Despite recession signals, technology just made a 3 month high
Updated
The world economy is facing economic slow down which has not yet affected US markets or the US economy. The recession warning indicator (top section on the chart) is hitting 100%.
The 2yr-10yr bonds rates are still inverted and the FED is determined to crush inflation before it adjusts rates. That's all uncertain but significant headwinds are present.
Looking at the main price chart showing the technology ETF (ticker: XLK), it has just made a new 3 month high. It would be great to see XLK now consolidate between $170 and $177 and then retest the 20 week moving average and bounce up closing a week above $170 before it then gets up above $177. This way we'd have a clear higher low which would give early confirmation that we've broken the downtrend that started after the July 2023 high.
From there, I'll be looking to see if it can reach all time highs.
Despite that bullish view, I think the US markets may merely be in a short term uptrend.
These uptrends can be supercharged whenever there are a lot of short sellers who are getting wrecked by these fast moves to the upside.
But I am just as willing to believe there will be similarly harsh drops to the downside if people are leveraging up in their "Buy the dip" frenzy and if the general market sentiment swings too rapidly away from "Fear" into "Greed".
By it's nature, the market is a fluctuating mechanical beast that is attracted to liquidity (pools of money that are on the wrong side of the current market direction). Whenever liquidity gets released rapidly then we get dramatic shifts in price. These liquidity releases occur when investors and traders (either short or long) capitulate or get wrecked. The mechanical beast will always hunt stop losses and move against the majority of traders. In this way the market works best when it wrecks both the shorts and the longs until they give up and new money comes in that isn't sensitive to capitulating. But right now we're in a market where every long-only investor should have at least one eye on the recession warnings and short only investors should not believe their own bs regarding the timing they hope to see the market capitulate.
Based on this theory of the market, it seems very possible for XLK and perhaps some other sectors to reach all time highs just ahead of a major downtrend. But it will not come when everyone is ready and positioned for it.
The macro economic picture is mixed.
The FED hasn't raised interest rates and is waiting for the economy to either start to weaken or force the FED to raise short term rates further. US unemployment is just starting to tick up after being below historical trend. US private debt remains low. US government debt (treasury bills and bonds) are continuing to be bought so, in theory, the US might squeak through this period. I doubt it though as history is against that happening.
So for now, I continue to hold my longs from the October lows. I will look to take 50% profit on XLK near to $180 and otherwise be guided on how the market reacts as it reaches resistance points and forms new higher highs or lower lows.
I'll definitely be thinking about the risk free rate of earning over 4% in cash in almost any place I look. If we don't confirm an uptrend that's going to be very appealing.
Risk management:
If prices spike back down and make new lows below the October lows then I will sell my positions on any retraces and just wait to see what happens and look for when a new uptrend starts to emerge after the sideways chop and because I hope to avoid any significant downtrend.
The 2yr-10yr bonds rates are still inverted and the FED is determined to crush inflation before it adjusts rates. That's all uncertain but significant headwinds are present.
Looking at the main price chart showing the technology ETF (ticker: XLK), it has just made a new 3 month high. It would be great to see XLK now consolidate between $170 and $177 and then retest the 20 week moving average and bounce up closing a week above $170 before it then gets up above $177. This way we'd have a clear higher low which would give early confirmation that we've broken the downtrend that started after the July 2023 high.
From there, I'll be looking to see if it can reach all time highs.
Despite that bullish view, I think the US markets may merely be in a short term uptrend.
These uptrends can be supercharged whenever there are a lot of short sellers who are getting wrecked by these fast moves to the upside.
But I am just as willing to believe there will be similarly harsh drops to the downside if people are leveraging up in their "Buy the dip" frenzy and if the general market sentiment swings too rapidly away from "Fear" into "Greed".
By it's nature, the market is a fluctuating mechanical beast that is attracted to liquidity (pools of money that are on the wrong side of the current market direction). Whenever liquidity gets released rapidly then we get dramatic shifts in price. These liquidity releases occur when investors and traders (either short or long) capitulate or get wrecked. The mechanical beast will always hunt stop losses and move against the majority of traders. In this way the market works best when it wrecks both the shorts and the longs until they give up and new money comes in that isn't sensitive to capitulating. But right now we're in a market where every long-only investor should have at least one eye on the recession warnings and short only investors should not believe their own bs regarding the timing they hope to see the market capitulate.
Based on this theory of the market, it seems very possible for XLK and perhaps some other sectors to reach all time highs just ahead of a major downtrend. But it will not come when everyone is ready and positioned for it.
The macro economic picture is mixed.
The FED hasn't raised interest rates and is waiting for the economy to either start to weaken or force the FED to raise short term rates further. US unemployment is just starting to tick up after being below historical trend. US private debt remains low. US government debt (treasury bills and bonds) are continuing to be bought so, in theory, the US might squeak through this period. I doubt it though as history is against that happening.
So for now, I continue to hold my longs from the October lows. I will look to take 50% profit on XLK near to $180 and otherwise be guided on how the market reacts as it reaches resistance points and forms new higher highs or lower lows.
I'll definitely be thinking about the risk free rate of earning over 4% in cash in almost any place I look. If we don't confirm an uptrend that's going to be very appealing.
Risk management:
If prices spike back down and make new lows below the October lows then I will sell my positions on any retraces and just wait to see what happens and look for when a new uptrend starts to emerge after the sideways chop and because I hope to avoid any significant downtrend.
Note
I hadn't finished writing up my draft when it saved and locked me out so here's my actual text:The world economy is facing a slowdown that has not yet affected the US markets or the US economy. The recession warning indicator (top section on the chart) is now above 90% which it hasn’t done during the 2002-2022 period.
The 2yr-10yr bonds rates are still inverted and the FED is determined to crush inflation before it adjusts rates. These are uncertain but significant headwinds for the market.
The technology sector ETF (ticker: XLK) has just made a new 3-month high, breaking the downtrend that started after the July 2023 high. This indicates a possible reversal of the bearish trend and a continuation of the long-term uptrend.
XLK is trading above the 20-week moving average, which acts as a dynamic support level. The moving average also shows a positive slope, indicating a bullish momentum.
The XLK has a strong relative strength compared to the S&P 500 index, which means that it is outperforming the broader market. This shows that the technology sector is leading the market recovery and attracting more investors.
The XLK has a high liquidity, which means that it has a large volume of trading activity and a low bid-ask spread. This makes it easier to enter and exit the trade at favourable prices and reduces the risk of slippage and manipulation.
Outlook:
- The XLK has a potential to reach the all-time high of $181 which is the next major resistance level.
- The XLK could also consolidate between $170.00 and $177.00, forming a higher low, before breaking above the resistance level. This would confirm the uptrend and provide a better entry point for new buyers.
- The XLK could face some volatility and pullbacks along the way, as the market sentiment swings between fear and greed. The XLK could also be affected by the macroeconomic factors, such as the interest rates, the inflation, the unemployment, and the debt levels.
- The XLK could also reverse the uptrend and make new lows below the October 2023 lows, if the market conditions deteriorate and the recession becomes inevitable. This would invalidate the trade and lead me to exit the trade.
Market cycle theory:
At the end of a major market trend we can see supercharged rallies if there are a lot of short sellers who are forced to capitulate and buy the rally because of these fast moves to the upside.
And there can be similarly harsh drops to the downside if people are leveraged up in a "Buy the dip" frenzy. We can get hints of this if the general market sentiment swings too rapidly away from "Fear" into "Greed".
I think of the price movements of the market as the movement of a mechanical beast that is magnetically attracted to liquidity. In this way of thinking about the market, the liquidity is pools of value that can be unlocked at certain price levels based on those pools being stressed by being on the wrong side of the current market direction of movement. The market will digest all that liquidity until it can’t digest any more and then it will reverse its directional trend.
So, in this way of thinking, liquidity gets released rapidly when investors and traders (either short or long) capitulate or get wrecked. The mechanical beast will always move against the majority of traders and always hunt pools of stop loss positions.
Following this logic, the market naturally tends to function by wrecking both the shorts and the longs until invested money left in the asset or sector isn't sensitive to capitulating.
Right now we're in a market where every long-only investor should have at least one eye on the recession warnings and short only investors should not believe their own BS regarding the timing they hope to see the market capitulate. The market will naturally exhaust most traders and investors prior to it making the real move.
Based on this theory of the market, it seems very possible for XLK and perhaps some other sectors to reach all-time highs ahead of a major downtrend. But whatever happens it will not occur when everyone is ready and positioned for it.
Absorbing info with every cycle
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