We had a widely divergent market yesterday...as some groups rallied strongly as others got hit hard. In other words, the rotation that we’ve seen in the stock market in recent months was on steroids yesterday. Therefore, even though the S&P fell 0.8% on the day, the breadth on the S&P 500 was almost perfectly flat. In fact, there breadth was only 1.7 to 1 negative on the Nasdaq Composite Index...BUT it was almost 5 to 1 negative on the NDX Nasdaq 100 Index. Therefore, we can see that most of the decline in the S&P and Nasdaq was concentrated in the big cap tech names...and thus it was a “narrow” decline in the broad averages.
“Narrow rallies” usually don’t last very long, so “narrow declines” shouldn’t last very long either. The problem is that “narrow rallies” can still last for many weeks, so we don’t want to become too complacent about this action. Let’s face it, the sharp decline in the FAANG stocks in September still caused the S&P to correct 10% back then.......Thankfully, we were very, very, very early with our call to “rotate” towards groups like the bank and energy names (back in September and early October...when the KBE bank ETF was 60% lower and the XOP oil & gas ETF was 80% lower). Therefore we have not had to scramble to play catch-up like many others have had to do in recent weeks.
There has obviously been a lot of focus on the rise in long-term interest rates, but this will be even more in focus today...with Chairman Powell’s semi-annual testimony in front of Congress. There seems to be some concern that he will say something that will disrupt the bond market further today. He has been consistently dovish for many months, so we do not expect anything disruptive from the Chairman in his testimony. However, if he does start talking about tapering back on their massive QE program sooner than the consensus is thinking right now, it will certainly cause even more volatility in the market place as we head into the end of February and into the month of March.
The other focus today will be on two of two assets that have rallied very strongly over the past 8-10 months...Tesla (TSLA) and Bitcoin. Both got hit quite hard yesterday. TSLA fell 8.5% and closed on its lows for the day. Bitcoin fell 4.5%, but it was able to retrace more than half of its early day decline by the close. Both are seeing more downside follow-through in pre-market trading...so how these two assets move over the rest of the day today will be important.
For TSLA (as we mentioned yesterday), the stock had already broken slightly below the “neck-line” of an “head & shoulders” pattern, so yesterday’s sharp decline took it meaningfully below that key support level...which is negative. Yesterday’s sharp drop also took it well below its 50 DMA...which has provided strong support since last April. Therefore, the fact that it is trading down by another 5% this morning is not good for the stock on a technical basis.
That said, we’ve seen TSLA get hit hard in pre-market trading in the past...only to bounce strongly once the market opens. Therefore, there is a chance that the stock could recover its 50 DMA very quickly (just like it did on two occasions in November). However, if it does not bounce-back strongly from these early morning lows today...and it closes in negative territory...it will signal that it short-term trend has changed...and that the kind of strong decline of 30% or more (that has taken place at least once or twice every year in the last decade) has begun.
Even if it does break-down, it will not necessarily mean that the bull market in TSLA is over by any stretch of the imagination. Like we just said, deep declines in TSLA take place every year...so they are actually quite normal for this stock. We’re just saying that if it does not regain its 50 DMA very quickly, the damage we have seen over the past week or two will show that its short-term trend has reversed for now.
As for Bitcoin, it’s technical picture is not as precarious as it is for TSLA. (However, its MACD chart is about to make another negative cross, so that’s a concern.)......It did bounce nicely off of its lows yesterday...and it has not broken below any important support levels so far. If it does break-down further, we’ll be watching two areas for support. First is the $43k level...which is where the lower line of the Bollinger band comes-in.
Below the $43k level, we’ll be watching the $40k-$41k range for support. There are three different reasons to sight this level. First, it’s where the 50 DMA comes-in. That moving average has provided very strong support for Bitcoin since October (and it held that level like a rock during the January pull-back). This range is also where Bitcoin topped-out in early January...and became the breakout level this month. Thus this “old resistance” level has become “new support.”....Finally, the $41k level is a Fibonacci 61.8% retracement of the rally off the late January lows.
So as you can see, there are several reasons to think that the $40k-$41k should provide very good support for this cryptocurrency if (repeat, IF) it breaks-down further from current levels. (Of course, if it breaks below that 40-41k level in any meaningful way, it’s going to be very bearish on a short-term basis, but that areas should at least provide some very strong initial support.)
Again, as it is with TSLA, nothing we’re saying here means that the rally in Bitcoin is coming to an end...and that we’re about to see the kind of massive decline Bitcoin experienced in 2017 (when it fell more than 80%). These assets see rather big declines on a regular basis, so we’re merely trying to say that we could see another decline of 25%-30%+ before too long.
As we have said MANY times in the past, even if these assets are going to change the world, their prices can see BIG declines along the way. Let’s face it, AMZN’s stock has seen dozens of such declines on its way to changing the world over the past 25 years.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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