EB Daily Market Report - Special Report - Thursday, October 27, 2022
I've been researching and working on a brand new User-Defined Index at StockCharts.com that expands on the QQQ:SPY, XLY:XLP, and IWF:IWD sustainability ratios. The idea is to eliminate gaps from the calculations similar to the calculation of AD lines (accumulation/distribution lines). I'm a HUGE fan of AD lines as secondary indicators, and I've been working to establish a way to gauge intraday strength in my sustainability ratios. I cracked the code earlier today with the INTRADAY QQQ:SPY ratio and it essentially confirmed what I've been preaching throughout 2022. The stock market is "rigged" and only the big firms truly are aware of what's taking place in the stock market. EarningsBeats.com is changing that game.
Introducing the Intraday QQQ:SPY ratio, designed to help us filter out the opening gap noise and concentrate solely on what matters most - rotation when actual money is changing hands. Below is a chart of the Intraday QQQ:SPY ratio, with a panel underneath showing the current QQQ:SPY ratio that includes opening gaps. Check this out:
While the QQQ:SPY has broken to a new low, the INTRADAY QQQ:SPY sustainability ratio shows a MUCH different, and much more bullish picture. During the trading day, the relative strength of the QQQ vs. the SPY is quite strong and still significantly above the May low. Note that during the true "distribution", or selling, period from January 3rd through May 20th, the INTRADAY QQQ:SPY was moving lower, same as the QQQ:SPY. The opening gaps LOWER in the QQQ since August are clouding the true picture of what's happening during the day as money actually changes hands.
Also, I want to point out that the INTRADAY QQQ:SPY correctly pointed out the weakness earlier in November 2021. It produced an earlier warning sign. The gaps higher in late-November sent the QQQ:SPY higher as well, but the INTRADAY QQQ:SPY turned lower in late-November, providing us that earlier warning signal. I believe the addition of these INTRADAY sustainability ratios will SIGNIFICANTLY improve our market guidance at EarningsBeats.com, and I'm really excited about that.
It will take some time, but I'm hoping to have the INTRADAY XLY:XLP and IWF:IWD ratios completed before our November 5th event.
At the closing bell today, we begin the MOST BULLISH period of the year, October 27th close through January 18th close. Quite honestly, we could be moving into the final phase of the selling. Check out the potential bottoming reverse head & shoulders pattern that could be taking place right now:
The pattern measures 11.6% (bottom of head to the neckline). A confirmed breakout above the neckline would measure another 11.6% higher. Of course, patterns do not execute until a breakout is made. And the pattern certainly can fall apart. But given the new INTRADAY QQQ:SPY ratio that suggests significant RELATIVE accumulation in the QQQ, the beginning of the most historically-bullish period of the year and this potential bottoming (and reversing) pattern, I am willing to begin building a position in the leveraged QLD (ETF that tracks the NASDAQ 100 at a 2 to 1 clip). The upside to owning the QLD is obvious. If the NASDAQ 100 rallies, the QLD will produce twice the return. Just keep in mind, however, that if this position is the wrong move, you also will lose 2 times the drop. My strategy will be to replace a portion of my QQQ holdings with the QLD from the NASDAQ 100's ($NDX) current value down to 10,975. I would likely reverse this strategy if the NDX were to close back beneath 10900.
Today's selling is at least, in part, due to the UGLY quarterly earnings report by Meta Platforms (META, -24.88%). It was one of the ugliest relative strength charts heading into earnings and I made it clear that I did not like this stock AT ALL before earnings. Wall Street hates the stock and now we know why.
One last note. I trust Apple's (AAPL) earnings report after the bell tonight more than ANY of the other large cap names that have reported this week. AAPL is the largest component in the S&P 500 and NASDAQ 100, so please understand that "as goes AAPL this afternoon after earnings, so too likely goes the S&P 500 and especially the NASDAQ 100." I expect more discussion of shortages, but I also expect AAPL to beat estimates as they tend to be fairly conservative in their guidance - setting the bar low and exceeding.
Happy trading!
Tom