Douglas Busch

Consumer Collapse: After last week's shellacking just one major S&P sector is in the red in 2024 and that is consumer discretionary down 1%. The WEEKLY chart below of the XLY shows a bearish rising wedge with higher highs and lows since the summer of 2022, but the coiling action is likely to result in a volatile fashion. Some may state that the XLY is just representative of only AMZN and TSLA, but the broader XRT is licking its wounds as well. But that fund fell 3.3% Friday not only completing a bearish island reversal but breaking BELOW a bullish ascending triangle, and we know from FALSE moves come fast ones in the opposite direction. It was not long ago TSLA recorded a one-hundred handle surge between mid-June and early July, but that has evaporated as quickly as it began. It is now touching the upward-sloping 50-day SMA for the initial time following the breakout above the inverse head and shoulders formation at the very round 200 number, often an ideal entry point. Once again the WEEKLY doji candle the week ending 7/12 was the canary in the coal mine (as well as the quick failure attempting to break above the double bottom base) for the change in the prevailing trend. AMZN which reacted to earnings Friday recorded a bullish hammer as it filled in the 2/1 earnings-related gap CLOSING just below the 200-day SMA. These 2 XLY giants have been wounded. We will find out next week if it was mortally so.

Semi Breakdown: Just in late June NVDA was briefly the largest company in the world and the headlines splashed around with its $3T market cap. How quickly things could change. It has now lost both of those statuses and currently trades 22% off its most recent 52-week highs (what some would call "bear market territory"). The chart below shows its erratic daily ranges beginning with the bearish engulfing candle on 6/20. Wide and loose trade are hallmark bearish traits, the exact opposite of very taut action on the bullish side. The wild swings are what we tend to see at market tops, not at bottoms where trade firms up and selling gradually comes to a halt. The WEEKLY chart we drew up in yesterday's tech note could see a move back toward 90 which on the daily would translate to a gap fill from late May. It is looking at a potential rare 3-week losing streak, down 3.4% heading into Friday, and the good news there is it has only occurred 3 times since the start of Q4 '22 and it did not drop another week. Its MONTHLY chart still shows it an incredible 67% above its 50 MONTH SMA, although it has only come into contact with the line twice in the last decade in 2019 and 2022.

Group Eagerly Awaits Leader: With the bevy of earnings reactions this week perhaps none will be looked at more than AMZN on Thursday afternoon. The fifth- largest company in the world and the top holding in the top-heavy XLY at 22% will have a big say on not only the consumer space but the market overall. Keep in mind the second biggest name in the fund in TSLA was a disappointment after reporting on 7/24 completing a bearish island reversal (after the gap up on 7/2). Notice Tuesday recorded a bearish engulfing candle right at the downward sloping 21-day EMA. The MONTHLY chart below of AMZN shows an attractive long cup base and we know the bigger the space (longer the base) the greater the space upon breakout. This cup pattern commenced in mid-2021 and June broke above the 188.31 pivot and we know the best breakouts tend to work right away, so the fact that July with 2 sessions left is now below the pivot is a red flag. The daily chart shows a break BELOW a bear flag and we know from FALSE moves come fast ones in the opposite direction. Thursday afternoon will provide fireworks one way or the other.

Size Matters:   An interesting pair has put on a nascent sprint higher and is the small sample size a head fake or the beginning of something decisive? I am talking about the XBI and the IWM. Below is the daily chart of the XBI which seemingly is often at some kind of "inflection point" at the very round par number. Notice the almost perfect correlation here since April at various times with both the XBI and IWM trading in tandem. This is not out of the ordinary as firstly biotechs thrive in a decreasing interest rate scenario, as they are often unprofitable and depend on that type of environment to survive. Then when one looks at the sector composition of the small-cap index, healthcare and financials are the two largest (with industrials just behind) near 18%. So one would think to monitor the Russell 2000 for a clue as to where biotech may be headed. Currently, it is sporting a bull flag formation and a break above the 225 pivot carries a potential move to the round 250 number. Notice the apprehension however there and the dubious candlesticks at the level with a big reversal on 7/17 which was well above 225 intraday but could not CLOSE above it, and the spinning top last Friday and the bearish engulfing candle Monday.