On the weekend news that a peace agreement has been formally agreed between Iran and the US and is due to be signed on Friday, we have a bit of an "everything rally" in premarket. SMH is up 3.45%, IGV is up 2.16%, QQQ is up 1.99%.
We aren't yet fully in the clear, as we approach the upper resistance for the week, which doubles up with the 21VWMA at 7524. We want to see this premarket gain hold through the cash session, and ideally built upon, but things do look positive.
Throughout the recent correction, we continued to maintain a constructive stance on price action, citing the resilience in the leading sector SMH and the extreme price action on QQQ as a suggestion that the market should be able to stage a snapback rally, and thus far we have seen that materialise.
Last Tuesday, we noted that QQQ had staged a 5% intraday decline off its highs, quite a rare event that has seen Nasdaq bottom in 4 of the last 5 occurrences, with the only non compliant event still seeing a 7% rally off the lows over the next 2 weeks.
https://preview.redd.it/zhcq1a3btf7h1.png?width=728&format=png&auto=webp&s=043a9679884a6935f3224bd770c804b1da59a4b1
We are on track to make it 5 out of 6, with all things equal.
The sell off over the past week was sharp, and looking back we see a clear false breakdown on Nasdaq, before rallying higher:
https://preview.redd.it/h36kcx6dtf7h1.png?width=1252&format=png&auto=webp&s=b6002ce190f07cda53999c17fdeccb7c0862ce52
As they say, false moves lead to fast moves, and so that has occurred again.
Nasdaq bottomed exactly at the 50% retrace of the YTD gain, and thus far, it is proving a wise decision to maintain exposure through the correction as we see many of our holdings, particularly those semi focused ones, have rallied back towards their highs.
https://preview.redd.it/o2wgodaetf7h1.png?width=950&format=png&auto=webp&s=6b5cd416ec833e16a87b595f9f08f3c09bef0662
There is some argument being made that SPY is simply forming a head and shoulders on the daily chart:
https://preview.redd.it/1dxrjt5ftf7h1.png?width=1400&format=png&auto=webp&s=d2eabf9615c6566174ec35c9cda8889cf6f22ba6
Personally, I push back on that narrative, and instead raise you an inverse head and shoulders on the 4 hour chart:
https://preview.redd.it/s7o29lyftf7h1.png?width=1400&format=png&auto=webp&s=5fd90d5959c4e7e8ae4bbdd301d7487f9a5c8615
I believe higher prices are in order.
I did hold my hedges over the weekend incase things did not materialise well with the peace deal, but structurally we are seeing a lot of repair on the major indexes.
If we look at the leading sectors, which I have continued to reiterate focus around through this correction, we have:
SMH above all the EMAs, the 5d crossing above the 9d, all EMAs pointing higher and back at ATH. Barring a rejection off ATH, which we may see but will likely only prove a buying opportunity, this is called structural repair.
https://preview.redd.it/k16xcy0htf7h1.png?width=1300&format=png&auto=webp&s=bc444d1c9f6239a2f8119bb9f58bbcc3a9f302e2
If we then look at XLK, which is the other leading sector that I focused on in my analysis:
https://preview.redd.it/8aunls1itf7h1.png?width=1400&format=png&auto=webp&s=836fca5201a2c32a370be572907f7f3cad66d064
We see that we have recovered the important 183.15 level and are again, above all the EMAs.
The reason why we look at the leading sectors is because in a healthy correction, we do not want to see leadership completely change hands. We don't want to see semis lead, only for leadership to switch to defensive sectors. That's not healthy.
But here we see leadership has remained where it was, in semis, and the suggestion then is where the leaders go, the rest of the market will follow.
If we look at NDX, again back above all the EMAs, with all the EMAs curling higher.
https://preview.redd.it/hm871gijtf7h1.png?width=1400&format=png&auto=webp&s=fe1d09e496214295e175d2fdae0d189622879f18
This is a healthy structural repair. The EMas are your guide of structure and all are pointing higher again.
As mentioned, we want to see a close in these levels, but things look constructive again, and if we close near here, we can offload those hedges at close.
ES is back above 7500, the level above which we see mechanical support towards 7800.
However, you should bear in mind that the price does somewhat overstate the move as ES is benefiting from a contract roll to the amount of $62 points, so maybe look at US500 for now.
Nonetheless, things look constructive.
COR1m had spiked during the correction, but has since faded strongly from its local highs, which is supportive for equities:
https://preview.redd.it/30t1uqfktf7h1.png?width=1400&format=png&auto=webp&s=51e400f4afab4af120981f0020a83d63b8aa2d38
On the peace deal news, crude has plunged and on the weekly chart, if we review structure, we are below all the EMAs and the 21W EMA is now working as resistance:
https://preview.redd.it/wecw6x7ltf7h1.png?width=1210&format=png&auto=webp&s=b56f41c4c2339bdda6607a77c71c3189c0babe3a
This is quite important and the timing is beneficial as it allows Warsh and the committee to justifiably continue to push back on rate hikes, citing the normalising oil prices.
Of course, we know that inflation is not so simple as simply tracking oil prices, as there is firstly going to be a lag in that showing up in CPI, but alos we know that inflation has spread into other parts of the economy beyond oil prices, but with core coming in cooler on both CPI and PPI last week, we also have enough there to justify pushing back on rate hikes.
We have FOMC on Wednesday. I do not expect anything particularly hawkish. It is Warsh's first meeting and I expect him to strike a dovish tone. he has a "reputation" as a hawk, but that's not strictly true. It's just how the media wanted to paint him. He is someone who priorities the potentially deflationary impacts of AI and argues that a strong economy and job growth does not necessitate inflation. Instead, he thinks that due to AI, fast growth int ehe economy can occur without any spike in inflation at all.
That is the narrative that I expect him to push. That, and the fact that the Fed is willing to look through the recent supply shocks as a one off, rather than persistent cause of inflation.
The market isn't really pricing much risk into Warsh's first meeting. We know that VIX does typically increase slightly into the FOMC, and that's normal. There's nothing really to read through on that. And we also have VIxperation on teh same day, which has some mechanical buying pressure on VIX, but it is nothing worrisome.
Whilst the market is in this position above all the EMAs, we can much more reliably push the BTD narrative, in support of a wider grind higher. That;s going to be the play. Just try to position yourself in the right stocks, mostly semiconductors, and then try to ride out any volatility.
Mechanically, if we analyse the forces at play here, we have the 21VWMA at 7524. if we can break above here, then we should see a vol decay driven grind higher.
I am still conscious of the Abi signals that were firing last week:
https://preview.redd.it/l0v9widmtf7h1.png?width=1400&format=png&auto=webp&s=e3c54197ff361a51d1a1591513695e436d8baef7
We know that this will be an issue at some point, but into July at the earliest it would appear in terms of the mechanical forces, particularly so once we clear 7524.
The VIX term structure is healthy (I don't know why it displays in this weird inverse colour tone that it is):
https://preview.redd.it/f583pxlntf7h1.png?width=1246&format=png&auto=webp&s=398d136d46337109dc065c7cb94744edbe91e679
The front end of the curve has dropped a lot and spot price is below the front end.
Everything here is telling you BTD on any weakness and expect wider grind higher.
Midterms are coming. Volatility is likely, but look at these approval ratings for Trump.
https://preview.redd.it/7q8z2k8otf7h1.png?width=1228&format=png&auto=webp&s=f3093f5d70cf4e129cd3ac405d20c540d6b7443c
In the gutter.
I'd actually half expect some more government support and impetus here as he tries to prop his approval rating up, which may give us more positive action on the index.
Now things to be aware of for this week:
1. Friday is a holiday so Thursday is OPEX.
These are the wild cards:
Positive: We still await potential government stake in AI companies news, as meetings are expected to be held in teh White House this week, if earlier indications are anything to go off of.
Negative: Perhaps the bigger story for the AI trade landed Friday night. The government issued an export-control directive forcing Anthropic to suspend its two newest models, Fable 5 and Mythos 5, citing national security. Anthropic calls it a misunderstanding and is working to restore access. But the precedent is what matters. If the government can switch off a frontier model on national security grounds, that is a new variable in the trade. Does it push enterprises toward open source they actually control? Does regulatory risk start getting priced into the complex? Worth watching how it ripples through AI and tech this week.
https://preview.redd.it/a0aze2l0xf7h1.png?width=994&format=png&auto=webp&s=1301d22b903f0a92a65d49951b3098ca4b2557dd
https://preview.redd.it/htjuhoaptf7h1.png?width=994&format=png&auto=webp&s=b990abbe9a4b362fba335e699483f34676adf2ee
As of right now, the bias remains:
Buy the dip
Grind higher expected, particularly so when we clear 7525.
Keep an eye on this chart.
This chart will keep it really simple for you:
It marks the weekly high and low from the last week and ATHs.
Above the weekly high of last week, we are v bullish. Above ATH, even more so.
Below the weekly high, keep an eye on the EMAs, bias is buy the dip until proven otherwise.
Below the lows of last week, which are NOT expected to break as the market fully prices downside structure to remain supportive, then bearish.
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