A Large Scale Thematic Divergence

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E-mini S&P (June) / NQ (June)

S&P, yesterday’s close: Settled at 4183.50, down 41.75

NQ, yesterday’s close: Settled at 13,356.75, down 353

Fundamentals: U.S. benchmarks are sharply off Friday’s closing levels and this should come as no surprise. We discussed in our Midday Market Minute on Friday, all too often we have seen Nonfarm Payroll gains dissipate at the onset of a new week. Furthermore, Friday’s have generally been strong in recent months, to only give back chunks on Monday. For us, per the discussion in our Technical section, a break below major three-star support at 4200 in the S&P set the selling in motion. Although that trigger did not happen until after 1:00 pm CT, the sellers were driving the NQ for much of the session. This brings us back to our conversation last Thursday:

U.S. benchmarks have diverged this week. The Dow set a fresh record high yesterday, whereas the NQ is down 2.5% on the week and trading 4% from its record. As for the S&P, it is trading slightly lower on the week, a blend of the two. On Tuesday, big Tech got trucked, but as one could imagine given the Dow’s record, many names within Energies, Industrials, and Materials are trading much higher on the week. The talk of rising rates has certainly weighed on Tech, but there are also various idiosyncratic themes ranging simply from air coming out earnings enthusiasm, to the chip shortage, and concerns of high multiples. One conversation that we find ourselves having more often with clients is that at some point soon, broader index gains may not be so robust. For instance, what if the S&P is flat next year because Tech loses ground due to rising rates. At the same time, what if there are real inflation tailwinds and Crude Oil reaches $100, the Energy sector could easily gain 20%. As we move closer to the Fed tightening policy, whether the end of this summer or not until the turn of the year, these are important conversations; we could see a continued divergence. How is your portfolio positioned? Do you want to have a call to discuss? Email us at info@bluelinecapllc.com to schedule a time.

The Dow hit a fresh record for its fourth consecutive session yesterday and we followed up on this conversation in the Technical section, saying:

At the onset of a new week, this divergence is front and center. Can the Dow maintain its pace of gains without Tech joining the party? Regardless, with the NQ trading exactly in between 14,035 and 13,336 this morning, we do not think this 700-point, or 5% range will stick for long.

Lo and behold, after trading to a low of 13,305 and settling at 13,356 yesterday, the NQ decisively broke below this support overnight. It is our belief, for a large-scale, longer-term, thematic divergence, like what we are starting to see, a cleansing is in order first. What does that mean? We must see a broader selloff to remove some froth, and of course Tech sells off to a larger degree than Financials, Industrials, Materials, and Energies. Yesterday may seem like the start, however, it has been happening for three months. Yes, the NQ did make a new high in April but could not breakout above major three-star resistance at 14,035. Only Microsoft, Alphabet and Facebook joined the party, briefly. However, Apple, Amazon, and the chip sector each failed to breakout above previous highs, whereas software has lagged significantly since February. Furthermore, the NQ sold off from its February 16th high by 12%. The Dow only sold off by less than 5%, after putting in a high more than a week later, February 25th. From their respective lows, the Dow and NQ each gained 15%. The NQ now topped two weeks ago and the Dow may have yesterday. These are similar patterns to February, but what we are getting at is the divergence may be larger this time around.

On the economic calendar, JOLTs Job Openings are due at 9:00 am CT. We then look to a deluge of Fed speak; NY Fed President Williams at 9:30 am CT, Fed Governor Brainard at 11:00 am CT, San Francisco Fed President Daly at noon CT, Atlanta Fed President Bostic at 12:15 pm CT, and Philadelphia Fed President Harker at 1:00 pm CT. All are 2021 voters, except for Harker. Tomorrow brings the much-awaited CPI data.

Technicals: It is our belief, the type of market described above can bring opportunities to each, bulls, bears, and traders maneuvering on both sides. In the end, this is a secular bull market and selloffs can be vicious, however, the rallies even more so. From an intermediate to long-term perspective, buying the dip has been proven correct for not months, but years. From a more near-term perspective, there are new developments, and clear patterns such as the ones described between the NQ and Dow above. There are others too, like the head and shoulders pattern in the Russell 2000. We have spoken briefly here and a bit more detailed on the Midday Market Minute about selling the rally there until a close above 2300. Still, through all the idiosyncratic divergences and bearish patterns over the months and years, buying the dip has paid. For now, in the near-term, the S&P confirmed a head fake yesterday by not only slicing through major three-star support at 4200.75-4203.25 but settling back below our recurring 4186 mark. Listen, if you did not position short already, you should not be looking to chase a move below last Thursday’s low of 4140.50, as it is developing this morning, but looking to where the dip should be bought. There has been a floor of support against our major three-star level at 4118-4120.50; one does not have to pick a low, but if this cannot be broken within the first hour of trade, we imagine a strongly bullish response that one could ride. However, a break below here opens the door to 4070. As for the NQ, it has broken below the critical major three-star support aligning with the March 31st bullish breakout at 13,304-13,336; the tape responded as perfectly as it could against here yesterday, but the sellers cracked it overnight upon a weak close. Price action has already moved into strong support at 13,090, but dip buyers and those looking to close shorts should pay attention to 12,871-12,900; aligning a trend line with multiple technical levels of support. As we have said, this type of market can be traded for either side, but what matters most is patience and those who are patient can capitalize.

Bias: Neutral/Bearish

Resistance: 4169.75**, 4183-4186***, 4200.75-4203.25***, 4228-4232**

Pivot: 4139.75

Support: 4118-4120.50***, 4113**, 4099.25-4101.25***, 4070***, 4052.25*, 4036.75***, 4010-4020****

NQ (June)

Resistance: 13,304-13,336***, 13,414**, 13,570-13,597***, 13,696-13,722**, 13,790-13,803***

Support: 13,090***, 12,871-12,900****, 12,609**, 12,503***, 12,134-12,200****

Our daily research overs the S&P, NQ, Crude Oil, Gold, Silver, Currencies, Corn, Soybeans, Wheat, Livestock, and Softs markets. SIGN UP FOR A FREE TRIAL. YOU KNOW WHERE TO GO! Visit us at www.bluelinefutures.com

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