The glass half full

Good morning,

Last week the Nasdaq posted its worst performance since the early pandemic days. The $QQQ lost the 200EMA, while stocks such as $AMZN are reaching their 2020 levels. The fear of interest rate hikes, FED tightening, corroborated with profit taking after a long bull run accelerated the selling last week. On such occasions, we advocated staying out of the way and looking just for tactical trades. Finding a tradable bottom takes a lot of patience and one needs not to find the trend. For now, the path of least resistance remains to the downside, but the risk reward for a potential broken bounce favors the bulls.

On Friday at the close, we decided to put some extra risk on as we have reached extreme oversold levels. Despite the fact that from a macro perspective, we believe that we can still fall further from here, the possibility of a 2-3 day bounce is very likely before the next leg down. Instead of buying individual stocks, we started buying $SPY and $QQQ calls going out 2 weeks.

The earnings season is in full swing and this week we have 3 important names reporting: $AAPL, $MSFT and $TSLA. The market’s reaction to these reports will be indicative of the overall complexion of the market. Futures are slightly up this morning. See if early strength builds or if the sellers come back towards the close.

Our focus today will be on the main ETFs, $SPY and $QQQ in order to map out possible bounce levels. In terms of individual names, $FB and $MSFT seem to be displaying good relative strength at the open, so keep them on your radar. At the other side of the spectrum, $AMZN is at 2020 levels which makes it quite appealing, at least for a quick bounce to its 200EMA.

$SPY chart

The overall market tried a timid bounce on Friday but the sellers came growling back in the afternoon pushing the market to new yearly lows. The $SPY broke below the 200EMA which is a first since May 2020. We are very oversold on a daily chart, but looking at the weekly one, there is plenty of space to the downside given the immense rally we had in the past 3 years. In case we push higher from here, the first resistance level is at the 200EMA, 439 (orange line on the chart). The next one is 444-446 before Friday’s high of 448.

$QQQ chart

The tech sector has been hit the hardest since the beginning of 2022. Stocks such as $AMZN and $GOOGL have reached levels from 2020 and 2021. $AAPL and $TSLA continue to hold in better but look extremely vulnerable should they disappoint at earnings. With the $QQQ firmly below the 200EMA, see if the bulls attempt an oversold bounce. For today, 353-356 is the first resistance area. The 200EMA is all the way at 364. Keep an eye on the semis as they are a good indicator of investors’ risk appetite. $AMD and $NVDA will be our focus today.

When everyone on the street becomes extremely bearish, trying a contrarian approach can pay handsomely. Do it in a responsible way and make sure to get out if we break Friday’s lows. Seeing the glass half full is what we are trying to do doing such corrections. Protect your capital, remain tactical and look for opportunities for an oversold bounce. Be greedy should the opportunity arise.

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