Powell Blinks and Stocks Soar - Is it Sustainable?

Is the Pullback Over? Key Charts and Levels That Suggest Not Yet

Investors got bullish signals, as Fed Chair Jerome Powell indicated that central bank policymakers are open to cutting interest rates at their meeting next month, though perhaps not as aggressively as some had hoped. Lower rates should help sustain the market's summertime rally, especially after recent weakness in the jobs market and worries about AI spending had slowed the bulls.

Powell told the Jackson Hole conference that "the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance," signaling that rates could be cut as soon as September. This would mark nine months since the Federal Reserve's last rate cut.

Historically, such pauses have been good for stocks. When the Fed has waited 5 to 12 months between rate cuts, the market was higher a year later in 10 out of 11 instances.

Regarding the pullback that started during the week that just ended, I studied the price action from different perspectives for this publication, as you know, when there is an unexpected move I don’t fight the tape, I study more.

The following heat map presents the price variation during the last 5 days, and you can tell how weak has tech been while the gains have been driven by other sectors like Energy (XLE) gained +3% during the week), Real State (XLRE) +2,4%), Materials (+2,4%), and Financials (XLF +2,1%) as part of the group of sectors rallying more than 2%; Industrials, Healthcare, and Consumer Discretionary gained more than 1% during the week.

There is a clear rotation in the market, tech is overheated and the big players closed the week still in the red despite of the Friday’s rally.

The Top Signal Remains in Play Over the last 3 years, shooting stars on the weekly chart for semiconductors SMH have anticipated pullbacks, which are highly correlated with declines in the S&P 500. This past week, a "hanging man" candle—another reversal pattern—has appeared on the weekly charts for both $SMH and the $SPX. The major index is now printing a weekly reversal signal, and seasonality increases the odds that a pullback is developing.

On the other hand, Bitcoin hit the $111K target on Sunday sealing a bearish weekly setup that was correctly anticipated in my site after the shooting star observed last week. This is significant because Bitcoin sometimes anticipates moves in the stock market, to which it is correlated. The bearish MACD crossover is a reliable signal for Bitcoin in this timeframe.

Let's study some individual stocks.

AMZN The Bullish "Cup" formation was not completed last week, the price declined following the market until the 50DMA was reached by a doji and then a bounce came on Friday. Follow through is a must for next week, the price must stay above $227.1 and rapidly recover $229.5.

GOOG Cup Formation Awaits Its Handle: The combination of an RSI divergence and high volume on a daily candle that lacked conviction creates a good scenario for a pullback. This "handle" formation would likely bring the price back toward the main volume shelf before the next potential move higher.

NVDA had a nice bounce but failed to reclaim the key confluence zone formed by the 10 and 20-day moving averages. From a bullish perspective, it wouldn't be a bad scenario if the stock becomes oversold by the end of trading on Wednesday, just ahead of its earnings report.

Let's finalize this analysis with QQQ:

As anticipated on Thursday in my public posts on social media, Friday could see a bounce, though it was stronger than expected. The rally, fueled by Powell's comments on potential rate cuts, peaked at 11 AM before stalling for the rest of the day. For the week ahead, bulls need to see the price decisively conquer the 20-day moving average (20DMA) and for the bullish Stochastic crossover to be confirmed.

The critical "line in the sand" is $569.6. If the price slips below this level, the recent pullback is likely to resume. Holding above it is necessary to prove this was more than just a dead cat bounce.

Next week, all eyes are on NVDA earnings report.

Have a good week.

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