Another Key Reversal Top?

It was another topsy-turvy week in the stock market as stronger-than-expected early economic reports again made investors fear that the Fed would not be able to cut rates. Traders were apprehensive as they waited for Wednesday’s after the close earnings from NVIDIA
NVIDIA

SPDR Dow Jones Industrial Average ETF Trust
Corp. (NVDA) but they had nothing to fear as once again they beat on earnings and revenues.

The stock climbed well above the $1000 level to gain over 15% for the week as they also announced a 10-1 stock split that is scheduled for June 10^th. This set the stage for a wild open on Thursday as buy orders flooded the market.

As I mentioned before Thursday’s open “It will be interesting to see how the markets react to the NVDA news as I would be on the lookout for a possible negative reversal”. As it turned out the S&P 500 opened higher at 5340.26 (line b) which was above the prior day’s high, reached 5341.88 before closing at 5267.84 which was well below the prior day’s low.

I have discussed prior the key reversals on July 27, 2023, as well as on April 4^th, 2024, line a. They are also referred to as bearish engulfing patterns but when I first learned about them candle charting was not widely used. Thursday’s trading met all the psychological criteria. A strong market trend, a very bullish opening that was preceded by sharp overnight gains in the futures and then investor FOMO after NVDA’s earnings.

I frequently stress that one should carefully analyze the entry price of any new positions. One strategy I teach is to buy close to a rising 20-day EMA where a tighter stop can allow one to better limit the risk.

On Thursday, May 23^rd NVDA opened at $1020.28 which was 12.2% above its 20-day EMA and also well above the daily starc+ band at $999.70. NVDA was clearly in a high-risk buy area. Though NVDA finished the week even higher it closed over $130 points above good support and a logical stop. This would be a potential risk of well over 12%.

So does the key reversal in the Spyder Trust (SPY
Principal Shareholder Yield Index ETF

SPDR S&P 500 ETF Trust
) mean we have to see a correction of 4% like what occurred after the April 4^th reversal? Or should we be prepared for the double-digit decline that took place after the key reversal on July 27^th, 2023? That correction lasted until the end of October 2023.

Overall the technical warnings in July were stronger than the current situation as the A/D lines eventually generated stronger sell signals. For example, the Invesco QQQ
Invesco QQQ Trust
Trust (QQQ) did not close below Wednesday’s low so it did not trigger a key reversal last week.

The 20-day EMA and initial chart support is now in the $443.33 area with the QPivot at $429.56. The recent breakout to new highs is bullish for the intermediate term. The weekly starc+ band is at $466.73 with QPivot resistance in the $473 area.

The daily Nasdq 100 Advance/Decline line had a new high last Monday overcoming the negative divergence at line b. The A/D line dropped back to its WMA on Thursday but then rose on Friday. A move above last week’s high would be very positive.

The relative performance (RS) has gotten stronger as it has moved further above the downtrend, line c, and its rising WMA. The weekly RS is positive as it is also above its WMA signalling that QQQ is again a market leader.

This analysis is consistent with the readings from the IWF
iShares Russell 1000 Growth ETF
/IWD ratio analysis. The downtrend from the February high, line b, was broken two weeks ago. This means that growth is now leading as the prior high at 1.936 has been overcome. The 20-week EMA has turned higher which also favors growth over value. It would now take a decline below the April low to change the outlook. The MACDS are rising and improving but are still negative.

It was a rough week for the markets as the Nasdaq 100 Index was the only one that was higher, up 1.4%. The S&P 500 was essentially flat. The SPDR Gold Shares (GLD
SPDR Gold Shares
) dropped 3.5% last week leading on the downside followed by 2.7% declines in both the Dow Jones Transportation and Dow Jones Utility Average. The Dow Jones Industrial Average was also lower, losing 2.3%.

Given the lower weekly closes a further pullback early this week would not be surprising, As long as there are not stronger sell signals from the A/D lines even a correction like April is not expected. The growth of ETFs and stocks will be favored as they are likely to be leaders this summer. Be sure to watch both your entry levels and risk.