In early 2024, MicroStrategy (MSTR) became a meme stock favorite thanks to its close ties to Bitcoin. If you rode the hype to its peak in March, hopefully you cashed out before hedge funds began shorting it heavily and going long Bitcoin instead.

How would you have known that hedge funds would begin plunging the stock? Like most traders, you probably wouldn’t have direct access to this type of information before it’s too late. But you’d have indirect information from institutional investors’ “footprints” in the market.

Tracing the Impact of Hedge Fund Shorting in MSTR

Pull up your SharpCharts platform, type MSTR in the symbol box, and look at its price action in March. It peaked at $200 a share, which is when hedge funds began shorting the stock.

In the Overlays section below the price chart, add the 200-day simple moving average (SMA). Even though MSTR’s intermediate-term trend is down, its long-term trend is still up, yet it’s currently being challenged.

Clues That Smack of Heavy Short Selling

Here’s what I’m looking at—my complete chart (which you can follow or customize yourself by clicking on this link).

DAILY CHART OF MSTR STOCK. The footprints of hedge fund activity were evident in the divergence between price and momentum.Chart source: StockCharts.com. For educational purposes.

Look at the blue lines in the lower panels that follow the contours of the price action, Relative Strength Index (RSI), and the Chaikin Money Flow (CMF). You may not have had knowledge of hedge fund shorting activity, but the traces of their actions are evident in the divergence between price action and momentum.

The jump from $49 to $200 in just over a month screams meme momentum. But what momentum? The RSI tells you that those three consecutive higher swing points from the end of February to the March peak are overbought, with momentum dropping off. The CMF also shows that buying pressure is declining as the price keeps moving higher.

The Ichimoku Cloud is plotted to measure the intermediate-term trend and momentum. As you can see, the first bounce after the March decline (see orange circle) was met with buying at the 61.8% Fibonacci Retracement line. The second and third took place at the 200-day SMA.

Despite the volatility, the intermediate trend is sideways, and the momentum is flat. For the long-term uptrend to hold, the price needs to stay above the 200-day SMA—and that’s being tested.

Closing Bell

Here’s the takeaway: Some fundamental developments aren’t always easy to spot. Most investors wouldn’t have caught certain hedge funds’ short-selling moves in MSTR stock. That’s where technical indicators save the day. In this case, it was all about divergence. You can also rely on other indicators to catch trends before they’re obvious. Use the StockCharts tools listed in the Member Tools section of Your Dashboard to stay ahead with timely, actionable insights.

Last but not least, be sure to save MSTR in one of your StockCharts ChartLists.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

I hope you had a relaxing, restful long weekend, and welcome to September.

It was a pretty dismal post-Labor Day trading session. We all know September is the worst for stocks, but let’s hope the first day’s action doesn’t foretell how the rest of it will play out. All the broader equity indexes are down, with the Nasdaq taking the biggest hit. The Nasdaq Composite ($COMPQ) and Nasdaq 100 Index ($NDX) closed lower by over 3%.

The StockCharts MarketCarpet was a sea of red, with technology stocks leading down. Some pockets of strength can be seen in Consumer Staples, Real Estate, and Utilities, the leading sectors in Tuesday’s trading.

FIGURE 1. A SEA OF RED. The StockCharts MarketCarpet gives you a good idea of stock market action.Image source: StockCharts.com. For educational purposes.

Tuesday’s Manufacturing PMI was 47.2%, which is lower than expected. This suggests that manufacturing activity is contracting, which may have been the catalyst that led to the stock market selloff.

The daily chart of the S&P 500 ($SPX) below shows the index hit its 50-day simple moving average (SMA) and bounced off it. But what’s less discouraging is that it closed below its 21-day exponential moving average (EMA) and a consolidation range.

FIGURE 2. THE S&P 500 BREAKS BELOW ITS CONSOLIDATION RANGE. If momentum continues to slow, there could be more selling pressure in the near-term.Chart source: StockCharts.com. For educational purposes.

Overall, the pullback is still well above its August low, so, technically, Tuesday’s selloff isn’t as bad as it may seem. But it’s not all that great, either. The full stochastic oscillator in the lower panel shows declining momentum, so there’s a chance that the chart could get ugly.

Techs Tank

The Nasdaq Composite chart looks even worse. The index is flirting with its 100-day SMA and is below the 38.2% Fibonacci retracement level. The stochastic oscillator is also declining much steeper than for the S&P 500.

FIGURE 3. TECH STOCKS TANK. The Nasdaq Composite is flirting with the support of its 100-day moving average. The stochastic oscillator in the lower panel is in a steep decline.Chart source: StockCharts.com. For educational purposes.

The selling frenzy in Tech stocks isn’t new, especially in semiconductor stocks. Nvidia’s earnings weren’t good enough for the market, and Broadcom, Inc. (AVGO) will announce its earnings on Thursday. AVGO stock closed lower by over 6%, and NVDA closed over 9% lower. If Broadcom doesn’t report strong enough earnings, there could be more of a selloff in the Technology sector.

Of course, time will tell, but it’s worth watching the CBOE Volatility Index ($VIX), which rose 38.13%. That may seem high, but it’s not as high as the August 5 spike.

FIGURE 4. THE FEAR INDEX ($VIX) ROSE OVER 38% ON TUESDAY. A spiking VIX is something to watch since it indicates fear among investors, which means further selling could occur.Chart source: StockCharts.com. For educational purposes.

When the VIX starts spiking, it indicates nervousness is in the air. If a rising VIX keeps you up at night, it may be better to take some profits, especially in your most profitable positions. There’s a chance that investors may rotate out of mega-cap tech stocks and into other sectors such as Financials, Utilities, and Health Care.

But today’s market action isn’t showing strength anywhere. Precious metals, oil prices, and cryptocurrencies all fell. The only area that showed strength was the US dollar and bond prices, the latter due to a fall in Treasury yields.

Closing Position

There’s a chance the market could digest today’s Manufacturing PMI data and recover, but there are two factors that warrant cautious trading—a rising VIX and September’s seasonal weakness. Earnings from Broadcom, Inc. and Friday’s Non-Farm Payroll data will be critical variables.

Links to Charts in This Article

Daily chart of S&P 500.Daily chart of Nasdaq Composite.Daily chart of $VIX.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

In this video from StockCharts TV, Julius evaluates the completed monthly charts for August, noting the strength of defensive sectors. He then analyzes a monthly RRG and seeks alignment for the observations from the price charts. Could “sideways” be the most positive scenario for the S&P 500 these next few weeks?

This video was originally published on September 3, 2024. Click anywhere on the icon above to view on our dedicated page for Julius.

Past episodes of Julius’ shows can be found here.

#StayAlert, -Julius

Good morning and welcome to this week’s Flight Path. Equities consolidated their new “Go” trend this week. We see that the indicator painted mostly strong blue bars even as price moved mostly sideways. Treasury bond prices remained in a “Go” trend but painted an entire week of weaker aqua bars. U.S. commodity index fell back into a “NoGo” after we had seen a few amber “Go Fish” bars and ended the week painting strong purple bars. The dollar, which had been showing “NoGo” strength ended the week painting weaker pink bars.

$SPY Consolidates in “Go” Trend

The GoNoGo chart below shows that after entering a new “Go” trend just over a week ago, price has consolidated and moved mostly sideways. GoNoGo Trend has been able to paint “Go” bars with a sprinkling of weaker aqua in the mix. The end of the week saw strong blue bars return and price toward the top of the range. GoNoGo Oscillator is in positive territory at a value of 3. With momentum on the side of the “Go” trend and not yet overbought, we will watch to see if price can challenge for new highs this week.

The longer time frame chart shows that the trend returned to strength over the last few weeks. Last week we saw a strong blue “Go” bar with price closing at the top of the weekly range, close to where it opened. Some might call this a dragonfly doji, having slightly bullish implications. Since finding support at the zero level, GoNoGo Oscillator has continued to climb into positive territory now at a value of 3. Momentum is firmly on the side of the “Go” trend. We will look for price to make an attempt at a new high in the coming weeks.

Treasury Yields Paint Weaker “NoGo” Trend

Treasury bond yields remained in a “NoGo” trend this week but the GoNoGo Trend indicator painted a string of weaker pink bars. We can see this happened after an inability to set a new lower low. GoNoGo Oscillator is riding the zero line as a Max GoNoGo Squeeze is in place. It will be important to note the direction of the Squeeze break to determine the next direction for yields.

The Dollar’s “NoGo” Weakens

After a strong lower low we see the dollar rallied into the end of the week and GoNoGo Trend painted weaker pink “NoGo” bars. GoNoGo Oscillator has risen sharply to test the zero line from below and we see heavy volume at these levels. We will watch to see if the Oscillator finds resistance at the zero line and if it gets turned away back into negative territory we will expect NoGo Trend Continuation.

Extended trends often start with big bangs and major breakouts. Chartists can identify “big bang” moves by showing price change in ATR terms. We can use the price charts to identify big breakouts. Today’s example will show Paypal (PYPL), which is part the FinTech ETF (FINX). The ChartTrader weekly report featured FINX because it broke its July high and Paypal because it is part of this strong group. Note that we are offering a free look at this week’s ChartTrader report and video (here)

Let’s first look at the breakout on the price chart. PYPL was trading above 300 in 2021 and then fell to around 50 in October 2024. The stock rebounded with the market from November to January and then traded flat the last seven months. A large range formed with the stock hitting resistance at 68 at least four times since January. The stock broke through with a big move in August and this is very bullish.

Not only did PYPL break a major resistance level, but it did so with a big bang. The indicator window shows Normalized ROC, which measures the price move in ATR terms. Average True Range (ATR) is a volatility indicator developed by Welles Wilder. Normalized ROC (20,250) shows the 20 day price change divided by ATR(250). This indicator exceeded 5 in late August, which means the price move was more than 5 ATR values. A big bang indeed. This is the strongest 20-day move since 2021. Normalized ROC is part of the TIP Indicator Edge plugin for StockCharts ACP.

Even though the big bang move and a breakout are long-term bullish, note that Paypal is short-term overbought after this sharp advance. This means we could see some backing and filling as the stock digest the advance. The green shading marks an area to watch for possible support should we see a pullback.

Note that we are offering a free look at this week’s ChartTrader report and video (here)

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We had a sneak preview of emerging leadership on the morning of July 12th. That was the morning the June Core CPI came in well below expectations. The immediate rotation into several areas was quite evident and you can see it right here on this RRG Chart:

Financials (XLF), industrials (XLI), small caps (IWM), mid caps (MDY), and transports ($TRAN) were all poised to benefit from a change in Fed policy and the beginning of rate cuts. But Fed Chief Powell announced, and botched the announcement, in my opinion, with no rate cut and mentioning that a potential rate cut would be “on the table” for September. Now, I say “botched”, because the FOMC minutes came out two weeks later and the minutes suggested an upcoming rate cut was likely. “Likely” and “on the table” are not the same to me, but maybe others interpret it differently. Anyhow, that Fed announcement reversed the strength that we had seen in the groups mentioned earlier in July. Here’s how that RRG looked after the Fed announcement and leading up to Powell’s Jackson Hole address:

Does that not look like the exact opposite of what the market was looking at after the June CPI report was released?

Then comes the Jackson Hole speech on Friday, August 23rd, where Powell said, “it’s time for Fed policy to change”, or something to that effect. For 3 years, the Fed has been looking for proof that the decline in the annual Core CPI rate was “sustainable”. Did something happen between July 31st (Fed policy statement) and August 23rd (Jackson Hole speech) that suddenly made the Fed more comfortable of that sustainability? Was it the July CPI that showed inflation met expectations for that month? The only thing he’s proven to me, especially over the past 7 weeks or so is that the Fed changes directions more than a chameleon changes colors.

So now let’s use the RRG to track rotation once again, this time the 6 days since the Jackson Hole speech on August 23rd:

Here we go again! Now we’re beginning to see a repeat of what we saw in the middle of July as technology (XLK) and semiconductors ($DJUSSC) roll over on a relative basis, allowing the XLF, XLI, IWM, MDY, and $TRAN to lead the way.

Keep an eye on this rotation in upcoming days, weeks, and even months, because it’s exactly what I would expect to happen during a rate-cutting environment.

I look much deeper into this rotation, discussing the major indices, sectors, industry groups, and a few individual stocks in my Weekly Market Recap on YouTube, “Which Stocks Are Leading The Market”. Simply click on this link and enjoy!

Also, in my EB Digest newsletter on Monday, I’ll be featuring a now-leading stock that I believe could soar between now and year end. You can CLICK HERE to sign up for our FREE EB Digest newsletter and gain access to this stock on Monday!

Have a great long Labor Day weekend and Happy Trading!

Tom

The past sessions for the markets stayed quite trending; the headline index continued with its upmove. While extending their gains, the Nifty 50 Index ended the week on a very strong note. Witnessing a strong momentum on the upside, the markets expanded their trading range as well. The Nifty traded in a range of 393.65 points during the week and closed near its high point forming a fresh lifetime as well as a fresh closing high for itself. The volatility dropped a bit lower; the India Vix declined marginally by 1.18% to 13.39 on a weekly basis. While the markets rose in almost an unabated manner, the headline index posted a net weekly gain of 412.75 points (+1.66%). The month ended as well; Nifty posted a monthly gain of 284.75 points (+1.14%).

The markets are in a strong uptrend; however, once again it has created a situation wherein they have sharply deviated from their mean. This warrants a very careful approach towards the markets. The nearest 20-week MA is placed at 23.659 which is 1576 below the current close. The 50-week MA which is placed at 22104 is 3131 points below the current level. All these things point at the markets deviating from their mean once again; this leaves them prone to volatile profit-taking bouts once again at higher levels. This also highlights a need for vigilant protection of profits with every upmove that may take place as we travel with the trend.

Monday is likely to see a stable start to the day. The levels of 25400 and 25495 are likely to act as resistance points. The supports come in lower at 23900 and 23710 levels.

The weekly RSI is 75.03; it remains in a mildly overbought territory. The RSI shows a bearish divergence as it did not make a new high while the Nifty formed a fresh closing high. The weekly MACD stays bullish and remains above its signal line.

The pattern analysis of the weekly chart shows that the markets have taken out its immediate high of 25078; it is likely to continue trending higher while raising the support levels higher as well. Going by the derivatives data, the immediate short-term support has been dragged higher to 25000 levels; any violation of this point is likely to push the markets back into broad consolidation. The market breadth remains a concern; the breadth is not as strong as it should be otherwise if such strong trending moves are taking place.

All in all, there is nothing on the charts that suggests a correction in the markets. The ongoing uptrend is strong; the easiest thing one can do is to keep traveling the trend. However, at the same time, we should not disregard the fact that the markets are once again significantly deviated from their mean. It becomes all the more important that as we follow the trend, we do it very mindfully while guarding the profits vigilantly at higher levels. It would be prudent to keep actively trailing the stop-losses as that would help protect the bulk of the profits. The texture of the markets is a bit defensive; stocks from the PSE, Pharma, IT, FMCG, etc. are expected to do well. Overall, a selective and cautious approach is advised for the coming week.

Sector Analysis For The Coming Week

In our look at Relative Rotation Graphs®, we compared various sectors against CNX500 (NIFTY 500 Index), which represents over 95% of the free float market cap of all the stocks listed.

Relative Rotation Graphs (RRG) show a distinctly defensive setup. The Nifty Pharma Index had rolled inside the leading quadrant in the previous week. This week, the IT and FMCG groups have also rolled inside the leading quadrant. These groups along with the Nifty Midcap 100 which is seen losing relative momentum are by and large expected to relatively outperform the broader Nifty 500 Index.

The Nifty Consumption Index which is in the weakening quadrant is rolling back towards the leading quadrant. Besides this, the Nifty Auto, PSE, and Realty indices are also inside the weakening quadrant.

The Financial Services index has rolled inside the lagging quadrant. The Nifty Bank Index, Infrastructure, PSU Bank, Metal, Commodities, and Energy groups are inside the lagging quadrant. Among these, the Energy, Commodities, and Infrastructure indices are showing some improvement in their relative momentum.

The Nifty Media index is inside the improving quadrant; however, it is seen losing its momentum.

Important Note: RRG™ charts show the relative strength and momentum of a group of stocks. In the above Chart, they show relative performance against NIFTY500 Index (Broader Markets) and should not be used directly as buy or sell signals.  

Milan Vaishnav, CMT, MSTA

Consulting Technical Analyst

www.EquityResearch.asia | www.ChartWizard.ae

After Nvidia (NVDA) dropped after earnings this week, investors are once again reminded of the importance of the semiconductor space. I think of semis as a “bellwether” group, as strength in the VanEck Vectors Semiconductor ETF (SMH) usually means the broader equity space is doing quite well. Today, we’ll look at a potential topping pattern forming for the SMH, what levels would confirm a top for semiconductors, and what weakness in this key group could imply for our equity benchmarks.

Presenting the Dreaded Head-and-Shoulders Top Pattern

Ralph Edwards and John Magee, in their classic text Technical Analysis of Stock Trends, laid out the analytical process for defining a head-and-shoulders top. I’ve found that any price pattern like this consists of three important phases.

First, we have the “Setup” phase, where the price action begins to take on the appearance of a certain phase. This is when your brain tells you, “This is definitely a head and shoulders topping pattern.” In this case, we’re looking for a significant high surrounded by two lower highs, creating the appearance of a head and two shoulders.

We can clearly observe the setup phase on the chart of the SMH, with the June and July highs forming a somewhat nontraditional, but still valid, head. The lower peaks in March and August complete the picture. It’s worth noting here that, in each of those peaks, we can see a bearish engulfing pattern, serving as a wonderful reminder for longer-term position traders: ignore candle patterns at your own risk!

What Would Confirm This Topping Pattern for Semis?

But the setup phase only means there is a potential pattern forming here. Next we need the “trigger” phase, where the price completes the pattern by breaking through a key trigger level on the chart. For a head-and-shoulders top, that means a break below the neckline, formed by drawing a trendline connecting the swing lows between the head and two shoulders.

Using the bar chart above, that would suggest a neckline around $200, over $40 below Friday’s close. Another school of thought involves looking at closing prices only, for a cleaner perspective and more simple measurements.

Using closing prices, we get an upward-sloping neckline which currently sits just below the 200-day moving average around $215. In either case, until we break below neckline support, this is not a valid head-and-shoulders topping pattern. The third phase, which I call the “confirmation” phase, involves some sort of follow-through beyond the breakout level. This could mean another down close after the break, or perhaps a certain percentage threshold below that support level. And once all three phases are complete, then we have a valid topping pattern.

Gauging Potential Broad Market Impact

So let’s assume that semiconductors do indeed complete the topping pattern. What would that mean for the broader equity landscape?

As of Friday’s close, the SMH is up about 38.2% year-to-date. That compares to the S&P 500 (SPY) at +18.9%, the Nasdaq 100 (QQQ) with +16.2%, and the equal-weighted S&P 500 (RSP) at +12.1%. So semiconductors have certainly been a stronger leadership group in 2024. But what about since the July market peak?

Now we can see that, while the S&P 500 is almost back to its July peak, the Nasdaq is still 4% below that day’s close and semis are a full 11% below the market peak in July. And the equal-weighted S&P 500 is actually above its July peak already, speaking to the strength that we’ve observed in non-growth sectors off the early August low.

There is no doubt that semiconductors are looking a bit vulnerable after Nvidia’s earnings this week. But given the strength that we’re seeing outside of the semiconductor space over the last two months, weakness in the SMH does not necessarily mean weakness for stocks. Remember that it’s always a good time to own good charts!

RR#6,

Dave

P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

In this StockCharts TV video, Mary Ellen reviews the broader markets, including NASDAQ weakness, and the outperformance in the equal-weighted S&P 500. She examines NVDA and shares how you should trade the stock depending on your investment horizon. Last up, Mary Ellen reveals top stocks in leadership areas.

This video originally premiered August 30, 2024. You can watch it on our dedicated page for Mary Ellen on StockCharts TV.

New videos from Mary Ellen premiere weekly on Fridays. You can view all previously recorded episodes at this link.

If you’re looking for stocks to invest in, be sure to check out the MEM Edge Report! This report gives you detailed information on the top sectors, industries and stocks so you can make informed investment decisions.