Stocks fell sharply on September 4 despite a late-day comeback that failed.

Stocks Drop As Major Trendline Breaks For The First Time Since April

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September 4, 2020


Macro – QQQ, SPY

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Michael Kramer owns QQQ Puts

The market has gone into another mode, and it is just flat out scary how it moves so erratically with speed. At 10:30 am on September 3, the Qs were at $294.50; around that same time on September 4, they were at $271.80, a move of 7.5% drop. That is insane. You realize if this type of movement took place over a week, there would be specials on TV about whether or not this is the next significant correction in the market. But because this happened in 24 hours, nobody has the time to even think about it. The moves we witnessed are not healthy, and they downright dangerous. It shows you how much speculation there is in the market, and much leverage must be getting used. You can see the danger of what happens when the Algo’s flip.

Everyone wants to know what happens next, and I wish I had an excellent answer for you. But I can tell you a few things about this market pullback that is different than the other retreats we have seen since April. First is the volume. Look at the explosion in the volume levels of the Qs; the last two days saw volume levels similar to that of March. It means the drop brought out a lot of sellers.

Second, for the first time since April 3, the S&P 500 closed below the uptrend. This is typically not something we want to see; it would indicate that momentum is likely shifting.

Third, the S&P 500 rallied into days end and failed at that trend line, with 45 minutes left in the day.

Fourth, the Qs failed to get over resistance around $286, which served as support on September 3.

One more, the number of stocks below their 50-day moving average in the NASDAQ 100 fell below 60% for the first time since April 27.

The rally into the close was impressive, but it could have just as easily been on the heels of short-covering as it was on real buying. It is important to remember that this is a three day weekend, and nobody wants to be short into a three-weekend. Especially when some piece of news could drop Monday at 5:30 pm, about some bogus vaccine in a golden hamster showing an immune response to the COVID virus pumping up the futures, as dumb as that may sound.

So, unfortunately, we will have to wait until Monday to get more confirmation, but based on what I see, I’m not too fond of it. I may be more conservative then many of you about the market rising, and have a more negative attitude, but that doesn’t mean I want it to fall. I do run a long-only portfolio, and it is still 65% or so invested long, with 35% in cash. I’m just glad I trimmed my Tesla position again this past week.

Tesla didn’t make it in the S&P 500 from what I am reading tonight. The stock is falling after hours. Tesla was a big part of this momentum trade, and if this stock gets hit on Monday, it is likely to drag down some of the other momentum names with it. Tesa has to hold support at $370; otherwise, it is a fast drop down to $330.

I don’t understand how Tesla was passed up for ETSY, Teradyne, and some company I have never heard of, but that how it goes.

PayPal is a pretty good example of what happens when a stock breaks and uptrend and is then is reject on the retest.

Square broke one of its uptrends, but for now at least found support at the other.

Skyworks is another example of a stock breaking its uptrend and failing on the retest.


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