Trading the Close: Daily Chart Review & Setups

Market Analysis & Observations - February 16, 2024

Key Concepts:

• Breakout Level: A price point where an asset moves above a defined resistance, often signaling a continuation of an upward trend. Failure of this level can indicate a trend reversal.
• Ascending Trend Line: A line drawn connecting a series of higher lows on a chart, indicating an upward trend. A break below this line suggests a potential trend reversal.
• Bearish Engulfing Pattern: A candlestick pattern where a bearish (downward) candle completely “engulfs” the previous bullish (upward) candle, signaling potential downward momentum.
• Distribution Top: A market phase where large investors gradually sell their holdings, leading to sideways price action and eventual decline.
• Head and Shoulders Top: A bearish chart pattern resembling a head and two shoulders, indicating a potential reversal of an uptrend.
• Price Gap: An area on a chart where the price of an asset jumps significantly with little or no trading activity in between. These gaps can act as support or resistance levels.
• Psychologically Important Levels: Specific price points (like 50,000 on the Dow) that traders and investors often focus on due to their perceived significance.

I. Market Overview & Initial Reactions

The speaker began by referencing Pam Bondi’s prediction of the Dow reaching 50,000, characterizing it as “tempting the market gods.” He asserted that such declarative statements often precede market corrections, referencing a historical pattern. Today’s market performance confirmed this, with indices down 1-2% across the board, and his trading screen displaying a “sea of red.” He noted that previously covered short positions were declining, while current short positions were performing well. The overall sentiment was to “let it die,” though he admitted to some anxiety over previously closed positions.

II. Index & Sector Analysis

• Diamond Trust (DIA): Broke below a previously identified breakout level, considered a “yellow flag,” but not yet a major concern. A failure of the ascending trend line would be a more significant signal.
• Dow Jones Industrial Average (YM): Fell below the 50,000 level, seemingly validating the speaker’s earlier warning. Down 431 points. A break of the ascending trend line is anticipated to accelerate the decline.
• SPDR S&P 500 ETF Trust (SPY): Has been “grinding away” for months, transitioning from a rocket-like trajectory to an “orbiting” phase. Currently experiencing a fall, with significant distribution occurring. A lower high was achieved yesterday, potentially signaling a shift in momentum.
• Defensive Plays (XLB, XLP): Defensive sectors like materials (XLB) and consumer staples (XLP) were performing strongly, even on a down day, indicating a “rush to safety.” The speaker avoids these sectors.
• Emerging Markets (EFA, EM): Experienced a reversal after a period of strong performance, particularly in Asia (Korea, Japan). EFA and EM exhibited bearish engulfing patterns, suggesting a potential move towards new lows. The speaker attributes the recent strength in Asian markets to investors seeking alternatives to dull crypto markets and the US stock market.
• iShares Russell 2000 ETF (IWM): The price gap discussed previously remained a key level. The index fell today, erasing gains from prior days, but has not yet broken the ascending trend line.
• Invesco QQQ Trust (QQQ): Down 1.8%, bouncing within a range since September. The speaker highlighted the lack of progress despite numerous press releases and positive financial results.

III. Earnings & Individual Stock Analysis

• Cisco (CSCO): Surprisingly fell significantly (12.5%, over $10) despite its typically reliable performance, adding to the bearish sentiment.
• Tech Sector (ENQ): Has been grinding sideways since September, requiring a significant event to break below the current pattern.
• Semiconductor Sector (SMH): The speaker closed a short position in SMH prematurely, despite a strong bearish engulfing pattern forming. He regrets this decision.
• Dell (DELL): Down double digits, approaching a potential head and shoulders top completion.
• Applied Materials (AMAT): Worth watching for its influence on the semiconductor space.
• Dash (DASH): Tumbling down, below a topping pattern.
• Rivian (RIVN): Potential long opportunity if it seals a price gap.
• Arthur J. Gallagher (AJG), Boston Scientific (BSX), Co-Star (CSGP): Previously shorted positions that are now showing signs of bottoming out, prompting potential profit-taking.

IV. Broader Market Themes & Perspectives

The speaker emphasized the importance of political and financial factors colliding, particularly the reliance on the stock market as a key indicator of success for the current administration. He believes that a market falter would be detrimental to the administration. He also noted the shift in investor behavior, with funds flowing from crypto into more active markets like South Korea. He highlighted the “AI scare trade” and the subsequent sell-off in software (SaaS) companies.

V. Commodities & Crypto

• Precious Metals (Gold, Silver): Weak performance. Gold did not violate a key horizontal array, while silver experienced a significant decline.
• Bitcoin (BTC): Down $7,000 from its recent peak, approaching levels seen last Thursday. A break below 60,000 could trigger further agitation. Michael Saylor’s Bitcoin strategy is also down.

VI. Notable Quotes

• “If you tempt the market gods like that, they will smite you. Thousands of years of your ministry have proved this.” – Regarding Pam Bondi’s Dow prediction.
• “It’s like a trajectory of a rocket. It sort of shoots off and then like gets uh milder and milder and milder and now we're sort of in this like in the ionosphere just sort of orbiting Earth.” – Describing the SPY’s recent performance.
• “The only thing the man’s got left to point to is the stock market. If that falters his snappy dressing style, I don't know. I mean, it's it's over.” – On the political implications of a market downturn.

VII. Conclusion

The market experienced a broad-based decline following a period of optimistic predictions. Several key indices and sectors showed signs of weakness, with bearish patterns emerging. The speaker highlighted the importance of monitoring key levels and trends, while also acknowledging the potential for political intervention to support the market. He emphasized the need for caution and the potential for further downside, particularly in previously high-flying sectors like tech and emerging markets. The 3-day weekend offers a brief respite before further market developments unfold.