Key Tactical Takeaways:
> Monday's early-session price moves across both risk and risk aversion proxies were so anomalous that we are still witnessing some mean reversion-related follow-through of yesterday's 2nd half reversals this morning.
> With the dollar making another attempt at a tactical low, EEM and metals look vulnerable to additional weakness over the short-term. This gains meaningful credence if DXY closes above ....
> SPY is now poised for a critical test of Monday's breakout area near .... Failure to hold this level would ignite a deeper retracement that first targets ....
> There is the potential for recent vaccine and election-related narratives to change in the weeks ahead. In the absence of any change, we'll look to ... for alpha generation, while staying clear of trying to catch lows in big tech.
Some Quick Thoughts:
From a technical perspective, Monday's cross-asset price charts revealed patterns that only a candle chartist can love. Since we began publishing this letter in late June, Monday's session marks the 1st time we've seen the S&P 500 tag the 3-sigma target that we provide each day on page 2. The seemingly epic downside reversal that materialized from Monday’s 3-sigma high of 3657 leaves an indelible mark on the daily chart, and one that permabears are suggesting will mark the top of a massive "broadening top" pattern that has been taking shape since 2018. While this pattern (see page 8) does exist, this is not our base case. Our base case is more for of gradual bullish rotation into 2021.
After correctly de-risking into the election, we've missed this entire rally. Price action has defied logic for many professional investors, and after Monday's vaccine-fueled rally even the laggards have escaped favorable buy points. Staying on this topic, there is massive rotation going on behind the scenes. If you are one of our new retail subscribers that have become so accustomed to profiting from large-cap tech longs, we advise caution before trying to bottom fish these names. There is a big shakeout at hand and if QQQ settles below ..., which the pre-market drop of 1.44% in NDX futures is indicating, that shakeout could extend another 3 - 7% in the days ahead.
Look, this election situation is far from over. In fact, some big market players I speak to suggest that the uncertainty can extend to January, with respectable odds that Trump may still be the victor. While such an outcome would not bode well for the social fabric of this country, it would be supportive of big tech and growth, so we must pay close attention to this story in the coming weeks. Another issue that would be supportive of not just big tech and growth but also treasuries and other "stay at home" stocks that were battered on Monday is if the market begins the realize the difficulties involved with distributing a vaccine that needs to be stored at -94 degrees. Stay tuned.
Unfortunately, it could be several weeks before this and the uncertainty regarding the January GA Senate run-off start to clear up. In the meantime, we're focusing our next long trade idea entries in .... We'll also be looking to short GLD if DXY settles > ...
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