Stocks Retreat – When Will It End?

Selling has been plaguing the markets for the last few weeks with no end in sight.  How did we get here after experiencing a double-digit rally over the course of four months?  And when will the selling stop and the buying resume?  There are two tickers that need to improve before we see a change in behavior.

Bond yields rose again, which puts pressure on tickers like TLT, the 20+ Year Treasury Bond ETF. 

That, in turn, puts pressure on tech stocks that often use debt to finance expansion plans.  As debt gets more expensive to own, revenue tends to shrink.  

We can see that the Invesco Technology ETF, QQQ, broke out of its channel and has been steadily heading lower.

We need TLT to hold at current levels to help protect technology from dropping further, which might spur another round of buying.

The other chart that needs to change to bring the bulls back to life is the chart on Oil.  A few days ago I wrote that Oil crossing above $77 was bearish for the markets, but the glimmer of hope is that Oil has also broken out of its channel and is heading back down toward $77.

What this means is that the markets are choppy and I expect this to continue throughout the historical weak months of August and September.  Oil is moving in the right direction, but it may be too late to save Tech, and others, from extending the pullback into something more significant.  

Depending on where you draw the S&P 500 channel lines, we’ve either broken support or we’re still sitting dangerously close to doing so.

If TLT breaks, the tech sector is likely to keep falling, especially now that it’s out of its channel, and tech falling will put pressure on the rest of the market to follow.  With the S&P 500 already close to a support line, watch for a break lower.  If that happens, we could see another 3-5% drop before the selling is over.

That said, after experiencing a nearly 5% drop already, this is the time you would expect some fake selloffs to shake out the last holdouts.  

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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.