Readers Who Bought Tech During The Selloff, Watch For These Factors

When you trade, you need to have a plan

Last week, I suggested to readers that the market was likely to sell off leading into the FOMC announcement on Wednesday Buy The Sell-Off Into The FOMC Meeting, Stay With Tech. So now I expect my readers to wonder what happens next. This coming week’s economic numbers are fairly calm – on Friday we have the University of Michigan Consumer Expectations. I don’t recall that being a big market mover unless it’s a huge upside change from the previous month. So let’s think it through.

The Factors are technical and economic data-related, with market psychology thrown in.

First, let’s deal with the technical aspect, below is the SPX which is the S&P 500 Index. The SPX is generally accepted as the main gauge for stocks, not the Dow Jones Industrial Average, which is followed by the general media. In any case, below is the 6-month SPX courtesy of Yahoo Financial.

The purple line you see that starts from the bottom left and runs beneath the blue is the 50-day moving average. You see that the SPX (the blue line) was well above it. That is, until April when we saw that we had 3 months of sticky inflation and the market didn’t like that. We see that this week stocks made a sharp movement upward, the 50 DMA is just below 5130. We closed at 5127.79, whether we stopped right there because traders knew the 50 DMA was right there or it also marks where there’s a lot of overhead resistance.

Since stock charts are about tracking price, all the squiggly meandering of the SPX not only represents the price but also individuals who bought at that price and are close to getting their money back. The horizontal line is 5150, which would in my opinion, signal that we are back in an uptrend. We’d still need to break out which offers resistance but, I would feel a whole lot more bullish if we pushed through the 5150 level. So why am I bullish? Let me modify that, why am I bullish enough to say stay in tech? I do think we are going a bit higher, but, I also think the big tech names will have more movement to the upside.

In this article and the prior one, I was talking about trading, so at some point you take profits on a trade. To the extent that we maintain some upward momentum, I think the reward outweighs the risk.

Powell said the exact right thing on Wednesday, and Friday the Employment numbers just happened to be soft

I believe market participants were relieved that Powell didn’t take rate cuts off the table for 2024. Furthermore, there was talk from certain economists that Powell should at least put rate hikes on the table. I think vague memories of Powell turning very hawkish and calling for pain, and whatnot – the so-called Powell of “Jackson Hole” which I did mention in my previous article would be bandied about.

In any case, the stock market hates the unknown, it craves visibility. Perhaps that is why it loves the idea that there will be a rate cut someday. As long as it hangs out there, the market is happy. So after the rate decision, when Powell was reassuring but also said the Federal Open Markets Committee needed to see more data, but he was sure that the current rate was restrictive enough, and that there would be a rate cut, the market was elated.

Then came the perfect April Jobs report on Friday, which made me wonder if he knew that it would break his way. Stocks jumped, with the SPX – S&P 500 index ending up 1.26%, regaining all that it lost this week and gaining 28 points over the prior week. Not to be outdone, the Nasdaq rose 1.99% and tacked on 230 points from the previous week’s close. With this kind of leap, we could see a bit of consolidation on Monday, but I believe that underneath the indexes we could see the best stocks moving higher.

Next week might be fine, but we could have another sell-off the following week.

Once again, we have the PPI on May 14 and the CPI on May 15, both at 830 AM. Hope for the best and prepare for the worst. I would think we would see some moderation since consumers seem to be rebelling against high prices a la the Starbucks (SBUX) earnings debacle, and McDonald’s (MCD) missing earnings as examples. Perhaps it’s the more price-sensitive among us that are saying no to higher prices, but I think it’s the start of a trend.

Of course, this April employment report moderating is a sign of some slowing. That should be reflected in the CPI, perhaps the PPI as Oil has come down meaningfully as well. Even though fuel isn’t counted in the Core CPI, it affects the cost of everything. After all that, I think it would be prudent for me to lighten up my trades towards the end of this week and hold some cash instead. I might even put some hedges on Monday or Tuesday using Put options.

So here’s why I think the Fantastic Five, or the Super Six should run a bit higher

Let’s look at the 3 Tech Stocks I am trading. The first is NVIDIA (NVDA). Let’s use the 3-month chart.

We have two concepts here; one is the bullish formation of a “Cup and Handle” and the other is a measured move. This is an estimation of how high the stock might rise. The difference between the 2 horizontal lines is about 115 points. That is so large that I won’t add it to the top horizontal line, where I start the measurement at 877. Let’s remember that NVDA hasn’t reported its earnings yet. Now that skepticism has been introduced by this large selloff, I think it has reason to gain some buyers this week.

Let me also say that I don’t believe that NVDA will tack on 100 points this week. The “Measured Move” has no immediacy, and it is an estimation, not a hard and fast level, especially since I picked the lines on the chart to measure. One thing I am sure of, for NVDA to fall to $760 a lot of individuals must have sold shares well lower than where NVDA is now. I would think that some want back in, especially money managers.

Next on my list is Alphabet (GOOGL) which had a cracking good earnings report.

GOOGL reported $80B and beat estimates by nearly $2B and beat GAAP earnings handily as well. What’s more, for the first time in history, GOOGL instituted a dividend, which will attract a new set of investors as well. If that isn’t enough, they announced a $70B buyback. So yes, I disregarded the Monopoly trial, which we won’t hear a verdict on for weeks or months. I got long in GOOGL a trade during the sell-off. Let’s take a look at the 3-month chart again.

This chart is very simple, and remember I am using the leverage of options, so I don’t need a lot of points to get a good return, the trend is higher, and I think even though I am not going to be on in this trade for long, I believe GOOGL needs to be rated higher than where it is right now. So many things are working right now for them, including better growth and higher profitability in Google Cloud, and AI. I will stay for another 4-5 points and call it a day. If we do have a sell-off the week after next, I might get back in for another round.

Finally, there’s Amazon (AMZN) which had earnings and also did great.

Inverse head and shoulders, which is very bullish. The way the formation is just reaching higher tells me that there’s an excellent chance that AMZN will also break out to new highs.

So let’s summarize: I believe that the Tech Titans, including Apple (AAPL), have a very good chance of reaching higher. I want to stress that I believe that many market participants sold these stocks and are underweight in these names. Both NVDA and GOOGL had steep declines in April, and so did AAPL for that matter, I think many participants will want to get back into these names and will start doing so this week. Perhaps Monday will show some hesitation, and unless there is some new news, let’s say geopolitical, then all bets are off, but that is always a danger.

The above is me thinking out loud about trading. If you are investing, or you are trading equity, and you intended to stay in your position before this article, please give it some thought. I am trading very short-term here, and the PPI and CPI might be good for stocks, or the market decides to look past them because of the weaker employment number.

So if you intend to stay in your trades for a few months, that could work fine as well. Longer term, I do believe stocks are going higher. If you are a long-term investor, certainly stay in your investments. I am writing about my specific circumstance, if it matches yours, great, if not, perhaps you found some interesting stuff here.

Since I spent a lot of time with my trades, let me list some of my equity investments: ASML Holding (ASML), Intuit (INTU), Meta Platforms (META), and ServiceNow (NOW). They all fell hard this week, so I added to my positions.

OK, good luck everyone…