Engulfing The Engulfer
The S&P closed out an impressive holiday week up 3.12% but most importantly, reclaiming the top of the bearish engulfer highs.
Note also the break of the resistance trendline that would more classically define the downtrend.
At this point, it would seem that the only thing left for bulls to do this week is set a higher low over the 674 engulfer highs zone.
The rally last week seems to be on the heels of two major themes. Let’s take a closer look and see if they are likely to persist or fizzle out.
Point One: AI Bubble Fears
One of the main drivers of the most recent downdraft was the persistent headlines on circular financing in the AI world, and valuations being stretched too far.
Michael Burry championed this thesis on the depreciation schedules not accurately being accounted for; arguing that 2-3 years was far more realistic than 5+.
Burry’s fear was almost directly addressed during Nvidia’s earnings call two weeks ago where the CFO Colette Kress said:
“Thanks to CUDA, the A100 GPUs we shipped six years ago are still running at full utilization today,” Kress said. She emphasized that point by also saying “our GPU installed base, both new and previous generations, including Blackwell, Hopper, and Ampere, is fully utilized.”
The AI ETF ‘AIQ’ from Global X pictured above provides a fairly comprehensive and equally weighted view of AI components. NVDA is not over represented in the ETF.
Note how after the Thursday bearish engulfer session, bears would have had everything they needed for a capitulation flush under Thursday’s low on Friday. Friday instead offers a look below and fail, and as of this Friday’s close, price is above the engulfer high.
If the AI trade was going to be dead and gone, this was the time for bears to make a stand, and they failed.
As it relates to a bubble, something you don’t tend to see is an exodus from the very thing claimed to be a bubble. Instead you’d expect to see record inflows.
Take a look at the net flows of buying vs selling in tech stocks from BofA clients. (Source: Connor Bates)
Even amidst these substantial outflows from tech, we continue to see Google acting as a new AI leader on the TPU vs GPU theme after providing context behind the Gemini 3.0 launch.
Expect the recent leaders to build bases as they cool off, and new potential leaders to emerge. Why would this be the base case vs the entire thing fizzling out?
Genesis Mission.
On November 24th the Trump administration launched ‘Genesis Mission,’ an executive order aimed at establishing dominance in the development and deployment of AI.
Remember when Sam Altman called for a government backstop on AI, then quickly retracted his statement? Well, here it is. Too big to fail.
Actually pretty slick for a gov site: genesis.energy.gov
So point number one, AI bubble fears and circular financing, seemingly has been shrugged off by Wall Street for now.
Point Two: Federal Reserve ‘U-Turn’
Perhaps the more frustrating component of the market rally has come on the heels of a total Federal Reserve ‘U-Turn.’
We discussed this flip flop in last weeks newsletter, however it’s become much more obvious over the last weeks worth of trade with breadth improving in a major way.
To start, here are the current Fed odds below, and keep in mind that peak flip flop had +80% odds of a pause for December.
Not only did Williams two Friday’s ago bless the rate cut, but Waller on Monday explicitly stated he’ll be voting for a rate cut due to the labor side of the mandate.
From there the Russell 2000 rallied 5.65%.
The other reveal that allowed perception to flip more doveish was the idea of Hassett being picked as the replacement to Jerome Powell as Fed Chair.
Fed Chair is the most direct way for the administration to exert influence over the Federal Reserve, and we know the administration wants rates lower.
Not only did the Russell 2000 rally in a big way, but underlying participation in the NYSE improved.
In April, the highly regarded Zweig Breadth Thrust triggered. This triggers when a 10-day EMA of Advances divided by Advances plus Declines goes from below 0.40 to above 0.615 within 10 trading days.
We’re almost there again.
We’ve got until December 5th. (Source: @SubuTrade)
Another place this has shown up as a clear signal is in the home builders and lending stocks.
Just have a look at XHB, LEN, RKT… and dare I even say UPST (pictured below).
If these charts start failing, it could be a heads up that the tailwind is losing some steam and would be a notable data point.
So as we move forward into the end of the year thinking about a Santa rally, it really boils down to these two themes remaining intact:
- Non-issue in AI bubble land.
- Accommodative policy from the Fed.
Historically the Santa rally should start later in the month of December and run into the first few days of January.
This actually sets us up perfectly for a much needed pullback to retest the top of the bear engulfer, setting a daily higher low, and attempting to move higher into year end.
So speaking of that pullback..
…as always, the charts light the way, so lets take a look through things relevant to this upcoming weeks worth of trade.
Trade Brigade Live Squawk
Why wait for the holidays? Give yourself the early gift of intraday clarity.
Check out this recording for a taste of what each morning session is like: 07/09 Live Squawk
Onboarding support will be available through the evening and Monday morning starting at 6:30am EST before the 8am premarket-prep kick-off.
Broad Market Analysis
SPY – Monthly
Hanging man, hammer, whatever side you’re on, all I know is that the 610s will still easily yield a potential higher low if the higher timeframe pulls back again.
SPY – Monthly
Here is your monthly reminder as well that bad things generally only happen when the monthly trend is down and under the 20SMA. Reinforces the classic mantra that markets don’t crash from the highs they crash from lows.
See ’00 pictured above. ‘08 is identical with the double top.
SPY – Weekly
Last weeks bar cleared all major resistance hurdles that the prior week bar close was threatening. Back above all aVWAPs, high volume node, above the fib 38.2, close over prior week range high back in trend channel. Busy chart, but it tells an important story.
SPY – Daily
The end of week rally brings a higher high in the trend count over the 11/20 & 10/10 bear engulfer highs. The best higher low to keep trend up is a hold over 674, but there will still be an opportunity for a higher low anywhere over 664.15.
SPY – Hourly
The major pathing ideas ideally hold that higher low over 674. From there looking for higher lows to participate long side now that the trend is flipping back to up on the daily chart.
If we need the line in sand 664.15, and can NOT set a higher low back over 674, it will complicate the end of the year and will likely require the reassessment of supporting evidence charts to evaluate the nature of the failure.
Market Internals
Supporting the claim that its worth changing tone. Buyers dominated the exchange level this week with solid volume inflows regardless of what the tempo may have felt like intraday
Market Profile
Value continues to drift higher and make trend shape profiles rather than short squeeze. Notably the Tuesday move. Tuesday low looks into the lower distribution from Monday’s single prints, sellers couldn’t find lower acceptance.
XLK – Technology Sector
My largest concern is that the XLK had an impressive rally, but was unable to take back the bear engulfer high from 11/20. 10 of the 11 S&P sectors have… This is the odd man out, and its also the heaviest weight component of the market. Keeping a VERY close eye.
If you want the full take, including all of the nuance of breadth, risk appetite and much, much more, check out the weekend episode here:
Economic & Earnings Calendar
- ISM Manufacturing & Services
- Will have most relevant insights on both prices paid and employment situation
- PCE is outdated
- UoM Survey numbers are more relevant Friday
Top watches: MRVL, CRWD, PSTG, CRM, SNOW, RBRK, S
Swing Stock Scans
AAL – Daily
Flat top base breakout potentially underway with recent strength back over the moving averages. Slower mover, so don’t expect much here, but clean thin structure to retrace if it goes.
Understand that you could use the group: AAL, DAL, UAL, LUV.
BMY – Daily
Another flat top base breakout but the key here is the higher low coming into the top. If this can break the inside days from the end of last week and clear the daily 200 SMA, looking for a move towards the 56.8 area. In a thematically relevant sector with all the recent strength in healthcare.
C – Daily
Once again, another flat top base breakout setup but this time into all time highs.
JMIA – Weekly
Almost picture perfect cup and handle on the weekly with recent strength off of the pullback. Looking for a move over 13.50 to set up something on the daily worth participating in. Plenty of overhead supply so mind that, but starting to show signs of perking up.
LUMN – Daily
A chart pattern that has been working well recently is the look below and fail. Study the CLSK chart and you’ll see that this looks similar with the potential for a move over 8.15 setting up a rally to the highs around 11. Great linear move prior, monitoring for a second wind.
ONDS – Daily
A retail darling that’s starting to show signs of a developing uptrend after the recent pullback. Over 8.75 with volume to support it could travel back to recent highs and potentially higher if markets remain risk on into the end of the year.