marking one of the worst weeks of 2024 for the markets. Crowdstrike’s cybersecurity outage, which shut down 8.5 million Microsoft devices and 3,000 flights, negatively impacted the healthcare, financial, and airline industries, and contributed to the recent market weakness. However, systematic selling appears to have been set even before the news. The summer rally was spectacular, but it’s probably over, and now it’s time to think defensively for your portfolio or trading account. Notice that the QQQ appears to be selling off in an orderly fashion and following the 55 SMA on the 30 minute chart down.
The systematic selling is driven by retail positioning. Retail found their courage and bought a glut of call options betting that the market continues higher. As always, the Market Makers don’t let most people make money in the market so as Retail call option buying hit an extreme, the market pulls back to wash out the calls. Note that the ROBO Put/Call ratio is at an extreme just as it was last year at the Summer high, before a multi-month pullback. A multi-month pullback is definitely possible now as we gear up for Election Year volatility.
You can see that the Fear and Greed model was gearing up for another run into the Greed area, however it was stopped in its tracks and reversed.
The Commitment of Traders Report (COT) for the Nasdaq 100 shows that Market Makers are reducing long positions, which are at the lowest levels in a year. Perhaps they know what’s coming. Hedge Funds also reduced long positions.
Meanwhile both Market Makers and Hedge Funds took some profit on short positions. A recovery rally may be needed for Market Makers to collect a larger short position before the market really falls apart into the 4-Year Cycle low (we’ll discuss in the Premium Section).
Smart Money appears to be buying the dip as Dumb Money runs for the hills. This increases the odds of a relief rally occurring before the real drop occurs.
Market Conditions
The SPY found resistance near the R2 Pivot Point and fell below the 9 & 21 EMAs. As we believe that the 21 EMA (blue line) is the best trend indicator, this signals that the uptrend is now over. Price did fall to the 30 SMA, which is holding. We’ll have to see if buyers come back in and push price back above the 21 EMA. The $542 level has to hold or else price could fall to the $532 or $524 levels quickly. Here are a few items to consider:
RSI formed a bearish divergence, which was a prelude to the current drop.
MACD made a bearish crossover and the Histogram is now negative, showing increasing negative momentum.
Global Liquidity (black line) is dropping as the market falls.
Net New Highs are still positive, but the number fell drastically over the past few trading sessions.
The McClellan Breadth Oscillator fell quickly as breadth declines.
The Advance/Decline and Advance Decline Volume Lines both fell last week, telling us that money is flowing out of the market.
The Intermarket picture weakened last week as depicted above. The 10-Year Treasury rate (TNX) and US Dollar (DXY) both rose last week, acting as a headwind to risk assets. Oil fell, which could be interpreted as a future lack of demand. This may imply a future global economic slowdown. Finally the VIX spiked from low levels, telling us that some more downside is definitely possible.
The the recent selloff is very risk-off as Technology, Communication Services and Consumer Cyclicals (known as offensive sectors) led on the way down. This hints at an underlying weakness to the market at the moment.
Even the Russell 2000, the beneficiary of the recent rotation out of large cap growth stocks, gave back a good amount of its gains as it retraced 38% of the recent up-move on heavy volume. IWM could have been hurt by the uptick in interest rates as well as profit taking. It’s possible that IWM declines into the half-cycle low around 7/31.
Conclusion: The Summer High may be in, although we may make a double top or lower high pattern in August. We had a spectacular run in 2024 so far. It’s now a good idea to focus on holding onto your gains, instead of trying to make more gains. In the Premium Section we’ll go over a few warnings that cycles are providing. This could be the key to knowing when to avoid a significant drop. More importantly, this could be the key to buying low as the market turns up once again.
Note: We also have another surprise in the works for our Founding Members, which will be released soon.
Disclaimer - All materials, information, and ideas from Cycles Edge are for educational purposes only and should not be considered Financial Advice. This blog may document actions done by the owners/writers of this blog, thus it should be assumed that positions are likely taken. If this is an issue, please discontinue reading. Cycles Edge takes no responsibility for possible losses, as markets can be volatile and unpredictable, leading to constantly changing opinions or forecasts.