Market Outlook 30-Jul-2023
ETF Spotlight: QQQ (NDX), Trace's approach to charts, "Buy-the-Dip" candidates (DIS & SQ)
Good afternoon investors and traders,
I hope your week has been fruitful, and that you're relishing your weekends. The news cycle (including FED announcements) and the launch of the earnings season have created a buzz in the markets. The Thursday-to-Friday action serves as a robust reminder of why I find value in the weekly charts.
On today’s agenda:
ETF Spotlight: QQQ
“Buy the Dip” Candidates: DIS & SQ
My approach to charts & markets
Major ETF Spotlight: QQQ (via NDX)
Starting with the monthly timeframe candles, then drilling down to weekly.
Monthly:
There’s a lot to take away from the monthly chart of NDX. The three things that stand out to me are:
The tremendous upside counts I can generate via PnF (I highly recommend you learn to do this counting style)
The momentum range with some “extreme” ranges (pre-Dotcom, post-Dotcom, GFC)
The trend from the GFC —> Present
I note:
PnF target of $27.9k is a whopping 77% above Friday’s close.
The momentum recently “reset” and curled higher from the bottom of the range, indicating there is some gas in the tank for further price appreciation until it reaches the top of the momentum range.
Finally, the trend from the GFC has been a stride for the bulls, and Friday’s close is approximately half-way between the supply & demand lines.
Drilling down to weekly:
The weekly chart gives us a picture of market trends for the past 2.5 years. It's important to note that we're seeing prices approach the zone between Preliminary Supply and Buying Climax, a critical area identified in the 2021 Wyckoff distribution phase. Though the Buying Climax threshold still sits 6.5% above where we closed last Friday, we could start seeing the market releasing some supply. It's common for markets to show 'memory' of past events, and considering this, it wouldn't be surprising if attempts at bear raids materialize in the near future.
Trace’s Approach to Markets
I’ve shared some thoughts before in early 2021.
Expanding on that, I have found the following rules of thumb very helpful in my approach to markets:
Follow trends & strength until it price breaks below critical levels. (See Marty Zweig’s #1 rule)
Spotting accumulations & distributions (easier through PnF lens)
Protect losses with disciplined stops. If no stop is in place, you must accept reality of $0 on the position, especially when using options.
Calculate reward to risk rations using PnF as a guide
Seasonality
Using key indicators such as: Zweig Breadth Thrust, Breakaway Momentum, Capitulations, Coppock, BPSPX
Buy the Dip (BTD) Candidates
While I don't typically pursue investment opportunities during "dips", it doesn't preclude me from finding a chart or two that may be compelling. I often come across stocks that have remained stagnant or have trended downwards while the broader market has maintained a robust performance or even seen an upswing. A stock's resilience in retaining a key level during a pullback, particularly when multiple support factors align, is something that often catches my eye.
Two charts that currently exhibit these characteristics are for the stocks DIS and SQ.
DIS:
Yes —full disclosure, I do own DIS in the Portfolio and have recently added a call position (last month).
The chart above depicts a monthly trend tracing back to 1974. In my view, such charts are highly valuable. It's rare to find trends that exhibit such remarkable pivot points coinciding precisely with deep momentum. Whenever I stumble upon such trends, they immediately capture my attention. This is why DIS stands out as a potential "buy the dip" candidate for me.
I've noticed that many market players have successfully pinpointed the horizontal support level at $86, which has a history stretching back 6-7 years. This recognition of a critical support level is commendable.
However, I haven't seen many referencing the long-term channel dating back to 1974. Should the market decide to ensnare recent buyers entering at this support level, the shakeout could potentially reach as far down as the trend support level at $73. It's at this point where I would consider becoming heavily aggressive in my investment strategy, as I anticipate this could be a highly profitable position. I'm considering a bullish risk reversal strategy. Essentially, this involves selling cash-covered puts, and utilizing the proceeds to purchase out-of-the-money call options. This represents the most assertive long position strategy I would undertake.
SQ:
The monthly chart illustrates that momentum has significantly decreased, reaching its lowest levels since its inception. However, this decline in momentum seems to be positioning for what could be the deepest crossover of the signal line we've ever seen. This is combined with the price successfully maintaining a support level that was established in 2018. There are a couple of ways to strategize with SQ, depending on the timeframe you're considering.
Wait for a breakout above the $94 mark
Buy the dip around the $50 region
This does provide a wide range, but until the price touches either of these two points, I'll withhold any action. And, even if the price soars to $94 or higher, I would still interpret this as a potential "buy the dip" scenario on the monthly timeframe, with some tailwinds.
Now, here's a critical point to remember. The depth of analysis I've shared today is just a fraction of the insights and strategies that premium subscribers get access to. For just $10/month, you'll gain access to detailed market analysis, specific actionable trading ideas, and a host of other benefits designed to give you the edge in your trading activities.
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Best Regards,
Trace