Happy Saturday fellow traders and welcome to our Weekly Digest! It has been a difficult week in the markets with lots of misdirection as the bulls and bears fought a tight battle until Friday’s close when the bulls capitulated and the bears managed to take full control.
Since Tuesday, we advised caution and staying tactical as the tape looked faulty. We had a disappointing August Jobs report the previous Friday which had an important effect on the market’s direction this past week. The FED comments and the ECB meeting mid-week did not help market sentiment either. Both institutions emphasized their desire to stop asset purchasing gradually by the end of the year despite a weaker than expected jobs market and a growing number of Covid infections due to the Delta variant.
This past week all attempted rallies have been subsequently sold and the bears pushed the acceleration pedal on Friday afternoon when they took the $SPY below the 8&21 EMA. What is next?
Historically speaking this past week is renowned for its increase in volatility as investors returned from their summer holidays and were eager to book some profits. For the next week, one common saying on the market is that the next leg of the rally starts with Yom Kippur on Wednesday. We shall see. From a technical perspective, we have a plethora of broken charts which need to be reconstructed fast in order for sentiment to change. We have seen such dips in the previous months, but at some point, the bounce might be more feeble and we might enter a longer period of sideways and downward action as the active bull run since spring 2020 might pause for a while. Inflation, interest rates, Chinese interference with tech, regulation and taxation are important headwinds for the longer term and we might see a jittery market for a few more sessions before we see a clearer direction.
We managed to avoid a big drop in our portfolio this week as we honored our stop limits and stayed out of the way for the most part. We did engage a few names around important support levels, but when the tape changed against us we were quick on our feet and exited. We had some impressive profits in $AFRM and $RBLX which showed relative strength, but apart from them, the biggest winner for us this week was damage control and staying tactical.
For next week, from a technical perspective we are cautiously bearish as there are a lot of important resistance levels ahead of us in the indices and many broken stocks below their momentum lines. At the same time, this might not be the best time to go all short as we have seen in the past, betting against the US market is in most instances a losing strategy even in the short term. The resilience of this impressive bull run from 2020 will be tested next week.
In today’s edition we decided instead of looking at the best trades of the week to go over the main indices and crypto charts in order to get an idea about possible entry and exit levels for next week. Please find below the charts for the indices and crypto and our quick thoughts going into next week.
$SPY chart weekend update
The faulty action started on Wednesday when the market dipped below its 8EMA (red line on the chart) and accelerated on Thursday and Friday, pushing the overall market below its 21EMA (black line on the chart). We have seen similar dips in the past months and they have proved to be great buying opportunities. As we mentioned earlier, this might not be the best moment to be overly short or long, but instead to stay tactical, see relative strength and determine the battleground between active bulls and bears before committing any capital to such a choppy market.
For next week, 445.31 is the immediate support line. If we break below this level, the next support area is 443 before we reach the 50 EMA (green line on the chart) around 441. In case of an oversold bounce on Monday, see if the bulls have the power to push the market above 448-449, therefore signaling an end to this short lived bears paradise. The best case scenario for active traders would be a poor start to the week, and subsequently a rally above 445.31, making a reversal more powerful.
The tech sector had an impressive start to the week as it posted a new all time high. However, as the $SPY got weaker, tech could no longer support this upper channel and broke down. The candle from Friday is indicative of lower prices from a technical perspective, as we broke the momentum trend line. We are still above the 21EMA, but it will be difficult to defend it if the selling pressure continues on the overall market. For next week, see how some of the leading names react, if they show any relative strength in order to get an idea of the next direction. For support levels, 375 is the first line in the sand, followed by 370 from where we started the recent uptrend. If the bulls want to reclaim some power we need to reclaim 378-379 early in the week.
Crypto has been one of the weakest assets this past week. It started the week very strong amid speculation that El Salvador’s Bitcoin day will be a huge catalyst. It turned out to be a sell-the-news event as $BTC quickly dropped 10.000 points in one of its classic flash crushes, while Ethereum dropped 1000 points. Having a stop loss at 50.500 was a wise decision that protected us a lot of capital. For now, both crypto are from a technical perspective an avoid. The recent action after the big drop is suggestive of a bear flag and a possible ‘H’ setup which in theory will push the price of Bitcoin below 43000 and Ethereum below 3015 in the coming sessions. For the crypto sector to act better, Bitcoin needs to quickly reclaim 48.000 and Ethereum 3600 and show some commitment to a new active sequence. If you are super active and believe you will miss an opportunity to buy around these levels, you can be long with a stop around Tuesday’s lows in both crypto.
Have a great weekend, stay tuned for our updates and remember to stay tactical until better set-ups present themselves!