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To Fail or Not to Fail?

Index Price Action

Over the course of the last month, after the last quick down move at the end of May, the indexes have continued to chop. All of this chop, while not too exciting to trade, has created a lot of consolidation. Consolidation that will, sometime soon, breakout. However, at this juncture, it’s not entirely clear which direction it’ll go.

That direction is going to largely depend on key, news-related catalysts, like earnings, the Fed, and the gusto behind buyers and/or sellers.

Let’s take a look at the daily chart of the Nasdaq futures, which are currently stuck below key resistance at the 12,500 level.

Nasdaq Futures – Daily Chart 7.20.22

The Nasdaq Futures have reached June highs, but are still below May highs.

 

Earnings as a Catalyst

Now, as I’m sure you’ve heard me say by now, I have gone into this earnings season bearish – with the caveat that because all the data looks so bad, IF reports end up ‘better than expectedly terrible,’ that leaves room for the market to rally. We’ve already started to see some of this action from several key players that have reported earnings thus far, including JPMorgan Chase (JPM), Taiwan Semiconductors (TSM), Bank of America (BAC), Wells Fargo (WFC), Netflix (NFLX), and more.

After all, Netflix ‘only’ lost 970,000 subscribers this quarter, instead of an estimated 2 million. Even though clearly they aren’t growing, and are instead shrinking, the news was expected to be so bad that when it was better than terrible, the stock was able to rally (so far) post-earnings. And, what was the reaction? NFLX gapped up 3.2% and had a massive IV crush in the options pricing as well. The stock also broke above my key area of resistance at $200, which opens up the door to a rally into $220-250.

NFLX-EarningsAnalysis-Q2-2022
Netflix Earnings Analysis over the past 20 quarters, with a highlight on the past 7 quarters.

 

The Nasdaq so far has responded favorably to NFLX earnings and is up about 1% (7.20.22 at 12:23pm CT).

Technical Factors

Of course, earnings aren’t the only thing that matters, and the technical signals are key here as well. There are a couple of key signals that notably point out that for the first time since March of 2022 are beginning to show up.

First of all, price has finally broken above critical moving averages. As you can see on the Nasdaq chart above, the day prior to NFLX earnings (July 19th), the Nasdaq broke through overhead resistance and traded above the key moving averages (8 EMA, 21 EMA, 34 EMA, and 50 SMA) for the first time since March. Between that move, plus a follow through day on July 20th, the technical patterns have significantly improved.

But, that is not all. There is also positive volume as demonstrated by the VZO since the beginning of July. There is also what looks to be a bullish daily squeeze. I say ‘what looks to be’ because you can never 100% know if the squeeze will fire to the upside or to the downside. The majority of the time, the squeeze fires in the direction of the trend – which is down. But, this squeeze is demonstrating positive volume and momentum, in addition to key technical breaks higher as well. All of this is pointing to that squeeze actually being a countertrend, bullish squeeze. It just needs a catalyst!

The next breach that the index would need for the next leg higher, which could cause that squeeze to fire, would be to breach the 12,500 area of resistance. Could Tesla’s (TSLA) earnings be the catalyst to make it happen?

I know one thing, which is that if 12,500 breaks with a vengeance, we could easily be up at 13,500 in a short matter of time.

I’m not saying the final low is in, but we may at least get a sustainable rally. To see which way it goes, I’ll be highly focused on this index price action in addition to the reaction post-TSLA earnings on July 20th. We should have that answer very soon. And, when we do, it’ll be time to put on some trades.

As far as where we go next, join me at the market open in the Free Trading Room to kick off your mornings! You can sign up using this link. Best of all, it’s free! 

 

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