Market Milestones: Dip & Thoughts

The markets continued to sell off this week, and bearish headlines proliferated across the internet and media. Headlines like “Stocks smoked, Nasdaq falls over 3.5% in worst day since 2022” and “A wipeout on Wall Street sends the S&P 500 down by 2.3% as Big Tech skids” were the norm this week. The Fear and Greed Index dropped fully into the fear box at 39.

SPY

Meanwhile, the SPY is a mere 4.9% off its all-time high and back to prices not seen since mid-June. Granted, big tech and semiconductors are pulling back, and rather sharply at that. It seems that the last 600 days of price action have conditioned investors to believe that big tech and the AI plays are infinite money-printing machines, and that these stocks are unable to go down. NVDA, MSFT, META, and AVGO have not hit their 200-day simple moving average (200DSMA) in the last 18 months. META and MSFT are getting pretty close to their 200DSMA during this current pullback, while NVDA and AVGO still have not hit the 100DSMA. This shows the relative strength and absolute parabolic moves that the strongest semiconductors have had.

AVGO

We spoke just last week about SMH and NVDA and the great risk-reward that they and many tech names will offer if they can pull back into the long-term moving averages and horizontal supports. Tech has continued to fall this week, but many traders and investors may have been spooked by the current sentiment and not followed through on the plan they made only one week ago. Let’s look at SMH chart once again because it’s a great ETF fundamentally and technically, and it has the added bonus of being 20% weighted to NVDA.

SMH hit the 100DSMA on Thursday for the first time in 261 days and did so on large bearish volume with a strong lower wick. The RLT Newsletter has been discussing these levels for weeks and they are now getting hit. Individual plans on what to buy, where to buy, and how to protect should have been formed well in advance, making it easier to buy when dips get a little scary.

SMH

Headlines, likely written by AI featuring articles written by AI, are appearing left and right about the AI sector cooling off and the AI stocks crashing. When the time to buy comes, it’s never easy, it never feels great, and it doesn’t always work out.

That last one is the real doozy, right? Not all dips are dips; some are the beginning of crashes. However, that should all be accounted for well before any trade is entered into a broker and long before any trade fills. Maybe SMH breaks down and flushes through $218.00, which is an Alert Zone that was outlined at the same time as the Buy Zone. If that happens, the second part of the trading plan kicks in, risk is mitigated with protective puts or stops, and the money that is lost does not become catastrophic to the portfolio. Nearly every time a trader enters a position, it will go into the red for some period of time. You don’t need to call the tops and bottoms to make money in the markets. You just need the risk-reward to work and the probabilities to be in your favor. Prepare mentally to have the dip extend far beyond your stop or protection level, and maybe you will be pleasantly surprised when it bounces.

QQQ

When we look at this current dip, it looks like it could be close to a bottom. The QQQ and SMH are both down into their 100DSMA while the SPY has retested its bullish retest gap from 6/12. The QQQ is back to oversold on the 10-day RSI which has marked a bottom over the last year. Whether or not the bottom is here will depend on four companies next week: MSFT, AAPL, AMZN, and META. If the biggest companies in the world have good earnings and positive reactions, that will likely mark the bottom of the market for now and lead to a rally into the highs. If not, prepare to hedge, protect, and plan for lower limit orders because Q3 could get a little bumpy.