QQQ support violation postpones immediate rally

The recent selloff took a turn for the worse with the break of multi-week lows in QQQ, representing the worst two-day selloff since October 2023.  While I argued in last Friday’s note that this week should be important in causing a low to this recent decline, it doesn’t look to be in place just yet after Monday’s drop.   Interest rates and US Dollar continue to trend higher and these are key reasons along with the ramping up in geopolitical tension that stocks are declining.  Furthermore, QQQ just broke to multi-week lows, and this firmly puts the focus on later this week for a possible bottom, vs. earlier in the week given cyclical projections.  At present, after just a -3.6% decline over the last few weeks, this pullback falls in line with seasonal tendencies which argued for possible 2Q weakness before rallies back to highs.  I continue to view this decline as short-term in nature, vs the start of a major pullback.

Unfortunately, all of the positives about Technology resilience, lack of Defensive strength, cyclical tendencies and sectors like Healthcare and Financials nearing support couldn’t do much to help markets stabilize today, and the break in QQQ looks damaging in the short run.

To ask ourselves whether a major selloff is underway, a few things need to be answered:

1. Has Technology broken down vs. the S&P 500?
2. Did we witness indiscriminate buying into March where the majority of stocks were hitting new highs daily and there was a speculative environment?
3. Did intermediate-term breadth figures start to tail off sharply in recent months, similar to what happened in 2021?
4. Have defensive sectors broken uptrends vs. S&P 500 and started to show more evidence of strengthening?
5. Do seasonal trends show the 2^nd Quarter as being a peak for the year with regards to market cycles during Election years?
6. Have intermediate-term momentum gauges turned negative?
7. Is Consumer Discretionary still trending higher vs. Consumer Staples?
8. Is this bounce in long-term interest rates something which should challenge recent highs along with the US Dollar per their own respective Elliott wave patterns?
9. Have the uptrends in Growth vs. Value been snapped to show Value outperformance across Large, Mid-cap and Small-cap Styles?
10. Has recent sector rotation caused Financials and/or Healthcare #2 and #3 within S&P per Market capitalization, to turn down sharply enough that would violate their own respective uptrends?

I believe the answer to all 10 of these questions above is a resounding “ No”.   Thus, while DXY and TNX trending higher have indeed proven to be a hindrance towards the snapback rally in US Equities materializing, it’s hard for me to make the case for 7-10% losses (SPX currently sits at -3.6% decline since the March 2024 peak)

Furthermore, markets tend to absorb news quickly and discount events to the extent that sudden geopolitical tension likely shouldn’t prove too long-lasting. 

Daily SPX chart below shows the break of 5090-5110 which I felt might be important on this drop.  At present, the move in TNX up above 4.65%, has resulted in SPX’s decline continuing lower and now could very well test an area just below 5000 into 4/18-19^th before bottoming.

My thinking is that 4932 should not be breached, and that 4991-5,000 could hold on an initial test.  However, to have confidence of SPX turning higher, it’s important for price to eclipse 4/4 intra-day lows of 5146, with a daily close over 5212 giving even more confidence.

Overall, I cannot rule out a bit more weakness this week at this point as long-term interest rates are still pressing higher.  However, given that Technology has not broken down relative to S&P 500 and many stocks like GOOGL 1.03% , AMZN -0.58% , META 2.05% , MSFT 1.51% , NVDA 3.79%  remain in good technical shape, it should be right to buy dips in these names, not sell out of market exposure given geopolitical tension.

S&P 500

QQQ support violation likely requires a bit more consolidation before bottoming

Overall, I wasn’t willing to make much of the recent sideways churning QQQ since February as last Friday’s close of 438.27 lie within a point of 2/27/24’s 438.07 close.

However, Monday’s (4/15) decline appears a bit more bearish technically and does merit addressing to explore where this might go in the weeks ahead.

QQQ sliced under lows from 4/4 and 3/15 to reach the lowest levels since mid-February.  There appeared to be a breakdown of Semiconductor Index (SOX) under recent triangle support that also could allow for near-term weakness.

Bottom line, while some indicators might seem oversold, as per McClellan’s Oscillator, traditional momentum oscillators like RSI are certainly not oversold on QQQ as Monday proved to be the first real day of weakness which broke support.

I expect 2-3 days of possible weakness, but would use pullbacks in QQQ to think this should be nearing support for a move back to new highs.   Support lies at 425, then 421, and I expect that further weakness this week should bring about opportunity for those looking.

Invesco QQQ Trust

April election year seasonality

Recent turbulence doesn’t look all that unusual given the normal Election year seasonality during most April months.

However, it’s not likely, in my view, that stock prices slide throughout the month of April.  There should be some attempt at bottoming which happens sometime this week and can begin to lead higher.

Given Monday’s close near the lows of the session with an abnormally large “high to low” range, it might be unlikely that Monday marked the low for this decline.

Cycle studies pinpoint 4/20 which would line up with the upcoming Bitcoin halving due to occur this coming weekend.  Thus, it’s likely while the first half of April has been weak, the back half should fare much better.

Implied S&P 500 Trajectory

Defense stocks should prove appealing to buy after recent weakness given uptick in geopolitical tension

The pullback in Ishares Aerospace & Defense ETF (ITA -0.22% ) makes this appealing technically to consider after recent weakness.

Given the noticeable ramping up in rhetoric between Israel and Iran, this minor weakness hasn’t been damaging and should provide an appealing entry for many of the Defense stocks within ITA.

Note that the current Ichimoku Cloud has proven to be important in January-February of this year and prices are now revisiting the same area which represents the top of this Ichimoku cloud formation.

Thus, while the uptrend line from January was officially broken, it’s my view that this ETF is nearing support based on this pullback to support along with prior lows from March being at just fractionally lower levels.

Bottom line, after five of the last six days of selling pressure in ITA,  prices look like an attractive risk/reward near $127.

iShares U.S. Aerospace & Defense