Indices reverse after a 3 day bounce, earnings season kicks in

Good morning,

Yesterday we talked about the ‘health’ of the recent rally in equities. We said that we can measure this recent bounce by looking at $MSFT, $AAPL and $TSLA. All 3 stocks started the day in positive territory, but, one after another, they drifted lower. $385 was an important area for the $QQQ to defend. The bears gathered momentum and within the first hour of trading pushed this ETF lower, signaling a change in the complexion.

We quickly got out of our longs and waited for a signal to re-enter. As the indices pushed lower, strong stocks such as $MSFT continued their downtrend, and reaching even Monday’s lows, as was the case of the software giant. In such an environment, one has to be quick on his feet and realize when the music stops. This is an adult only market, in which participants need to realize that the active sequences of the past few years are much shorter. Choppiness, wild swings and frustration are here to last, reminding investors of the ‘taper’ period of 2018. We prefer to watch the show from the sidelines and look for compelling entry levels for quick daily trades. A portfolio approach will get you no where, leaving you vulnerable in the short term.

With the $SPY and $QQQ below all key moving averages there is no need to be a hero and fight this type of tape. Earnings season are officially starting today, with the main financial institutions reporting before the opening bell. See how banks’ earnings are received by this type of market. Value and re-opening plays are faring better in this environment as they are less dependent on the treasury yield. As a result, we are flat in our portfolio apart from $NCLH.

The PPI reading was lower than analysts expected, but still at a multi-decade high. If the next monthly readings point to a decline, at that point in time, we may speak about peak inflation. A peak in inflation will ease the work for the FED and allow growth stocks some breathing time and a possible come-back rally.

Our focus today will be on the main indices. We will see if early strength in pre-market (futures are currently up) gets sold again and we re-test the yearly lows. From a technical perspective, the path of least resistance is to the downside. Given the wild swings that occurred in the past 2 months, we would not be surprised if we were to have another bounce off these lows. However, we are in no rush to enter a portfolio approach and would prefer missing on a few trades instead of chopping money around.

$SPY chart

The overall market could not hold above the 8&21 EMA and drifted once again below them and into the low 460s. This can be considered the first day down of a new active sequence to the downside, so be in no rush to buy the dip until you see a clear signal. For today, see if $463 holds. If not, the next support area is around $460, before the yearly low at $456. For upside, see if $470 gets reclaimed, although at this point in time, this seems a bit far-fetched.

$QQQ chart

The tech sector has been an important tell to yesterday’s action. It got rejected early in the session at the moving averages around $389 and drifted lower for most of the day. Once it broke below $385 we exited all our longs. It closed above Monday’s low but looks extremely vulnerable at this point in time. $MSFT was an important barometer yesterday as it dipped below the monthly low. It seems that stocks within this sector which started the year on the wrong foot continue to be the most vulnerable and are an avoid for now. For today, see if $376 holds, if not a retest of $369 can occur quickly.

Be in rush to fight the current tape. Momentum has been lost and a lot of rebuilding needs to occur before we can talk about a new active sequence. See how the earnings are received today to get an idea of what will follow in the next few weeks. Continue to follow our updates on Twitter throughout the day!

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