How To Anticipate Market Moves By Looking Inward

March 28, 2023

The battle for 4000 continues in the S&P 500 (SPX) as the market has been in an uptrend since October, but has fallen victim to a series of lower highs and lower lows since February.  Here’s a chart of the SPY showing that the market momentum keeps stalling out during recent attempts to climb higher than 4000 ($400 on the chart below).

Part of that is due to a lack of a bullish catalyst to move the market higher.

There was some good news. Banking stocks stabilized for a second day and Consumer Confidence increased more than expected. The manufacturing index survey also returned positive results.

So, why the doldrums? Higher T-Note yields helped bring technology stocks lower to a 1-week low. Adding to the bearish side of things, inventory levels rose higher than the expected level, which is a bearish indicator that companies may need to cut production.

That left us with a mixed day of trading yesterday and until the Personal Consumption and Expenditures report comes out on Friday, I expect more of the same type of trading as long as the Fed can keep their mouths shut.

Speaking of tech stocks, I’m looking at the Nasdaq 100 (QQQ) rolling over a little here and heading lower, potentially to 300.

If you want to try to anticipate where the market is going and you’re using an ETF as your market guide, I look inward – inside to the components that make up the ETF.

In other words, if QQQ is going to move lower, what are the tech companies likely to move the ETF lower? Well, if you look at the top holdings by weight of the QQQ, you can see which stocks are responsible for the majority of the daily move.

As much as I’m bullish on Microsoft (MSFT), I don’t like the chart right now and I see a healthy pullback coming.  I’d like to see it come down to the $260 – $265 range. 

And here’s Apple (AAPL):

I’d like to see it come down to $155 or lower.

Instead of always looking at the sector ETFs (DIA, QQQ, SPY) to find the direction of the market, I like to look at the top companies that make up the ETF and determine which way they are likely to go. If MSFT and AAPL are headed lower, that will bring the entire QQQ with it. After all, MSFT and AAPl represent roughly 24% of the daily price change of the QQQ.

I may be wrong about the direction, but I’d rather look at the components of the ETF and use them to help me pick a direction ahead of time instead of reacting after a move already happens.

Today’s trade idea is using Vista Energy (VIST). While the chart doesn’t look like it has much room for upside growth from here, I’m looking for a roughly 7% gain from current levels. The current price is $19.27, so a 7% gain would get us to the top of the channel, around $20.62.

Using similar technical analysis conditions, the stock moved higher 66% of the time over the last 12 months, hitting an average 7% return in about 3 days. There’s a level of support around 17.80 that could be used as a stop loss.

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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation. 

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