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Divergences between sectors

Hey Market Pilots,

Last week was challenging. Mostly because there were events which threw confusion and unpredictable movements into the market. Earnings season is always chaotic as investors wait for news which will guide them until the next report and beyond, which during COVID-19, is a big question mark. On top of that, we had the FOMC report and as I have said in the past “It’s not the day of FOMC that matters, it’s the next day”. That was true once again this week.

Then this is where we get into the notion of each index being on their own planet. The QQQ’s which are mostly tech and had some major earnings reports like AAPL, AMZN, FB, GOOGL, didn’t even care about the FOMC. The QQQ’s gaped up Friday because of well received earnings reports. That gap had to get filled, but price found support at the 15 min 50 and continued. The QQQ’s look strong as they come out of a fairly clean flag, but I don’t believe they are out of the woods yet.

Next we have the SPY which is the most representative of the overall market. This index is what has been giving me the most trouble. I nailed the call on the overbought drop on 7/23/20 which you can read here. After that I was mostly bullish as the Moxie Indicator was drifting upward on the 15 min time frame and price got back on top of all MA’s but the FOMC loomed ahead. The SPY succumbed to post FOMC action with a large gap down the morning after but Moxie stayed elevated and price eventually came right back up. Then those big earnings came out which popped price, but price couldn’t find support. I was getting worried this would become something worse as price began to have to deal with an arcing Hourly 50 and 15 min 50/200. Only in the last hour or so of the day did the SPY find some traction and shot up. The whole week was choppy which muddled my signals and made trading problematic. 

Then we have the IWM…

Generally the index which is viewed as a risk on or risk off indicator. If the IWM is moving well, then investors have an appetite for risk and everything is probably moving well. But if the IWM is severely lagging, then the investing environment could be more dangerous and so money is hiding out in safer, big name havens. While the IWM did pop at the end of the day like the other indices, it is still under MA’s on the Hourly and 15 min time frames and is the worst of the bunch.

These divergences between the markets can persist for some time, but eventually even the leaders have to bend to the weakest. A handful of stocks can only carry the market for so long. Keep this in mind as you may be busy trading the successful tech names and not see the deterioration that is happening in the rest of the stock market.

Over and Out,

Your Market Pilot

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