We Broke Down, Now What?

Yesterday was a very violent session for anyone who was in any of the recent leading names. Every name that outperformed over the last 60 days was thrown out with a double digit move down. So if you lost alot of money, congratulations, you probably made alot over the last 2 months because you were in the right place. Yesterday’s move was an all timer. The VIX was up 39%, the SMH was down 9.2%, the Korean market was down 14%, and the Nasdaq was down just under 5%. So considering the lack of really bad news like covid or a war kicking off it was one of the most surprising moves you will ever take part in. Now it’s over, and we look to what’s next.

You have to look at all timeframes: Daily, Weekly, and Monthly to get the real story. On one hand we are breaking down on the daily chart, that is never ideal, but if you zoom out and look at longer term charts, we haven’t seen any real long term technical damage as of this moment. We’re going to look at the QQQ because that is the whole market at this point, the SPY is important but with how that is weighted and where most people are allocated, the QQQ is what we will discuss.

The daily just knifed through the 21 yesterday without even a test. You figured the first test in 2 months would give you maybe a couple tests before potentially breaking down but it just broke through and the computer triggered selling kicked in. This is now a downtrend in the short term and the 50 day below is the next level of support over 5% lower. So all those people cheering for us going up everyday, this is what happens, you get so extended that the 50 day on the Nasdaq was nearly 15% lower just 3 days ago. So when you move down, it is a very sharp move down. Stairs up, elevator down, but when you go up pretty much every day for 2 months that is life. Make no mistake there is nothing bullish about this chart, now we need to find a base as quick as possible and turn up hopefully before that 8 ema crosses down through the 21.

The weekly chart is far more constructive, we have not even pulled into the 8 week, the blue line below. If you notice, most of last year we just trended along that moving average and life was fine, we were so extended from that sharp move up that even this nasty pullback couldn’t bring us back to the 2 month average price. Think about that. I suspect we test this next week and bulls would like to see this hold.

The monthly chart is even less terrifying, look at the last 2 candles, this is just an inside candle forming so far, nothing really bearish unless we go all the way down and slow below last month’s open and even then it still would not touch the 8 month which again the market rides on for the vast majority of time. Think about, stocks don’t get too extended from their 8 month average price, this is the entire tech market we’re talking about not a single penny stock that deviates from the norm but because of how silly things have gotten the last 2 months, the overall tech market did get nutty.

So what now? Under the 21 ema like we closed yesterday you always want to lighten up to whatever you’re not scared holding longer term. It means it will be rough for a little bit, at least until we are back to trending over the key moving average. From a fundamental standpoint earnings are great, that isn’t a concern now. Google spooked the market a bit with their big raise and that was followed up with Meta floating news of a big raise yesterday, where do you think those funds go when both raise money? Back into this circular economy spending on more infrastructure. Is there a real chance all these companies are overbuilding? Sure it is possible, but what do you want them to do? They view ai as an existential threat, they all have a ton of money and serious cash flows to work with, so why not throw every dollar at this war because losing could mean you are potentially irrelevant.

Bottom line, yesterday was ugly, unless you were living under a rock or bought these names way too late, you probably made alot over the last 60 days. They say things don’t go up in a straight line, well, they did, and now we have a pullback. Was yesterday about yields or really just an excuse to pullback? I think it was everything all at once. People were raising money for the SPCX ipo, you had a strong jobs report which spooked investors looking for rate cuts, and you had Korea implode all at the same time. We are not in a bubble, we could be in a couple years, but we are in the 3rd inning of a baseball game right now. This is nowhere near the peak. Every company is spending today to see where ai can go. Could it all be a bubble in 18-24 months? Sure, we could hear about it costing too much, the returns not being there, etc and we’re already hearing rumblings about that now. 3 years ago this was all an idea, now it is finally unfolding into serious revenue, in 18 months either that revenue declines because people don’t see the value or this is here to stay but crashes don’t happen this early. This isn’t 2000 where webvan or mamma.com were going public with nothing, these are real companies building real things with good earnings. Something like Anthropic is growing revenue at a rate we’ve never seen before, everyone wants to be involved int his revolution. We are barely into what is the largest infrastructure buildout of our times. We’re not going to crash until we see what this actually yields and if we overdid it, then yes there will be a crash. Yesterday was just a routine pullback, just relax, pull up a 100 year chart of the market if you need to be comforted right now, we always resolve higher.

Have a good weekend, I will see you monday