The Rally FINALLY Gets Tested
The S&P gained an incremental 0.37% last week and printed the first weekly inverted hammer through this entire rally.
(Bars on right are a weekly chart overlay.)
The level to watch will be last weeks low at 732.25.
If that breaks, a gentle pullback seems to be in the cards as money rotates out of semiconductors and into software names, continuing the theme of what happened last week.
The AI Squeeze Halted by Inflation… Kinda
The bull case has been pretty simple. AI works, semiconductors lead, earnings are holding up or even growing, and people are massively underexposed to this market.
However, extended crude oil pricing from the Iran conflict is finally becoming an issue:
- April CPI came in at 3.8% year over year.
- April PPI came in at 1.4% month over month.
Thats not a typo, thats the hottest month over month inflation reading we’ve seen since 2022 and it was nearly three times hotter than the expected number.
Add in oil remaining stubbornly over $100/bbl on the Sunday night open and the ten-year yield breaking out over 4.5% as a response, and suddenly the macro backdrop doesn’t look so friendly.
The AI narrative has been enough for the market to brush this story off for now, but the longer these metrics stay uncomfortably high, the easier it will be to poke holes in the bull thesis.
China Gives The Bulls Weekend Hope
Over the weekend news broke that during the China – US summit, both sides had agreed to create trade and investment bodies aimed at improving trade cooperation as well as reducing tariffs.
It’s a good headline that may buy bulls some more time if crude and rates remain elevated to start the new week.
If the overnight action headed into the Monday open starts to suggest a higher open (it doesn’t yet as of the 6pm futures open), the potential for a squeeze is on the table noting that the commitment of traders data indicated that positioning got even more short last week.
This doesn’t guarantee higher, but the mechanic is there if we start taking out Friday’s high.
It’s All Up To Nvidia Earnings
Next week is pretty quiet on the economic data front. All of the fireworks will be concentrated on NVDA earnings coming out after the bell on Wednesday.
As always, the numbers will be the cleanest litmus test of the AI trade. If the numbers work and guidance supports the capex story, market bulls get to keep the party going.
The WORST possible outcome here would be that the earnings, revenue, and guidance numbers are better than expected and yet the stock still sells off.
The crazy part? This has been the outcome over the last two earnings cycles.
Now we’ve got higher to fall from, with thin structure below. A negative reaction to earnings that brings price down towards the 20 SMA at 210 area wouldn’t be all that unreasonable.
Although NVDA is the heaviest weight component of the S&P and Nasdaq index, it is worth pointing out that generally earnings and revenue have been growing at a rapid pace, and thus the rally in markets has been justified on earnings growth, not just multiple expansion.
Just like markets typically bottom when the news seems like it just can’t get any worse, markets top when the news seems like it just cant get any better.
This isn’t a call for a top, its simply to say, if great numbers are poorly received by the market amidst one of the strongest AI driven runs we’ve seen, it may be time to think about the best of the best being priced in already.
As always, we’ll let the charts light the way. Let’s jump in.
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Broad Market Analysis
SPY – Weekly
Inverted hammer finally, however, still a green bodied close, higher high and higher low bar to bar, and still set a brand new all time high. If this leads to a pullback, markets can set a weekly higher low anywhere over the 698-700 prior ATH level retest.
The prior weeks low will be the determining factor as to if price pulls back more meaningfully in the first place. Base case would be for a look below and fail on 732.25 that leads to balance and digestion near the ATH. Beyond that, a higher low around 712.4 would respect a daily area of prior resistance that can now act as support, and also keep price over the pATH pullback at 700.
If markets do pullback all the way to the 700 area, just keep in mind that its roughly 5.5% pullback after 20% rally… more than acceptable.
SPY – Daily
Friday’s range is going to set the tone. Above the high and I’ll be looking for a squeeze into a more blow off top style capitulation ahead of NVDA earnings.
Under Friday low, looking for a break of Tuesday’s low to start the weekly pullback. Ideally the daily chart sets a higher low off of the gap fill reversal at 725 which is the lower bound of the weekly expected move as well as the daily 20 SMA. From there a reclaim of 727.75 and then last Tuesday’s low 732.25 should work the market back higher.
If the gap fill reversal then yields a lower high under the 732.25 area, we’ll have a daily lower high and then from there look to test 712.4 for the weekly higher low to be set.
SPY – Hourly
Generally looking for the first test of the 20 SMA on the daily and the gap fill reversal area to be bought on the first test to gauge strength of participants who have been sidelined through the rally, and are looking for an entry point to initiate new longs.
Same concepts as the daily with just a bit more detail.
Market Internals – NYSE
Undeniably a shift in tone at the exchange level that suggests sellers have a foothold. Looking to see if they can capitalize on it and actually get the daily higher low pullback into the 20 SMA where buyers can look for the daily higher low.
If sellers don’t follow through meaningfully below Friday’s low, looks like a squeeze could certainly be in the cards after the oversold AD line indication on Friday.
Market Profile
Value area was undeniably toppled lower on the Friday session. It’s clean to the downside below the entirety of the Thursday range which is a complete change in character out of the market. Even on the pullback from Tuesday, value was overlapping.
IGV – Software Sub Sector
As and if we continue to see semiconductors cool off, look for the software group to capture some of the rotation. If it does, its a sign that pullbacks in the market should be shallow and buyable. Money is moving around, not coming out of the market entirely.
RSP – Equal Weight S&P 500
We know that breadth through the rally has been really narrow, and its confirmed here with the lack of breakout to a substantial new high. Equal weight also already took out the Tuesday low that is going to act as the line in the sand in the weighted index.
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
Quiet week… nothing here that should be overly market moving.
Top watches: … NVDA
Swing Stock Scans
AAON – Daily Chart
Post earnings gap holding, great hammer relative strength on Friday. Looking for a move out of the wedge, or over Friday’s high to get started. Not interested if price starts to accept under the earnings range low 124.75. Look below and fail is fine. Acceptance inside is not.
DAR – Daily Chart
Holding the 20 SMA. If this wants to get in gear, over Friday’s high is an early entry to possible breakouts over the 65 flat top base level.
DOCN – Daily Chart
Post earnings gap up holding with flat top breakout over the 163.50 area available.
PWR – Daily Chart
Post earnings gap up holding with flat to breakout over the 785 area available.
SEI – Daily Chart
Flat top base breakout available over the 79.70 area after showing relative strength on Friday. If it pulls back ideally holds over the daily 20 SMA (orange).
VSH – Daily Chart
Looking for higher low consolidation over the gap fill reversal level at 34.7. So long as price can stay above that, seeking continuation out of this sleeper semiconductor name. If you zoom out to a weekly, this is starting a multi year consolidation range breakout over 29.75.