Don’t Argue With The Generals In July Until…

Traders who rely on the fundamentals could make the bullish case that earnings season is going well.

For example, Barron’s published:

It’s a good point, but the markets can often have a surprising view of what the future holds. So, we keep a closer eye on what the market is doing with the technicals, and as mentioned above, July can be a very pivotal month.

July may get its significance from the fact that it begins the second half of the year, it hosts an earnings season or some other reason.

In short, we give the market a couple of weeks to establish a range that begins the second half of the year. Then we trade based on the patterns that develop in and around this range. One example is to trade the low of the range for either a reversal low or a significant breakdown.

This year, the lower bound of the big range occurred on July 8 in SPY, DIA, and IWM, and July 1 for QQQ.

The chart below of the QQQ demonstrates how this “Calendar Range Low” is exactly where the market stopped and reversed.

I’ll explain why you might have expected this level to hold shortly, but first…

Below you’ll see a chart of the SPY with its July low noted.

SPY and DIA broke their July lows, but they didn’t “continue” (or confirm the breakdown).

So on Tuesday, with QQQ bouncing off its level like a trampoline and the SPY forming a reversal pattern, the stage was set for a rally.

However, the biggest indicator that the market was not ready to break was that the “Generals” (as I’ll call them for this article) didn’t show any signs of breaking July lows.

These Generals are Apple (NASDAQ:AAPL), (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Facebook (NASDAQ:FB), Alphabet Inc Class C (NASDAQ:GOOG).

Collectively they make up 47% and over 21% of the market capitalization of the QQQ and SPY, respectively. It will be very hard to have a big correction in the SPY or QQQ without their participation. I encourage you to look at these stocks with the perspective of the July low. Since you don’t know the exact formula for the July low, I’ve included FB’s chart below. The other stocks are obvious.

Of course, the market is not just 5 stocks, and there are some serious market corrections underway. For example, the Russell 2000 (IWM) has not had a good July.

This and a host of other conditions covered in last week’s highlights and weekly videos give us good reason to be careful in how and where we place our bullish bets.

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