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Issue #89 - At Least A Tradeable Bounce As Stage 2 Breakouts Proliferate

Issue #89 - At Least A Tradeable Bounce As Stage 2 Breakouts Proliferate
Photo by 312 Visuals / Unsplash

Trend Of The Major Indices And Market Health

After a panic open to start the week the S&P 500 closed the week flat on the heaviest weekly volume the SPY ETF has seen all year. Technology slightly outperformed with the Nasdaq 100 up 0.39% for the week and reversing off of the Monday low just like the S&P 500. Small caps fared worse closing lower -1.21% for the week for the Russell 2000 but well off the lows of the week. Small caps also successfully bounced at a logical support level around the 30-week EMA (Exponential Moving Average). Overall the stock market saw buyers step in and defend some critical price levels and absorb the panic selling that kicked off the week on Monday morning.

The panic that was seen in the market on Monday morning was a result from multiple negative news headlines the market was processing over the weekend. One thing to realize is the S&P 500 had already gapped down three times during this correction before Monday's panic. There was already fear and pessimism building in the market and then it went into overdrive heading into Monday's open. Headlines about war in the Middle East, Warren Buffett selling Apple stock, and recession fears among other worries stoked massive negative sentiment on social media especially and the market had a panic open on heavy volume on Monday. But that proved to be the low of the week as buyers stepped into an already beat up market which was down nearly -10% in the S&P 500 at Monday's low.

With the panic open on Monday the VIX spiked above 65 in one of its sharpest moves higher in the past 10 years. But by the end of the week the VIX gave up all its gains and printed a monster weekly reversal candle. In the Shorting Guide weekly reversals on the VIX are discussed as a potential bottoming sign for a stock market correction. The VIX is still above its 10-week EMA but its possible it has now made a top for this current stock market correction. Breadth in the S&P 500 improved by the end of the week with the percentage of stocks in the S&P 500 above the 50 day moving average rising to 58%. The percentage of stocks above the 20 day moving average in the Nasdaq turned up from an oversold level and could be making a similar bottom to where it bottomed in April 2024.

Volume surged in the S&P 500 this week and as discussed in the Correction Playbook volume coming into the S&P 500 after a correction often occurs around the bottom. And on top of this evidence of new potential sector moves and a proliferation of Stage 2 breakouts occurred this week, which are part of the Timing Model for identifying bottoms of a stock market correction.

So after the action this week despite the negative sentiment, the probability that this correction is either over or at an important low has increased dramatically. One possibility could be that this is the first low in a market that might retest this low in multiple weeks, as that happens frequently in the stock market. But if that does occur there's probably going to be at least a few weeks of a tradeable bounce where sentiment will start to get more bullish and some recent Stage 2 breakouts will start working. So the bottom line is its time to trade to the long side again, and understand that this low might get retested in a month or so. But until then if things continue to improve there's good potential for nice gains over the next few weeks with support from the S&P 500 behind new Stage 2 breakouts.

Sector Review

Artificial Intelligence (BOTZ) - the artificial intelligence ETF BOTZ traded above average upside volume for the first time since March this week. This ETF has been in a correction since early March and didn't join the semiconductor sector during its move higher out of the April 2024 lows. However now multiple artificial intelligence software stocks are moving higher for the first time in many weeks.

Cybersecurity (BUG) - the cybersecurity ETF BUG is actually already back above its 10-week EMA showing strong relative strength after the panic low this past week. Despite the negative news headlines from CRWD, other stocks in the sector completed Stage 2 breakouts this week on strong volume. Longer term this ETF has minimal overhead resistance, so if it continues into Stage 2 here it could become a market leader.

Fintech (ARKF) - unlike cybersecurity stocks which held up better during the 2022 bear market, fintech stocks were crushed and many stocks in this sector are still trying to break out of Stage 1. However with the financial sector still remaining strong fintech has a related sector that could help power it higher. ARKF reversed higher on above average volume this week and now is about to retest the support level that broke during the recent correction below the 30-week EMA.

Cannabis (MJ) - cannabis stocks are still setup for Stage 2 breakout but volume needs to come into these stocks like it did back in the March - May timeframe. Since then volume has dried up, but the stocks continue to base sideways in Stage 1.

Gold and Silver (GLD, SLV, SIL, GDX) - gold continues to consolidate sideways above all key moving averages. However the rest of the precious metals sector is still digesting the recent correction and looking for a bottom. Individual gold and silver mining stocks for the most part aren't acting like the sector is ready to get going yet. Continue to keep an eye on precious metals and if volume comes into the sector and gold breaks out the entire sector is back in play.

Stage 2 Breakouts

This week saw an explosion in the total number of new Stage 2 breakouts. The market hasn't seen breakout activity like this since the April 2024 correction bottom. Earning season has played a large role in this, but there's also evidence of sector moves starting in artificial intelligence, cybersecurity, and fintech stocks. Multiple stocks in each of those sectors had Stage 2 breakouts this week.

Not only did the number of new Stage 2 breakouts increase dramatically but there were multiple breakouts that occurred on huge volume. Volume is a key component of the best Stage 2 breakouts, the heavier the volume the better as it shows the buying power coming into the stock. There's been a notable lack of volume across the Stage 2 breakouts that have occurred for weeks so this is a bullish indication for the stock market.

Artificial intelligence software stocks have been out of favor for a while now so this is an interesting change for the market. Now that there's multiple sectors showing evidence of a sector move, pay attention to how these sectors follow up over the next few weeks and whether more Stage 2 breakouts occur or volume continues to come into the sector. If there is evidence of buying pressure over multiple weeks that's a sign of a leading sector. For example take a look at BOTZ in the May and June timeframe of 2023, there were consecutive weeks of big volume coming into artificial intelligence stocks back then that produced a powerful sector move with triple digit gains.

Best Stage 2 Breakouts

UPST, KVYO, and PLTR are artificial intelligence stocks completing Stage 2 breakouts this week. UPST and KVYO are working on Stage 2 investor breakouts on massive volume. KVYO is also a very recent IPO, and UPST is heavily shorted. PLTR is a sector leader and has no overhead resistance.

SG, SN, and SWIM are consumer cyclical stocks completing Stage 2 breakouts this week. SWIM and SG both had record weekly upside volume during their breakouts.

DOCS and VCYT are healthcare/biotech stocks with Stage 2 investor breakouts this week on huge volume.

PAYO and SHOP are fintech stocks with Stage 2 investor breakouts on heavy volume.

YOU, SWI, and FTNT are cybersecurity stocks with Stage 2 breakouts this week. YOU is a recent IPO and had its largest weekly upside volume ever.

The following are the best Stage 2 breakouts from the past week:

UPST, KVYO, PLTR, SG, SN, SWIM, DOCS, VCYT, PAYO, SHOP, YOU, SWI, FTNT

All Stage 2 Breakouts From The Past Week

Semiconductor stocks - NVMI, SKYT, CRUS, ONTO

Artificial Intelligence stocks - PLTR, UPST, KVYO, SOUN, DT, KRNT, APP, G

Cannabis stocks - ACB, TCNNF

Healthcare/Biotech stocks - VCYT, ALDX, NVO, BAX, INGN, INSP, OFIX, SGRY, SUPN, TGTX, TMDX, TWST, ACLX, AMPH, CLPT, FOLD, LLY, NTRA, OFIX

Gold and Silver Mining stocks - IAG

Tech stocks - AZPN, CRCT, VMEO, VSAT, BLND, AKAM, HEAR, TTD

Fintech stocks - PAYO, SHOP, FOUR, WAY, EXFY, PAY

Cybersecurity stocks - YOU, FTNT, SWI, CYBR

Industrials stocks - AXON, CAT, SWIM, ACM, CMPO, RKLB, XMTR

Oil and Gas stocks - INDO, AMPY, CLNE

Financials stocks - TRUP, HRTG, SUPV

Basic Materials stocks - RYAM

Consumer Defensive stocks - KVUE, LRN, SPB, STKL

Consumer Cyclical stocks - SG, SN, CART, COOK, CPNG, MELI, PLNT, PTLO, RVLV, UA, ACVA, BOOT, CARG, CAVA, EXPE, FNKO, YETI, HBI, XPEL

Communication Services stocks - ANGI, GENI, Z

Real Estate stocks - AHR, RMAX

(Note: Stocks in bold broke out on 2x average weekly volume or higher for the week)

Stage 2 Breakout Pullbacks

The correction has created the opportunity to buy pullbacks in most Stage 2 breakouts that have occurred over the last couple months. Many breakouts have failed, but some stocks are sitting at key moving averages where a stop can be put in place right below the entry for a favorable risk/reward trade. With the S&P 500 potentially a tailwind now for at least a few weeks some of these stocks could have big moves higher in a short period of time.

Remember in June and July there were some Stage 2 breakout pullbacks that had huge gains as the market was healthy for a few weeks and supported stocks moving higher. Now that the S&P 500 has had its biggest correction of 2024 there's potential for more big moves over a short period of time.

Artificial Intelligence stocks - PSTG, PEGA

Cybersecurity stocks - FFIV

Healthcare/Biotech stocks - LNTH, QURE

Gold and Silver Mining stocks - HMY, AGI

Autos stocks - EVGO

Basic Materials stocks - AVTR

Chinese stocks - QFIN, MOMO

Solar stocks - FSLR

Sector Trades

All three of these sector ETFs have a similar chart pattern where they broke down through support during this past week's panic but closed strongly for the week. This is a failed breakdown pattern where buying pressure comes in right after the breakdown and pushes price back up failing the breakdown. Failed breakdowns are covered in the Terminology document and this pattern can lead to big moves higher because weak hands are finally flushed out of the market. This allows buying pressure to continue to push price higher when the sellers are finally out.

Notice how each of these ETFs have been in correction for most of 2024 as well moving sideways after topping earlier in the year. 2024 has seen stealth corrections in many sectors while the major indices have moved higher. Observe the volume that comes into these ETFs over the next couple weeks as the sectors taking the biggest volume will likely be the biggest winners coming out of this recent correction.

This week's lows could be used as a stop for these trades and the entry could be on a pullback next week.

Artificial Intelligence ETF - BOTZ

Cybersecurity ETF - BUG

Fintech ETF - ARKF

Summary

The stock market has likely either completed a bottom for the current correction, or a tradeable bottom where its possible there is a retest of the lows in a few weeks or more. Regardless of either scenario, its time to trade on the long side again. The weight of the evidence has shifted bullish with a proliferation of new Stage 2 breakouts and evidence of sector moves. Artificial intelligence, cybersecurity, healthcare/biotech and fintech are sectors that should be targeted for new trades. Cannabis is also in position to breakout if more volume comes into stocks in the sector. It will be important to see the positive action from this week continue into next week with more Stage 2 breakouts on volume.

Education

Besides weekly commentary the education portion of this newsletter continues to grow.

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Published by:

Justin Smyth