Good morning and welcome to our Daily Charts column! Yesterday, we talked about the looming effect of the Treasury yield. After market participants neglected the drop in Treasuries on Monday and went on a shopping spree, the music stopped yesterday, as investors dumped all stocks with high multiple ratios. As a result, the tech sector was hit the worst. After a strong open, the $QQQ lost Monday’s high quickly and dropped all the way below the 21EMA. Such a sharp drop cannot be neglected. As a result, we decided to get out of the way, especially when it comes to tech. The other sectors had a decent bid, especially the financials as they benefit from an interest rate hike. The overall market did not fall apart (yet) as industrials, financials and materials had a strong sessions. However, should tech continue to be a laggard, we do not expect the overall market to remain elevated.
Today, we have the FED minutes 2 hours before the closing bell. Given the hawkish tone expressed last month, we do not expect much to change. Should Mr. Powell offer some more clarity with regards to the timing of the interest rate hikes this year, it may offer investors some more clarity. Clarity is always welcome by the market, so we may expect a relief rally once the FED minutes are done.
The big question for the rest of the week is whether Monday’s candle was just an outlier. If that is the case, and we neglect Monday’s action, one can easily see the continuation of the downtrend, especially for the tech sector. Nevertheless, the strength of other sectors is somewhat encouraging. We are currently in a wait-and-see approach with regards to tech and will wait for some more price discovery. On a brighter note, $F continues to impress as it pushed above $24. We hope you followed our recommendation on Twitter for this name on Monday around $21.
With futures currently down, our focus will be on the tech sector to see if it can defend yesterday’s lows or reclaim them depending on the open. Similarly, we will look at the $SPY to see if tech starts to drag it down, or if it can continue to grind higher, albeit at a slower pace.
The $SPY made a new all time high yesterday at $479.88 and then it quickly reversed, almost going to the 8 day EMA, but it stopped above it and closed just under Monday’s high. The fact that it did a turnaround kind of move this got us out of portfolio approach, waiting for price discovery today. If it holds above the 8 day $474.92 and it consolidates from there we’ll be more bullish, but for the moment the path of the least resistance is to the downside. Cash is a position and we prefer to take this stance rather than bleed further. There is no reason to jump to any conclusion yet and today may be pivotal for the near future action, combined with the FOMC tone.
The tech sector has been hit by the sell button yesterday and it completely reversed from Monday’s action leaving investors stumped. This got us out of all longs in this sector in order to protect capital. By going through the 21 day EMA all the way to the 50 SMA, and closing just above the 21 day it was not encouraging. This kind of move is usually followed by a more abrupt fall, which we are not interested in taking. We suffered some paper cuts when the $QQQ reversed, but we saved a large part of Monday’s gains by not fighting the trend. Now it is the time to see which is the real move? Monday’s bulls or Tuesday’s sell off? Until we see a clear direction we’ll keep cash as a position and look to do some day trades for cash flow.
If you fight the trend, which is still unknown, by throwing money at it you’ll end up with a big hole in your portfolio. It is wiser and more cost effective to assume some (smaller) losses and to protect capital rather than to take a falling knife, which in tech it can be quite painful. We suffered losses in $AAPL, $AMZN and $TSLA options, but we removed them when the $QQQ reversed and did not look back. You can always find an entry point in the market if you still have capital, but if you chop it up by fighting a trend or a big move you’ll be left without options. We can admit that this excessive rotation from 2021 unfortunately seems to follow into 2022, but we’ll have to make ourselves more elastic and open-minded in order to be quicker on our feet. In this market environment the active sequences seem to be shorter and more aggressive, therefore we need to transform ourselves in guerilla warriors rather than complain at the end of the tape. Stay sharp, focused and follow signals for a clear move. If this is too much for a trader it is always better to take a step back and watch the movement in order to situate yourselves better in the tape. Today we are very interested in the treasury yields and FED comments in order to gauge the complexion of the market.
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