Video and Report Headlines
- Long-term Breadth Indicators Remain Bullish
- SPY and QQQ are Not yet Oversold
- Equals, Mids and Smalls Hold Breakouts
- Corrections within a Bigger Uptrend (NVDA Case Study)
- DELL Nears Support-Retracement Zone
- AVGO Nears Support-Retracement Zone
- QCOM Returns to its Breakout
- PSTG Nears First Support-Retracement Zone
- MU Nears Support-Retracement Zone
The next Chart Trader will be posted on Thursday morning, August 1st.
This report starts with the long-term breadth indicators to confirm the bull market. Overall, S&P 500 stocks are stronger than Nasdaq 100 stocks. SPY and QQQ are in the midst of pullbacks and have yet to become oversold. Thus, they could have further to go before bouncing. We will then update the breakouts in RSP, MDY and IWM. It is important that the first two hold their breakouts. Failure would show selling pressure returning to the broader market. Attention then turns to the corrections in stocks that were leading in June. Many corrected hard, but they are becoming quite oversold and nearing Support-Retracement Zones. It is going to be a busy week because the Fed makes its policy statement, the jobs report is on Friday and several big names report earnings (MSFT, META, AMZN, APPL).
Long-term Breadth Indicators Remain Bullish
The %Above 200-day SMA and 26-wk High-Low Percent indicators remain long-term bullish, but Nasdaq 100 stocks are not as strong as S&P 500 stocks. The first chart shows SPX %Above 200-day SMA moving above 60% on December 1st and holding above 60% since then. NDX %Above 200-day SMA turned bullish with a move above 60% on January 27, 2023. Even though it has yet to trigger bearish, it dipped below 60% three times in the last few months. Nasdaq 100 stocks are not as strong as S&P 500 stocks. Put another way, the non-tech groups are holding up better than tech.
The next chart shows 26-wk High-Low Percent for the S&P 500 and Nasdaq 100. Both are bullish and supportive of a bull market. Again, we can see SPX 26wk HiLo% exceeding 20% in July and NDX 26wk HiLo% failing to exceed 20%. NDX 26wk HiLo% is not bearish, but is not as strong because fewer Nasdaq 100 stocks are hitting 26-week highs.
SPY and QQQ are Not yet Oversold
The next charts show SPY and QQQ with three short-term oscillators. The first is a 12 indicator overbought/oversold oscillator based on seven index-specific breadth indicators and five price indicators. It becomes oversold with a dip below -8 and overbought with a move above +8. Most of the time, I look for oversold conditions within a bigger uptrend. This means there was a decent pullback within the uptrend. Both SPY and QQQ are in long-term uptrends so I am looking/waiting for short-term oversold conditions. Once the ObOs12 indicator becomes oversold, I look for a tradable pattern on the price chart, a bullish divergence in %Above SMA indicators in the lower windows or a short-term upside catalyst.
The chart below shows SPY hitting a new high last week and falling around 3% the last ten days. SPY is in pullback mode as it corrects after a 15% advance from mid April to mid July. A falling flag formed the last two weeks and a breakout at 554 would reverse this short-term downswing. Until such a reversal, the call is for this correction to extend to the 530 area, which is a Support-Retracement Zone (blue shading). Broken resistance turns support here and this level marks a 50% retracement of the April-July advance. I am also watching/waiting for the SPX ObOs12 indicator to become oversold, which would require a move to -8 or lower. The green arrows on the price chart show when SPX ObOs12 became oversold in the past.
The next chart shows QQQ hitting a new high thirteen days ago and falling around 8%. QQQ fell more than SPY and is leading this pullback as it broke below the 50-day SMA. QQQ is in pullback mode as it corrects after the 22% advance from mid April to mid July. As with SPY, the call is for more correction because QQQ has yet to reverse its short-term downswing. A break above 480 would fill last week’s gap and reverse the short-term downtrend. Until then, the call is for a correction until QQQ hits the Support-Retracement Zone or becomes oversold. The Support-Retracement Zone is in the 440-450 area (blue shading). NDX ObOs12 dipped to -5 last week and has yet to become oversold (-8). The green arrows on the price chart mark prior oversold occurrences.
Chart Analysis, Setups and Trading Ideas
The following charts show price bars with the 200-day SMA (red line), the 50-day SMA (green line), the price-relative (ITB/RSP ratio) with the 200-day SMA and the percentage difference between the 5 and 200 day SMAs. On the price chart, I am looking for tradable pullbacks within a bigger uptrend or bullish consolidation patterns. With the price-relative, I am looking for relative strength. The price-relative (ITB/RSP ratio) rises when the ETF or stock outperforms. And finally, the percentage difference between the 5 and 200 day SMA is bullish (long-term uptrend) with a move above 3% and stays bullish until a move below -3%. This basically measures the tide or long-term bias.
Equals, Mids and Smalls Hold Breakouts
The S&P 500 EW ETF (RSP), S&P MidCap 400 SPDR (MDY) and Russell 2000 ETF (IWM) broke out with big surges in mid July and these breakouts are holding. Strong breakouts hold and it is important that these breakouts hold. Should two of the three fail to hold their breakouts, I would turn negative on the group. The breakouts started with big moves on July 11th and extended with gains the next three days. To keep it uniform, I will use the July 10th close to mark the re-evaluation levels. A close below these levels would erase the breakout surges and show weakness. The first chart shows RSP with re-evaluation support at 165.
The next chart shows MDY with re-evaluation support at 534.
The next chart shows IWM with re-evaluation support at 203.
Corrections within a Bigger Uptrend (NVDA Case Study)
This next section will cover the current corrections in some of the high-flying AI stocks. We will define the long-term trend, define a correction and show how to find potential reversal zones.
The first task is it define an uptrend. An uptrend is present when the 5/200 %Differential exceeds +3% (turns green). A downtrend is present when the 5/200 %Differential exceeds -3% (turns red).
The second task is to define a correction. A correction is a pullback or a consolidation after an advance. Five weeks is the minimum time required for a “decent” correction or pullback. I also look for a touch or break of the 50-day SMA (green dashed line).
The blue lines on the following charts mark corrections within a bigger uptrend. Most of these are falling flags, falling channels, triangles, falling wedges or trading ranges. These are tradable patterns because the subsequent breakouts (green arrows) signal an end to the corrective period.
The first example will focus on Nvidia (NVDA). Even though it seems to go straight up, the chart shows it spending quite a bit of time in correction mode. NVDA was up 238% in 2023. Most of this gain occurred in the first six months because the stock was largely range bound from July to December. There are 52 weeks in a year. NVDA advanced for 30 weeks (58% of the time) and corrected for 22 weeks (42% of the time).
Nvidia is up around 125% this year (2024). Again, it did not achieve this gain with a steady advance throughout the year. In fact, the chart below shows the stock spending 43% of the time in correction mode. During the first 30 weeks of 2024, NVDA rose for 17 weeks (57%) and fell for 13 weeks (43%). The chart below shows two corrections this year.
Once a correction unfolds, chartists can mark a potential reversal zone using support levels and retracements. The April low formed near the 50% retracement, the February high and the February gap. Broken resistance from the February high turns into support. Chartists should be on guard for a reversal when prices near a Support-Retracement Zone. NVDA hit such a zone last week as it retraced 50% of the April-June advance and tagged the late May low.
Overall, a falling channel could be forming and a close above 133 would break the upper line (breakout). Chartists can also watch for some sort of upside catalyst to signal a short-term reversal. We often see breakout moves start with an outsized surge back above the 50-day SMA. The January breakout started with a 3-day 10% surge and the April breakout started with a 2-day 10% surge (green ovals). NVDA reports earnings on August 28th.
DELL Nears Support-Retracement Zone
The next chart shows Dell Technologies (DELL), which is a data center trade. DELL advanced 185% from late October to May and then fell 38% from its high. The stock is nearing a Support-Retracement Zone marked by the March low, 67% retracement line and rising 200-day SMA. A falling wedge could be forming, but it is too early to draw the lower trendline (hence, a dashed line). In any case, the 100-110 area marks a possible reversal zone. DELL reports earnings on August 29th.
AVGO Nears Support-Retracement Zone
The next chart shows Broadcom (BRCM) surging 55% and hitting a new high in mid June. The stock fell with the rest of the tech sector and AI group. A falling channel is taking shape with resistance at 150. AVGO is near a Support-Retracement Zone marked by broken resistance and the 67% retracement. AVGO reports earnings on August 29th.
QCOM Returns to its Breakout
The next chart shows QualCom (QCOM) with a 121% advance from October to June. There was one correction from March to April. QCOM broke out in late April, surged to 230 and then fell back to the breakout zone here in July. Broken resistance here marks potential support. I am looking at the 165-170 area as a possible Support-Retracement Zone. This area marks a 50% retracement of the advance and the middle of the March-April consolidation. The rising 200-day SMA may also reach this area in the coming days or weeks. QCOM reports earnings on July 31st.
PSTG Nears First Support-Retracement Zone
The next chart shows Pure Storage (PSTG) with two Support-Retracement Zones. A 66.7% retracement of the April-June advance and broken resistance mark the first one in the 55 area. A 50% retracement of the December-June advance and support from the March-April lows mark the second one in the 50 area. I would consider the 50-55 area as a potential reversal area. PSTG reports earnings on August 21st.
MU Nears Support-Retracement Zone
The next chart shows Micron (MU) advancing 149% from October to June and then falling some 30% into July. This steep decline entered the 50-67 percent retracement zone and returned to the April lows. The blue shading marks a Support-Retracement Zone using the retracements, the March gap and the rising 200-day SMA. MU reports earnings on September 26th.
