Breakdown or Breakthrough?

Good evening,

This week, let's revisit the investment ideas outlined in my recent piece, "Getting on Base." The core idea was to capitalize on market opportunities while anticipating the release of key inflation data.

Essentially, "Getting on Base" focused on making a series of smaller, more agile trades, and positioning the portfolio for potential gains as market volatility may increase around the upcoming inflation reports.

• Uber: The 'S→D zone' held strong through Friday, delivering a solid upside gain amidst a sea of red. Uber, trading at $64.85 at publication, managed to reach a high of $66.60 (scary!) and settled the week at $65.96. This translates to a potential 2.69% gain at the highs and a respectable 1.72% gain at the close. A textbook example of a successful trade.

• Marvell: Unfortunately, luck wasn't on the righties side here. Marvell, priced at $116.93 at publication, closed the day at $114.32. While there were a few attempts to hold support at the trendline, true buying interest failed to materialize. Marvell ultimately ended the day in the red.

• Fortinet: Fortinet exhibited similar price action to Marvell, though it demonstrated greater respect for the trendlines. A brief 1% gain materialized during the market bounce around 12-1pm ET, but this was quickly erased as the broader market continued its downward trajectory.

• Cloudflare: Given that NET was trading near the upper end of its trading range at publication, Friday presented a more favorable entry point for buyers. While no trendline is absolute, patient traders could have capitalized on the early morning decline by entering near support and riding the bounce. This approach could have yielded an almost 3% gain on a day that proved challenging for most stocks.

• Microsoft: This one saw a weak showing early on, with a slight recovery during the 12-1pm ET bounce. However, the gains were short-lived, and any potential support levels quickly turned into resistance.

I'm often asked why I share my investment insights, and there are several key motivations. Firstly, I believe in empowering others. I never had access to this level of financial knowledge, and the thought of positively impacting even one person's financial journey is deeply rewarding.

Secondly, the market is flooded with information, yet most people never truly engage with it. I aim to cut through the noise and present actionable insights.

Finally, the market demands continuous growth – intellectually, emotionally, and psychologically. This aligns with my belief that sustained success in any field, particularly in finance, hinges on a strong mindset and a relentless pursuit of knowledge.

Now, let me share an observation I haven't encountered elsewhere. While I can't claim exclusivity, I haven't seen anyone in the current market discussing this. 

Continuing from our previous discussion on the 'base hit' strategy, many technical indicators suggested a period of market consolidation leading up to the release of inflation data. However, Friday's action demonstrated a more decisive move than anticipated.

Examining the previous three non-farm payroll releases (November, October, and September 2024), we observe relatively muted market reactions. The daily range of the S&P 500 (SPX) during these releases was 19.99, 49.30, and 50.38 points, respectively. Daily performance was modest, at +0.33%, 0.41%, and 0.90%, all well within the typical daily volatility of the index. This historical pattern might have led to an expectation of another uneventful release.

However, effective investment strategies often require anticipating the unexpected. A broader perspective reveals the following…

I encourage you to consider how the recent data release fits within the broader market context of the past nine months. This independent analysis may reveal insights that could be valuable. This analysis should be considered one piece of the puzzle in your overall investment strategy entering 2025.

If you've reviewed any charts after the close on Friday, you've likely observed numerous instances of the technical patterns illustrated below.

*Please note that the ticker symbols on the charts are not relevant to the primary focus, which is the analysis of the technical patterns.

The emergence of 'break-down' patterns across a wide range of charts suggests a potential shift in market sentiment. This pattern, which has historically offered favorable trading opportunities, may indicate the bottoming out of a recent correction for certain sectors. Be mindful of the third chart (potential reversal) and where price was at the time of this “false breakdown”. 

Market folklore suggests that Monday's price action often mirrors the previous Friday's trading activity. This observation stems from various factors, including the 'two-day rule' – a well-established trading principle.

The 'two-day rule' encompasses the time required for sellers to cover their positions and the standard two-business-day settlement period for most trades.

With patience, dip buyers may find opportunities tomorrow morning to push prices back towards previous trendlines, potentially retesting former support levels. This aligns with my initial hypothesis that the upcoming PPI (Tuesday) and CPI (Wednesday) releases will continue to significantly influence market movement.

Presented below are three additional charts: S&P 500 (SPY), Broadcom (AVGO) and Colgate-Palmolive (CL). Since the QQQ chart exhibits a similar pattern to the SPY, it has been omitted. While these charts do not represent the entire market, they offer valuable insights into the current risk sentiment, indicating whether we are in a 'risk-on' or 'risk-off' environment. 

Taking into consideration all the data we crunched above; I do believe these charts will help guide you for the week(s) ahead.

Over the weekend, I had an interesting conversation with a friend that presented some ideas I had not previously considered. Due to the nature of the information, I'm currently reviewing what I can appropriately share publicly.

This information is based on a report presented to his clients, and I will do my best to convey the relevant insights. If his analysis proves accurate, you may find the upcoming article particularly informative.

In the meantime, I hope today's article provides a helpful overview of potential market developments this week.

Disclaimer: Trade at your own risk. The information provided here is of the nature of a general comment only and neither purports nor intends to be specific trading advice. It has been prepared without regard to any particular person’s investment objectives, financial situation and particular needs. Information should not be considered as an offer or enticement to buy, sell or trade.

You should seek appropriate advice from your broker, or licensed investment advisor, before taking any action. Past performance does not guarantee future results. Simulated performance results contain inherent limitations. Unlike actual performance records the results may under or overcompensate for such factors such as lack of liquidity. No representation is being made that any account will or is likely to achieve profits or losses to those shown.

The risk of loss in trading can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition.

If you purchase or sell Equities, Futures, Currencies or Options you may sustain a total loss of the initial margin funds and any additional funds that you deposit with your broker to establish or maintain your position. If the market moves against your position, you may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice in order to maintain your position. If you do not provide the required funds within the prescribed time, your position may be liquidated at a loss, and you may be liable for any resulting deficit in your account.

Under certain market conditions, you may find it difficult or impossible to liquidate a position. This can occur, for example, when the market makes a “limit move.” The placement of contingent orders by you, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.