EB Daily Market Report - Brief Update - Tuesday, August 20, 2024
I wanted to provide you with a brief update on the market. One key piece of technical evidence that suggests this rally may have run too far in the short-term is the negative divergence that's emerged on the pivotal semiconductors group ($DJUSSC):
If we look back on the DJUSSC's hourly chart since November 2023, which shows the majority of the rally off the October 2023 low, we see only a handful of times when the hourly PPO approached or reached 2. On three of those occasions, a negative divergence printed and we saw subsequent weakness. Will this time be different? It could, because divergences provide us no guarantees. I would simply say that the risks are growing with each and every move higher on the semis.
And here's the 1-month hourly chart of the ring leader, NVIDIA Corp (NVDA):
Again, no guarantees here, especially with the Wall Street darling NVDA. But the short-term risk is obvious to me. The hourly PPO reaching 3 is also quite a stretch, if you look at a long-term hourly chart on NVDA.
It doesn't stop there, in terms of negative divergences. Check out the S&P 500 and NASDAQ 100:
S&P 500:
NASDAQ 100:
I wouldn't be surprised to see short-term difficulty ahead for our major indices, based off of these negative divergences, but these HOURLY divergences are NOT signals that span weeks. Instead, they'll normally play out over 1-3 days.
Current Trading Range
For our major indices, watch the all-time high closes as key resistance and rising moving averages (20-day EMA, 50-day SMA) as our downside support. Failure to hold moving averages to the downside could lead to an eventual retest of the August 5th low. My expectation over the next 1-2 months is for sideways rectangular consolidation.
Today's earlier intraday low and the rising 20-HOUR EMA on the DJUSSC are at 18750 and 18720, respectively. If both of these levels are lost, I believe selling could accelerate, so maybe keep a very close eye intraday on those levels.
Strategy
Listen, I cannot provide any recommendations for anyone as I'm not a Registered Investment Advisor, so please don't construe any of the following as advice. I have no idea what everyone's financial position is and it would be irresponsible for me to assume what would be in the best interest of individual members.
I do share periodically how I'm approaching the market, in order to provide some transparency. I'm likely going to add index ETFs to my retirement account periodically over the next 8 weeks or so to prepare for what I believe will be another strong Q4. My trading account will likely be much more flexible and, at times, very aggressive. While I won't provide day-to-day details of every trade I make, I will provide all of you what I'm seeing in the market each day and potential trades based on my analysis.
Seasonality
Given the wicked volatility in late July and early August just before and just after the Fed meeting, along with the heart of Q2 earnings season, something had to give and, for me, it was the August Seasonality Report. I apologize for not being able to get it out. I'm working on it now and have it available for you by tomorrow. My plan is to also provide you with the September Seasonality Report by the end of the week, so that you have that well in advance of the worst historical month of the year. In addition to providing the Top 20 seasonal stocks for September, I'll also provide a Top 5 or Top 10 weakest seasonal stocks for those who might consider shorting. That's completely up to you. You all should know by now that it's not generally my style to short individual stocks during a secular bull market.
Happy trading!
Tom