Weekly Market Overview – $SQ on Deck – August 2, 2021

Bearish – SQ – $247.26

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Market Outlook:

Both SPY and QQQ pulled back slightly after reaching new all time highs last week. SPY broke above the $437 level and has since retested it twice and is managing to stay above it indicating a new level of support has been formed. Sector rotation is shows growing momentum in the Communications, Healthcare, Discretionary and Technology sectors as the Industrial, Utilities and Staples sector are experiencing a decrease in relative momentum. Fundamentals will play an important role in markets this week as we enter another week of more earnings announcements. PMI and jobs data will provide some clues as to the timing of monetary policy tapering despite the Fed stating that the labor market still has a long road to recovery.

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SQ Bullish Trade Idea:
Our bearish trade is Square Inc (SQ). SQ is currently trading a high valuation of 123x next years earnings. Price has been rangebound since Feb 2021 and has approached the top end of the range which provides a good risk/reward bearish entry. Relative to the Technology sector (XLK), SQ has been underperforming since Feb 2021 which indicates further declines going into earnings. View SQ Trade

Sector Outlook

The Relative Rotation Graph (RRG) for sector rotation indicates that the extended leadership in Discretionary, Health Care and Technology was fading but looks to be picking up after as Staples, Utilities, Financials and Industrials slow down. These sectors have remained in the weakening category for a limited time and if they move above the 100 RS-Ratio and RS-Momentum levels, leadership in these sectors may continue. A number of sectors are in the improving category but slowing momentum may see Financials and Industrials move to the Weakening or Lagging categories.

Leading (positive relative trend and positive relative momentum): Healthcare, Utilities and Staples moved into the Leading category last week but only Healthcare is showing strengthening momentum while Staples and Utilities show weakening momentum. 

Weakening (positive relative strength and negative relative momentum): Technology and Real Estate are in the Weakening category. Technology is showing signs of increasing momentum which may move it to the Improving and Leading categories while Real Estate experienced a sharp decline in momentum from the Leading category last week.  

Lagging (negative relative trend and negative relative momentum): Only Discretionary is in the Lagging category but a sharp increase in momentum indicates that this will not last long and that XLY should move to the Improving and Leading categories soon.

Improving (negative relative trend and positive relative momentum): 5 sectors are currently in the improving category with Energy, Materials and Communications showing signs of growing momentum. A slow down in momentum in Financials and Industrials may see these sectors reach the Lagging or Weakening category. 

XLC

Price pulled back last week and is currently trading at the previous swing high at $82. A bounce higher from this level would confirm this as an area of support. Communications are in a bullish trend and pullbacks like these may provide good long opportunities.

XLV

Healthcare has experienced strong momentum in recent weeks with price breaking to new all-time highs last week. Look for pullbacks in XLV for long opportunities. Next support is at the $126 level. 

Market Observations

  • FB – As stated last week – break above $356 resistance indicates further rally. Price pulling back to this level would provide a better risk/reward long entry. 
  • WFC – Price has broken above the 100 W MA on the weekly timeframe and may rally to pre-pandemic levels at $54. 
  • TTWO – TTWO has formed a support level at $163 and pullbacks to this level would provide good long opportunities. Higher lows indicate a bullish breakout. 
Tony Zhang