Every week we rotate through the traders at Simpler Trading for the members-only weekly watch list, and this week it was my turn. I’m sharing it here because the theme ties right into my weekend review: extremes lead to reversion. Let’s take a deeper look at the mean reversion trade I’m watching and the setups already showing strength.
What the Mean Reversion Trade Looks Like Right Now
For weeks, tech, semiconductors and anything tied to AI got absolutely pummeled. Meanwhile, the anything-but-AI names kept moving up. Think Walmart and Home Depot. That reads to me like a rotation trade, a flight to safety.
My read is that both sides got extreme. The names moving up went to extremes, and the names moving down went to extremes. When that happens, the overbought names can start to pull back and the oversold names can start to bounce. That is the mean reversion trade in one sentence.
The news helped. The Anthropic IPO details came out Monday morning, and the read so far is that they matched what people expected. With the whole market hinging on the AI trade, reinforcing expectations instead of blowing them up is a good thing. Rates are also coming down, with the TNX lower and TLT moving up, which takes some pressure off the market. I think something like the IWM is starting to look a little better too.
The S&P 500 and SMH Need Follow Through
On the S&P 500, price was over the 50 with the Moxie Indicator below zero. That is an inverse trampoline move, a bearish setup, and we got the move down Thursday and Friday before Monday’s bounce. The S&P has been sideways for so long that I’m watching everything else to figure out when it finally does something. With midterms coming, I have a feeling the real repair may not show up until they are out of the way.
SMH is the tell for the AI space. It is oversold and sitting at support. Monday was encouraging, although I need to see follow through. A healthy multi-day bounce, maybe even a short squeeze, is what I want to see.
Retail Setups for the Mean Reversion Trade
With rates coming down, retail and interest rate sensitive names are perking up. American Eagle broke out of a bull flag. Urban Outfitters came up in the trading room, and it popped out of a bull flag too. Victoria’s Secret has been strong since its earnings, built a bull flag over the last few weeks, and popped Monday.
Outside retail, BlackBerry has been resting after a big run on the AI trade, and as long as it holds the 50, I think there’s something here. Tesla has been chopping in a wide range for a long time and is now breaking out. Taylor had a trade on it in the trade room and cashed it in Monday. If this market gives us any follow through, a breakout after that long sideways move is a good sign.
FOMC is Wednesday. No change in rates is expected, so the focus is what Warsh says. I’m not chasing the mean reversion trade. I’m looking for the names the market is actually rewarding. Watch the full weekly watch list in the video above, and for more on how money moves between groups, read my earlier breakdown on why this market rotation could catch traders off guard.
Your Profit Pilot,
TG Watkins
If the AI trade is the story of this market, John Carter’s Build Your AI Trading Team webinar is worth your time. He shows how to build your own custom AI for your trading, Wednesday, October 28, at 6 PM CT. Save your spot here.
