The Gap Trap

Lessons from FOMC & OPEX Week

If I were to try and define the weekly session in a word, it’d be…humpphhhh.

On the one hand, my risk composite model remained in the ‘all clear’ zone (more on that later) after briefly signaling a ‘caution’ signal last week - with risk assets across the board gapping higher on Monday’s session.

Those gaps, which seemed so promising at the start of the week, are now filled on SPY, QQQ and IWM - all whilst Bitcoin, which enjoyed a brief rally back up the 20dema during Monday’s session, is once struggling to hold any momentum and is down ~7% from the weekly high.

On a personal level, Monday’s gap had me fooled.

Excited at the prospect of new highs, swings that were opened on SPOT, TEAM and NOW all proved to be losers. Software, which I had hoped (and still do, to a point) to find buyers at the AVWAP from the prior lows, stuttered - with a number of key holdings currently pinned below key moving averages.

I could attempt to insert a narrative here to explain why the week played out the way it did, Warsh, OPEX etc. But where’s the value in that?

Instead, I’m simply going to hold my hands up, take the L and reassess where we’re at, and more importantly, where I think we might be headed as Q2 comes to a close in a few weeks time.

The lesson? Don’t chase up-gaps during FOMC and OPEX week.

Onwards and upwards.

Risk Composite Model

During yesterday’s session, I made a quick change to my risk composite model.

Instead of using XLY/XLP as one of the key risk metrics used to determine the overall health of the market, I subbed-in RSPD/RSPS instead - essentially ditching the former for an equally-weighted version of the same metric. Something I’m hoping will help to reduce false signals, which tend to occur when XLY’s largest weightings - AMZN and TSLA - make oversized moves.

Right now, we’re still showing a score of ‘0’ - signaling that under the market’s hood, few signs of stress exist - at least those measured on the composite model.

Rotation Thesis - Playing Out

Despite IGV and XLC continuing to lag, it’s good to see that the rotation thesis outlined a few weeks ago has played out, with XLF XBI and XLI the obvious winners - much to the delight of my JPM calls.

Tech bulls, myself included, will be pleased to see XLK holding nicely above an inclining 20, 50 and 200dema, though I remain frustrated by the bifurcated nature of the space, with SMH clearly dominating over former leaders, such as META and MSFT. Just take a look at SMH/IGV:

Will this momentum divergence between semis and software ever resolve?

Who knows.

All that matters right now is that until we start to see signs of cooling in semis and some rotation into other tech-specific sub-sectors, the choice remains simple: chase momentum in names like MU, INTC and TSM, or prepare for opportunities elsewhere?

Communications, Can You Read Me?

Whilst I may have been early on my XLC thesis, I’m still reluctant to accept that I’m wrong. Same goes for IGV. The bad news is that the market doesn’t care what I think. The good news, however, is that both sectors are offering solid entries at current levels, with tight stops on offer at/near this week’s low.

XLC

META

SPOT

NFLX

Healthcare Has a Pulse

Another area I’m looking at right now is healthcare. Right now, XLV is retesting the 50dema from above for the first time this month - and if it holds, I think there are some mid-term swing opportunities in this space.

XLV

LLY

NVO

HIMS

One last thing…

Whilst crypto continues to trade like a dog, there is one chart that’s caught my attention during this latest sell-off. Check COIN relative to ETH below - whilst the latter made a new low this month, the former is yet to do so, a divergence that in prior instances has signaled a bottom for both the crypto token, and COIN.

Does this signal the end of the crypto bear market is coming to a close? Not even close. But it’s definitely interesting - and one I’ll be monitoring over the next few weeks for further clues.

Have a great long weekend and enjoy some football.

Best,

Al

Disclaimer: The content provided by Al Trades Charts is for educational and informational purposes only and should not be considered financial advice. I am not a financial adviser. All opinions are my own and reflect my personal interpretation of market conditions at the time of publication. Trading and investing involve risk, and you should always conduct your own research, consider your financial circumstances, and consult a qualified professional before making any investment decisions.