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8 Monster Stock Market Predictions: Financial Conditions To Tighten This Week

Published 01/08/2022, 11:17 PM
Updated 09/20/2023, 06:34 AM

Stocks had another awful day on Friday following that very strong jobs report, with the S&P 500 dropping by 40 bps and the Qs falling about 1.1%.

For the week, the Qs fell about 4.5%, and from what I could tell, that was the worst first week of the year since the week ending Jan. 4, 2016, when the Qs fell 7%.

1. NASDAQ 100 ETF

The Invesco QQQ Trust (NASDAQ:QQQ) did manage to hold some essential support around $379, and once that level breaks, I think there is a good chance we will see the ETF plunge to the October lows at $359. The RSI was firmly trending lower and has yet to hit oversold levels below 30 yet, so there was certainly more work on the downside.

The more significant question was what happens after the long-trend uptrend breaks, which seemed bound to happen.

QQQ Daily Chart

2. Bond ETFs

10-yr ETF

There was also a massive move in the iShares 7-10 Year Treasury Bond ETF (NASDAQ:IEF), which rose back to the highs of 2021, at 1.76%. That is a considerable level for the 10-year 10-year with the potential to move to around 2%. A CPI that comes in hotter than expected this week could quickly help to push the 10-yr over this big resistance area. However, I am not expecting that to happen.

IEF Daily Chart

Corporate Bond ETF

Also noteworthy is that iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE:LQD) has fallen below essential support at $130. It is an indication that yields for corporate bonds are also rising sharply.

LQD Daily Chart

High Yield Bond ETF

Rates for high yield bonds rose sharply this week, as noted by the sharp decline in the iShares iBoxx $ High Yield Corporate Bond ETF (NYSE:HYG).

HYG Daily Chart

3. Financial Conditions

These changes in rates were also helping to confirm my belief that the Fed tapering would lead to tighter financial conditions. While financial conditions have not tightened the past two weeks, it seemed highly likely they would begin to tighten again this week.

US High Yield Index Effective Yield Daily Chart

We care about financial conditions because easy financial conditions allow for expanding margin debit balances. While tightening financial conditions makes it harder to get margin and leads to the contraction of borrowing.

Financial Conditions vs Margin Debt

As I have shown before, margin levels and changes in the equity market are highly correlated. Rising margin levels lead to higher equity prices, while the removal of margin leads to lower equity prices and greater volatility.

S&P 500 Composite Price Index

4. Netflix

Netflix (NASDAQ:NFLX) fell sharply last week, nearly 10.2%. What was worse was that the stock gapped below the March 2020 uptrend, falling out of its rising wedge.

It also saw its RSI break below a very long-term uptrend that started in July 2019. The stock was probably heading towards $480 over the next few weeks, but ultimately it was probably heading lower than that.

Netflix Daily Chart

5. Micron

Micron Technology (NASDAQ:MU) formed a bearish divergence, with the price reaching a new high, while the RSI made a lower high. It should look familiar because it was the same thing that happened in December 2020 and January 2021.

Additionally, the stock has been unable to break out to a new high and instead has been stuck at the old highs around $95. This one was probably on its way to filling the gap at $86.

Micron Daily Chart

6. Advanced Micro Devices

Advanced Micro Devices (NASDAQ:AMD) fell to support this week at $131; the stock broke the uptrend and then retested that break over the past few weeks.

The stock was sitting on support and finds itself in a downtrend. What made matters worse was that the RSI was on support at 39.20 and signaled that a further drop in the shares was coming. This one will probably be heading back to $117 over the next couple of weeks and ultimately on its way back to $100.

AMD Daily Chart

7. NVIDIA

NVIDIA (NASDAQ:NVDA) was no different, with the shares also sitting on support at $270. The trend was lower for both the price and the RSI. The stock wasn't even close to oversold yet, so it will probably push lower and fill the gap at $230 over the next few weeks.

NVIDIA Daily Chart

8. Home Depot

Home Depot (NYSE:HD) was just screaming to fill the gap at $375.

Home Depot Daily Chart

Original Post

Latest comments

You really think AMD will ho fown to $117?
made everything back on sqqq. in cash waiting to see if breaks support. I think market recovers with a dead cat +2 percent then -10 percent. Rate hikes or not it's inflation *** avg Joe's. In NYC I bet it's 20 percent at least with food. We are going down captain.
Another well written Article Michael thanks for the heads up again, you make it seem so easy I know you put in a lot of hard work to give to us readers.
Thank you!
Very well written
The emperor is wearing no clothes. Most are much too afraid to admit it as they scream, “BTFD” but the charts have been screaming a different tune for a very long time with divergent high after divergent high. The pavlovian dip buyers had a massive dose of fed heroin early 2020 until now (aftually the heroin drip started back in 2008-2009)…. I’m looking forward to the interesting new dance the fed does this new year as they tend to their carefully placed house of cards.
That look better. Thank you for the article 👍
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