Good morning fellow traders and welcome to our Weekly Digest column! It has been a busy week on Wall Street with plenty of ups and downs. The overall week saw all major indices closing lower. The main event was the FED meeting on Wednesday. Jerome Powell took a hawkish tone as he announced a detailed plan to fight inflation. Tapering will double in the coming months and 3 interest rate hikes are scheduled for next year.
What does it mean for the overall market? The market has been used to an accommodative FED which pumped billions of dollars monthly. Once the tap closes, investors will face a new reality. From a macro perspective, growth stocks with no profitability will be hit hardest while defense stocks, financials and strong businesses with good price/earnings ratios should outperform. The initial reaction to the FED minutes led to a strong rally in equities and our portfolio managed to take advantage of this. The following day, a sharp decline followed which negated all the upside. On Friday, indices tried to rebound but were rejected at key resistance levels. For now, the path of least resistance is to the downside.
The Omicron variant continues to spread faster than anticipated. UK announced the highest number of infections on a daily basis on Friday, while New York is grappling with a mix of Delta and Omicron which is putting pressure on its hospitals. Several studies showed that booster shots are an effective defense system against the new variant, but low vaccination rates across the globe are a big headwind especially in the northern hemisphere given the climate. The peak of Omicron scheduled sometimes in January may signal an end to the pandemic as we know it, but for the time being, all re-opening type plays have been obliterated.
For our portfolio, given the macro news and the technical outlook, we decided to take a more defensive and opportunistic stand. We are tactical going into next week and will look for more day trade opportunities at extreme oversold levels. For now, both the $SPY and $QQQ have lost recent momentum and are looking lower for the next period. At the same time, the strong seasonality may offer a boost into the year’s end. The ‘January effect’ may offer some dead cat bounces for broken stocks and indices, and we decided to buy some calls for $ARKK, $IWM, $XBI and $JETS.
Please find below the charts for the main indices with levels and thoughts:
$SPY chart
The overall market had difficult week as it could not hold on to Wednesday’s gains. It broke below the 8&21EMA losing recent momentum and closed just above the 50EMA (green line on chart). If this support is lost in the coming sessions, the next area is 454 before the monthly lows at 449. We are extremely light in our portfolio going forward until we see a clear reason to shift gears towards a portfolio approach.
https://www.tradingview.com/x/h4B54yyh/
$QQQ chart
Tech is pressured by the recent FED announcements and closed the week below the 50EMA. Most stocks within the sector look broken for now, and it will take some rebuilding before we can commit again to them. At oversold levels, such as was the case on Friday, some good cashflow trade opportunities are available, as was the case with $AMZN, $MSFT and $AMD on Friday. Knowing your levels helps on such situations, but make sure to book profits quickly and do not overstay your welcome. Next support level is the monthly low at 378.9. Is this is broken, a retest of the 100EMA is in play. Reclaiming 390-391 will be an important spot for the bulls into the year’s end.
https://www.tradingview.com/x/Cak1ojME/
$IWM chart
The small caps reached the bottom of their yearly channel on Friday and quickly bounced as has been the case in the past as well. We bought some calls for the end of January to take advantage of such a scenario. Our stop is at Friday’s lows. Reclaiming the 200EMA around 220 would be an important benchmark for the bulls.
https://www.tradingview.com/x/PoeOMx4W/
$XBI chart
The biotechs have been one of the worst performing sectors in the past 6 months. On Friday they finally woke up reclaiming their 8&21 EMA. We are long $MBIO and $LPTX, two promising biotech stocks and put on some calls for this ETF for the end of January if the recent trend will be confirmed. This is the first time this ETF closed above its 21EMA since the middle of November.
https://www.tradingview.com/x/kOTJ8kA5/
Have a relaxing weekend! Continue to follow our updates on Twitter and remember that cash is also a position until the dust settles and the market fully prices the recent news!
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