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Mish's midweek update: A trendsetting week in the markets (part 2 of 2)

Mish's midweek update: MarketGauge's Mish Schneider offers her expert analysis of US markets.

Welcome to the second of my two articles on an eventful final week of July for US markets. 

In part one (which you can read here), I previewed the US Federal Reserve’s 26-27 July meeting – at which policymakers raised interest rates, as expected, by 0.75 percentage points for the second month running – and I highlighted the key economic indicators to watch.

Today, in part two, I’m going to discuss a few potential trading ideas based on recent developments.

Rate rise triggers speculation

The Fed’s interest rate hike last week was met with a lot of speculative buying in the equities market. It also had an immediate impact on bond yields – just not in the direction one would expect. The initial move saw yields drop to roughly 2.6%.

Another key development last week was Thursday’s Q2 GDP update, which indicated that the US economy fell 0.9% year-on-year in the three months to the end of June. After two consecutive quarters of contraction – GDP shrank 1.6% in Q1 – the US is in a technical recession.

Though recessions are generally considered bad news, many investors interpreted it as a positive development on expectations that the Fed will step in to save the economy.

At time of writing on Tuesday, that expectation appeared to remain in place. In fact, there was some concern that long-term bond yields and the iShares 20 Plus Year Treasury Bond ETF [TLT] would begin to outperform the S&P 500 [SPY], potentially triggering an aberrant flight to safety in bonds.

Indeed, the jury remains out on the fate of TLT. Yields rose a bit on Tuesday, as shown in the chart below. 

Meanwhile, the SPY rallied on better-than-expected earnings results. This was a move that I predicted, as I wrote last week that “should SPY hold 390 and move back up over last week’s highs around 400…we can anticipate a move up towards 417”. 

As the chart below shows, SPY held 390, cleared 400 and on Monday reached an intraday high of 413.41, up from a high of 396.47 a week before. It didn’t quite reach 417, but came close. 

Against the current geopolitical backdrop (Ukraine, Taiwan) and in light of hawkish statements from certain Fed members, SPY will have to hold above 405 to keep investors confident.

Tesla moves up a gear

My article on electric vehicle (EV) uptake, published two weeks ago, also turned out to be prescient. Ahead of Tesla’s [TSLA] Q2 earnings, I wrote that “the EV maker could surprise to the upside. A move over $765 could take the shares back to $900-950”. 

Since that article appeared, Tesla’s share price, as shown in the chart below, has risen from $742.50 at the close on 20 July to $901.76 at yesterday’s close – a rise of 21.4% in a little under two weeks. On Monday, the stock reached an intraday high of $935.63 before falling back. 

With resistance now at the 200-day moving average of around $900, there is a case to be made for taking at least partial profits. 

But then what? Until the macroeconomic picture changes, it makes sense to approach TSLA, and indeed SPY, from a mean reversion trading perspective. In other words, to take advantage of this countertrend within a trend, it makes sense to take an active approach on the understanding that the moves we’ve seen could revert to their previous position.

Pay attention to sell signals

Looking again at the Tesla chart above, not only can we see resistance at the 200-day moving average, but we also note the position of the solid grey line, or the upper Bollinger Band, on price. When the price breaks back inside the Bollinger Band from an extremely high reading, that is a typical mean reversion sell signal.

Should the red dotted line of the Real Motion indicator fall below the dotted line, that too would indicate a mean reversion sell signal, or perhaps a place to sell any balance of profits. When both the price and Real Motion produce a signal in close succession, that can be an especially strong sign.

The same principles apply to the SPY chart. Speaking of mean reversion, if we look again at the TLT chart, above, we note that the price failed the Bollinger Band big time on Tuesday. The chart also shows that the red dotted line of the Real Motion indicator failed the momentum dashes. 

Whether one sells bonds, goes short on indices or just takes profits and retreats to cash, one thing is certain – nothing about the macro landscape has changed. The economy is stagnating. The prices of real assets, such as commodities, remain high and the geopolitical situation remains precarious. Soaring temperatures in the northern hemisphere have brought home the impact of climate change. And if the Fed is not aggressive enough, we will see another leg-up in commodities and perhaps new lows in equities.

This is a trader’s market, which means it’s sensible to sell extreme rallies, buy extreme dips, and to stay nimble. Real assets will continue to matter most.

Mish’s ETF support and resistance levels 

S&P 500 (SPY) 403 now closest support, 417 resistance
Russell 2000 (IWM) 182.50-183.50 support, may move to 190 next
Dow (DIA) 322-323 support, 331 next resistance
Nasdaq (QQQ)  308.55 support, 319 resistance 
Regional Banks (KRE) 60 key support, 65 resistance
Semiconductors (SMH) 230 now pivotal support, 237.50 some resistance
Transportation (IYT) The demand-side transportation sector cleared the base, now must hold 229.50
Biotechnology (IBB) 125 key to close above
Retail (XRT) 62 now support to hold, 66.25 big resistance

Mish Schneider is MarketGauge’s director of trading education and research. Read more of their market analysis here, and subscribe to their YouTube channel here.

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