Get A Haircut! (FXI,QQQ,DIA,USO,IYT)
Earlier this week, freewheeling Hugh L. O’Haynew over at our Wall Street Elite desk decided to push the toothless FAANG narrative. He was keen on portraying them as no match for the traditionally more defensive sectors going forward.
Well, no sooner had the words spilled out of his Visconti fountain pen, than old Huey was once again proven King Solomon, wisest of all men.
Our fellow Modern Bully got his timing wham-doggy perfect. The market did a flip like a four egg omelet down at the Canary Restaurant on Cherry Street, splashing the butter and bacon fat this way and that, and scorching old Netflix by a greasy 6.5% on the day.
There were signs over the weekend, of course (for those without crust on their eyelids – thick crusts like you find on the toast down at the Canary), that a selloff was in the making. But Huey already laid it out here.
What remains for us to determine is whether the selling will continue or was just a one-off, bad hair day for the big tech NASDAQ honchos.
And the answer is…
A look at the chart of the NASDAQ Composite offers little consolation for the bulls. As you can see, price is currently hanging from a thread –
Not only has RSI gone sub-waterline (in green), with MACD rolling lower and price gapping down (in red), but as you can see from the blow-up insert (in black), today’s open will disengage entirely from the short term moving average (blue), a development than generally spells lower prices ahead for the security in question.
Unless we see a strong move up by week’s end that brings price back in touch with that same MA, we can be nearly positive the next stop lower for the NASDAQ will be roughly 7250, the support line offered by the 137 day moving average.
At that point, we’ll recheck sentiment levels and review the entire market’s structure, but today it looks downright negative.
Moving Right Along
And that diagnosis is supported by the transport sector, another strong leading indicator of where equities are set to move in the coming months.
Here are the transports –
The chart shows a sector already separated from both its short term moving average as well as its all-important 137 day moving average (insert, in black).
And with both RSI underwater and MACD about to confirm, we have a bearish scenario that will undoubtedly touch the 10,100 line in the next few trading sessions.
The transports’ woes have been egged on by rallying crude prices. Oil at the NYMEX just hit three year highs, and it’s hard to guess where they’ll move next, considering the unknown fates of Venezuela, Iran and how exactly OPEC will behave in the months ahead.
And China…? Even worse.
China has been the driver of markets for a great part of the last decade and a half, so it always behooves us to keep an eye on that country to pick up clues regarding cash flows and sentiment on a global level.
And wouldn’t you know it, the Shanghai market looks like a roadside diner restroom after a Hell’s Angels pit stop.
This is the iShares China Large Cap ETF (NYSE:FXI) for the last six months, and it shows a market that has literally become ‘unhinged’.
With yesterday’s trade action, FXI dove beneath its long term moving average, completely separating itself from support, and setting up a “where-she-stops-nobody-knows” short term scenario.
As mentioned above, unless FXI re-engages with its long term (yellow) moving average at $43 before week’s end, we’ll have an open-ended sell signal for the Chinese market with first weekly support emerging between $39 and $40.
It could be we’ll find a silver lining in the coming FXI dump, one that aligns with the current near-oversold RSI read (in green, above). Should that indicator slice below its telltale 20 line on any further weakness, we’ll likely get some rebound buying.
At that point, we’ll assess a new, long China position, and we’ll be watching very closely for opportunities as they develop in the coming weeks.
Let’s address three open trades before we offer you this week’s initiative.
The first is a rollout of an open short DIA option that we last discussed in The Crypto-Reformation on December 14th. With the option expiring tomorrow, we’re buying it back (210 CALL) for $31.65 and selling the December 21st 213 CALL for $31.85.
Our May 3rd trade came to you in a letter called Out With the Old War, In With The New. There, we urged you to buy the USO October 19th 14 CALL for $0.87 and sell the IYT September 21st 210 CALL for $0.90. Total credit on the trade was $0.03.
We subsequently (and in hindsight, mistakenly) repurchased the IYT CALL for $1.75, and today we’re selling the long USO CALL for $1.19. The trade doesn’t make sense for a number of reasons at this point, and that’s that.
Net-net we come away with a loss of $0.53 on nothing spent.
Finally, on June 7th we penned a missive called Monster Chiller Horror Market, wherein we urged a speculative purchase of the QQQ July 13th 176.50 CALL for $1.99.
With the market falling, we feel it best to jump now and recover what we can. Sell the option for $0.44 and write it off to what it was – speculation.
We’re going to make a play off the foregoing charts today and bet that the fellow near the bottom of his slide – China – is going to outperform the guy who’s just beginning his fall (big tech).
We’ll use the Invesco QQQ Trust Series (NASDAQ:QQQ) for the tech names and FXI for China.
And it goes like this –- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Many happy returns,