Under the 30-week

The red flags that have been piling up for weeks have played out and we're now officially in a correction. The QQQ is -10% off highs and below the 30-week which is where if I haven't already been defensive, I would be now.

I've stayed defensive for week, but there have still been days where I'd doubt myself as some software and cyber names continued to look good. The problem was that semis, memory and AI infra were already broken in a big way. I didn't think the remaining strength in growth could hold up if those groups kept moving lower, and now we're seeing that pressure spread.

You can see the distribution is CIBR IGV last week below. SMH is only down -0.9% last week but came into the week heavily oversold, bounced, and made another low... its not relative strength.

I wanted to bring back up my post from Oct 14th because we had "Kill Candle" type of distribution across the market.

In the post I said "If you think this type of distribution is going to disappear like nothing happened that is very very unlikely."

Distribution is usually very subtle, so when something like that day Oct 14 shows up it is serious distribution that couldn't be hidden. One of the biggest things that has helped me over the past 2 years is recognizing when days like that show up, the market may look fine shortly after, but it sends a volatility shock throughout the market that needs either a lot of time to work off, or a correction.

The earnings reactions have been awful too. NOW was one of the software names I was tracking as RS and it sold off huge after earnings, finishing the week down about -33%. That's why I at the moment for me its the time to track RS, not trade it.

We saw this type of earnings reactions across other important growth stocks too. GOOGL -20% last week and INTC -30%.

Normally if a market is chopping and directionless like we were, earnings season can reignite a new trend. If a lot of stocks in a group start to break gap up big and trend in could bring back renewed interest in a group. We saw this in July briefly with many of the Software names. Right now though its pure distribution.

I always say the weakest markets have the biggest bounces. The bounces in AI infra look convincing. A few big up days can make it feel like you've missed the bottom, but look at where those rallies went on the weekly charts. These stocks had broken their bases and were in downtrends. They were bouncing into old support and declining averages, not building anything constructive.

Just like when a stock is in a healthy uptrend, it has healthy pullbacks but they are within the context of an uptrend, when a stock is in a downtrend it has big bounces, but they are within the context of a downtrend.

The reality is these broken down AI infra names now have a lot of overhead resistance. Even if a big bounce puts in a low, its unlikely to make much progress without more selling pressure. If it starts a trend change there would be no rush, it would slowly put in a higher low.

Flip CRWV over to invert the chart, and the action looks like a breakout, a pullback to the pivot and continuation higher. This is exactly what we look for in long positions.

I took a tiny CRWV short Thursday at 63.32 with a stop at 66, above the prior week's high. I covered it Friday at 54.85.

Looking at that inverted chart, I would have been sitting still if it were a long, but I closed the short. I'm still getting comfortable trading this side and keeping the size small.

I also took a small SNDK short that stopped me out. I shouldn't have put it on right before earnings. It went lower afterward, but I still took a bad entry.

For months we have been in chop, with no trend. Now we have one, just to the downside. We have an opportunity to sharpen out skills!

Corrections/bear markets... whatever this turns into, the most important thing for preparing for when it is over is to track relative strength. They can be last to crack which is why I only track it now.

Every time a new uptrend resumes, the RS list is what turns into the new market leaders.

At the moment here is what stands out most to me:

TEND, RBRK, PLTR, VEEV, SHOP, PAYC, RNG, FROG, DDOG, BOX, DBX, ZETA

For a reminder on RS turning into new leadership look revisit the April 12 report below.

I'm watching for the same thing this week: bounces into levels and declining averages where I can define risk on a short. I'm sizing small because I'm still working on executing this side.

For longs, we need growth leadership and I dont see any. For right now the plan is to track growth stocks displaying RS and build a watchlist. The stocks still on the RS list later on are what ends up becoming new leadership when the market follows through to the upside.