Tactical Strategy & Education: Technical Analysis and Key Levels Update on U.S and China Themes
Investor Education & Strategy Note on U.S. & China Technical Analysis (Thoughtful Preview Provided).
Note: This is a note written to supplement my latest March Investment Strategy piece with a technical analysis update on U.S and China levels that I believe members will appreciate.
Please make sure that you understand my style is “Intermediate-Term Investing” (a methodology that targets 3-6 months for ideas) before joining my Community. Please click here to learn what that is.
I’m happy to share my thinking with the good folks - just remember - these newsletters are my personal thoughts only and highlight my own plans and is intended for educational purposes.
Members,
I wanted to provide you an additional update to keep everyone informed on my latest observations. I’m always excited to write to you, as I’m sure you can tell.
In my previous note for March Investment Strategy written on 2/26, I discussed that we would likely enter a range-bound type of market behavior before the next decisive move up or down.
It was my personal belief that at SPX 3950 (when I released March Note), I believed we would first see a bounce back to 4050-4080 as seen below before any further significant leg down.
So far, that is precisely what we’ve seen. Nice!
Although these markets may have been range bound (relative to the large moves that we witnessed in January and Feb), they are powerful resting sessions that allow Intermediate-Term Investors or Long-Term Investors to carefully plan their next move.
Failing to plan during “boring markets” is a big mistake IMO. This is the time to start drafting where markets head in the next 4-6 weeks.
Markets are usually either 1.) Trending or 2.) Consolidating. This week was a prime example of Consolidation.
It’s very difficult to do thoughtful planning when markets are already trending as the direction has been set or is in motion.
It is during these times of consolidation that allow investors to take a step back and think about next moves.
My fundamental and macro opinion of the landscape has not changed (and No, having Bostic say that rates could be paused by Summer doesn’t really move the needle for me).
Given that my fundamental and macro opinions are unchanged from previous notes, I wanted to give a thoughtful, clean update on technical analysis on names/themes that have regions of value upon being reached - as well as regions of danger upon being reached.
For my public readers, I will release one of my recent research notes where I’ve removed the paywall for you to read to help you. I’d appreciate it if you share my content given that I’m sharing premium content to you as a public reader.
The paywall will be removed this Weekend but the post will be made private again on Monday, so grab a coffee and enjoy this note. What was discussed in this note on 2/26? That U.S. markets would consolidate first, and that China may see 1/3 of its declines get retraced/recovered. Reasoning is discussed inside, and both events have happened. 😊
If you’re part of my Public/Private community, connect with me on Instagram and Twitter for more commentary. I show a lot of cool stuff on those platforms.
For my private Community, now let’s look at charts and objective levels of interest.
This note will be refreshing in that it’s designed for Education, and I believe you will find enduring value from it as you build upon your ability to manage risk.
My biggest mission of course is to help you navigate this bear market. But an equally important mission of mine is to provide education on how to grow as an Investor and reduce mistakes that may end up being costly.
Bear Markets are the ultimate form of investor education and there is no better time to hone your craft than the environment we’re in now.
My goal in this Bear Market is to minimize my downside as much as humanly possible while maintaining upside exposure. All the Strategy & Guidance I provide is how I personally position.
Rain or shine, good days or bad days, I will continue to work hard for the Good Folks! I believe if a good process is followed, eventually at some point, the results will come.
And I am focused on building/refining a good process - every single day.
Technical Analysis (TA) in the context of Fundamental and Macro views.
Before getting the charts, I want to highlight a couple principles so that my thought process is understood.
On top of my macro and fundamental structural views, all target levels on stocks and indices I share inside our Community have a high degree of objectivity to it from a TA perspective: I look for regions on the chart where I believe institutions are likely to do business.
I do my best to stay away from transacting when stocks/indices trade in zones that are unclear for me.
I like to categorize ideas as Trend-Following or Contrarian. Trend-Following means you zoom out, and the trend is Up. Contrarian means you zoom out, the trend is down, but it appears as if the name trying to recover.
If I’m following the Trend upward, I like to buy on pullbacks, or wait for at least a slight discount to current levels
If I’m trying to be Contrarian (finding a recovery on a downward trend), I wait for objective oversold conditions and objective support levels. Never buy something just because “it’s down a lot.” Never short anything because it “went up a lot".
Generally speaking, based on my observations, I believe following the primary trend has a higher likelihood of success. Being contrarian has a larger potential for a higher ROI, but a larger chance that the opinion is incorrect.
Technical Analysis is typically the last step in my thinking process. I first determine whether the Macro environment makes sense (discussed previously in prior newsletters), if that Company has potential, and then use TA to assess entries/exits.
For execution, I like to think my transaction as “Okay, I have just purchased this company at XYZ Forward P/E along with what Price I bought it at”
Even though I am a Fundamental and Macro strategist, I now always use TA for confirmation. I rarely make execution decisions without confirming with TA. I always, always have my own upside targets and downside targets before entering/adding a position. Because I have targets, I calculate how much I can lose or win before I begin a transaction. For me, this is critical. For you, I think it’s important to find a system that works for your risk tolerance/psychology.
All opinions shared since December 2022 in my Community use TA to confirm my guidance. TA is a skill that has taken me a long time to incorporate with my Macro and Fundamental core skills, but I am now convinced it works and I wish to add as much edge as possible when providing any sort of guidance.
With this brief note discussed, let’s talk technicals.
The idea is to share with you my thought process so that you understand my methodology when I provide guidance on names.
At the Index Level (SPY/QQQ/KWEB/TLT)
What happened this week? The market moving event was Fed Governor Bostic saying that the Fed could be in a position to pause by Summer. This sparked nearly a 100 PT bounce in the S&P 500 mid-week.
Does this merit a sharp sustainable bounce above the SPX 200 Moving Day Average?
Sharp? Yes.
Sustainable? Time will tell.
S&P 500 E-Mini (Daily Chart - each candle forms after 1 Day)
Commentary: As long as the index stays above 3978 (200 Day Moving Average on Daily Chart), I believe we will continue a consolidating/range-bound behavior. For me personally, my bias is that 4100+ or above on the index are opportunities to set a trailing-stop once we go above this level.
Beneath 3978, and I believe 3900 will be tested in due time.
On QQQ (Daily Chart - each candle forms after 1 Day)
Commentary: As mentioned in a previous note back in Feb, I believed that a retest of 290 was possible (when the index was still at 310). This has materialized. Similar to the S&P 500 E-Mini, QQQ also bounced sharply from its 200 Day Moving Average. If yields continue to stay where they are now (10Y under 4%), I see QQQ drifting back to 306 before Sellers re-commit to pressure the market back down.
SOXX Semiconductor ETF (Daily Chart)
Commentary: SOXX is the key signal to watch in the upcoming week(s). I believe any retest back to horizontal resistance 433 (red neckline above) will be a very important level to monitor. I’ve assessed SOXX components along with this technical view.
If we fail at 433, I believe we are heading right back down to 400 (and lower).
However if we surge past 433, the entire market (SPY/QQQ/DIA) will likely be supported by Semis. Markets will not fall significantly for long if Semis are strong - I say this with relatively high confidence.
Market bears will be severely punished if they don’t see that surpassing 433 on SOXX is essentially going to add significant fuel for Bulls.
My bias currently is that 433 will be formidable resistance to target downside pressure upon reaching it with some reasons listed below. But I leave an open mind given that anything can happen in markets.
NVDA is the largest component in SOXX, and its upside is already quite baked in IMO (absent another significant positive catalyst). Broadcom (AVGO), the 2nd largest component in SOXX, reported strong earnings and no longer trades at valuation discounts. AVGO is likely to stay firm, but doesn’t have material upside (likely less than 10% upside) from here in my view.
Within SOXX, Applied Materials and Lam Research have their business models capped by U.S. Semis export curbs. This will only intensify.
So am I to expect SOXX to be carried by other components such as Texas Instruments and Qualcomm? I am not so sure about that.
AMD is one of my favorite names within the index, but this one name can’t single-handedly carry SOXX past its 433 resistance level.
For this reason, I personally like SOXX at lower prices and not today. My 385 target (mentioned previously in newsletter) eludes me for now. But my 290 QQQ and 400 SPY downside targets were met when shared in Feb.
433 on SOXX will be absolutely critical for the U.S. market. I will be watching this very closely.
On KWEB China Internet ETF (On the Weekly Chart - Candles form after 1 Week)
Commentary: In my March note, I shared the technical setup where I discussed my view (and reasoning) that recent KWEB declines would see 1/3 of them get retraced (aka recovered). What we’ve seen is KWEB go from 36 to 29 (7pt decline), and then now back to 31.6 (pretty much 1/3 of its 7 point decline get retraced with a 2.5PT recovery rally).
Nice!
This weekend is China’s National People Congress (NPC) where leaders will discuss their growth agenda for domestic affairs. If this meeting goes well, I favor a retest to 34/share in the coming 4-6 weeks.
If NPC does not go well, there’s an objective support level at ~27 based on my analysis. Will think about that level if it gets there.
In other company-specific opinions, BABA has disappointingly remained subdued but hope to see it get bids after NPC. JD has bounced off my 45 level nicely. JD has earnings on March 9th. Any significant dips into 35-40 on JD can be bought for a round-trip to at least 50+ over a 6-9 month period in my view. I understand that JD has been competing on pricing with PDD, which could hurt margins, but its valuation at 16X Forward P/E seems to reflect this.
In this next section, I wish to provide some practical education that I believe you will find helpful.
I had written this piece mid-week before Friday’s bounce, and wish to walk you through my thought process at that specific time. (Even though prices have changed since then my thinking process does not).
With Macro Support (Companies that are going in the same direction or positioned appropriately with the macro trends)
Example Themes with Macro support in my view (the idea is to find companies in these themes for trend-following):
Thrift shops/Discount Retailers
Energy & Oil companies
Defense (military) Companies
Inflation-linked companies (providers of inputs to Food/Commodities)
Example Themes with long-term secular uptrends but are amidst a cyclical downturn (the idea is to find companies in these themes that are contrarian at the right time)
AI/Semiconductors
Advertising
E-Commerce
Example Themes with clear Macro winds against it for the next 12 months (the idea is to avoid companies in these themes or hedge against them if you are experienced):
Real Estate (REITs) Sector
Consumer Discretionary Sector
An example of technical analysis combined with a fundamental view on a name with Macro Support
Walmart (analysis also applies to companies such as DG, DLTR, FIVE):
WMT has a business model that can withstand the soft environment we are in. Currently the name trades 22.8X Forward P/E (140.50). Still a bit expensive for an outright long, but can work if overall markets are supported.
If we approach 20X Forward P/E, the shares will approach heavy support (in my view) at 128-130. Even if we enter a very harsh recession, I believe those levels for Walmart will yield a positive ROI over a 3-6 month period if held. Any drawdown from those levels will eventually be recovered.
On shorter-time frames, WMT at 138 is potentially a bounce region.
Should WMT approach 153, that is an objective level to consider exiting the position/protecting your position if you are purely a price action investor. That would likely raise the forward multiple to 24X P/E, which is the same as the Nasdaq’s forward P/E of 24X.
I have no qualms selling WMT if it has the same valuation as the QQQ (for the same reason I believed it was unlikely Alibaba would get close to the S&P 500’s valuation in a note to members back in late January). I like WMT, but it doesn’t make sense for WMT to trade more expensively than QQQ for a long period of time.
Energy XLE ETF:
In my view, XLE ETF is ownership of commodities and energy dependency that the world needs given the geopolitical conflict. While a deep recession can hurt oil demand, heightened geopolitics will increase the intrinsic value of oil (you can’t fight a war & operate your economy without Oil).
Valuation-wise, Oil stocks are still historically reasonable if we use XLE’s top proxy Exxon Mobil as an example.
There are two levels of critical support that must be held for my longer-term positive thesis to hold: 78 and 68. So long as XLE ETF is above these levels, I stay bullish on this sector.
Near-term dips into 80-82 can be carefully accumulated for a well-diversified portfolio. I do believe that XLE ETF will revisit the “region of its highs” later this year (90-93).
How high beyond its recent swing highs can it go? I do not have enough information to say yet. But the macro and technical setup appear constructive to me.
Contrarian Ideas (the names are recovering in the context of a downtrend)
Pinduoduo (PDD) (This framework of thinking has parallels to BABA/JD as well)
PDD is one of the strongest momentum names in KWEB at the moment. While most investors are obsessed with Alibaba, there are 3 major ECOM players in China: BABA, JD, and PDD.
PDD is the smallest ECOM player with the largest growth rate. I’ve shied away from talking about PDD because as you can see from the volatility (the trading range), I don’t think this name is suitable for most investors.
The China selloff from 2021-2022 took PDD from 200+ all the way to 25/share. It has since recovered to 95 or so. In one word: Wild.
This is an example of a Contrarian chart: a recovery formation in the context from a giant cyclical collapse.
The name trades at the upper bound of its valuation range at 22X Forward. Given its growth prospects, I consider this to be fair.
If there were a fear-driven selloff back to the large neckline of 70, I am personally interested in re-entry form an investing standpoint.
Traders can use the smaller support region of 80-82 as a potential area to do business.
Looking longer term, I see resistance to challenge buyers and their ability to push levels higher at 107 and then another zone of resistance at 133.
Google (GOOG):
Although Google’s stock is obviously in a downtrend, their business model has secular tailwinds. The question is not if Google will recover, but when.
To assess the technical outlook, here is my belief:
Selloffs in 2022 were unable to break GOOG beneath 80, and that has been a region of support held multiple times.
The name currently trades 18X Forward, which is essentially the same as the S&P 500. Now, is it fair that GOOG trades at the same valuation as SPX, given that GOOG grows faster? No I don’t think so, and while I do think this shall be corrected in the future, the market will not definitively tell me when.
I believe GOOG revisits 103 resistance (and more) at some point in 2023.
Any revisit to 80 should be bought and not sold, in my view. The company is managing expenses appropriately and appears to be shareholder friendly with their corporate strategy.
These charts and thought process outlined above should be used as case studies to understand how I provide guidance. I had written this note mid-week in the first week of March before the Bostic-fueled rally.
Now what I will do is give a list of names and regions that I’m eyeing. All using the same methodology above:
Trend Following: Targeting longer-term upside upon pullbacks in Macro Supported Themes
CF Industries (now 86): I would ideally like to see a pullback to 80-82. On the upside, I see 90+ within the next 30-60 days. I believe 95-97 is possible within 6 months.
Mosaic (now 57): I had bought MOS (essentially the same as the CF idea - just a different company) at 50, and believe a pullback to 54 is healthy on its way to 63 or better in the 2H of 2023.
Occidental Petroleum (now 61): Any healthy pullback into 57 can eventually form a base for a move higher to 70.
Lockheed Martin (now 470): Pullbacks to 460 can form bases to eventually retarget 485 or better in 2H 2023
TJX (now 78): As long as no breach of 75, I see a revisit to 81 or better within 3 months.
FIVE (now 206): I’m interested in this name at 186, for a revisit to where it is now (206). FIVE has incredible momentum, but it’s too close to its technical neckline of 210 for risk/reward to be attractive to me.
JNJ (now 154): Previously discussed JNJ that 150-155 would be a buy region. As long as 150 is not breached, I believe 160 or better will occur within 3-4 months.
DG (now 218): If any post-earnings sell-off in DG to 195-205, I see this as an opportunity to carefully accumulate for a round-trip to ~230 later in 2023.
Contrarian - Targeting longer-term recovery in themes that have Secular Upside but are going through a Cyclical Downturn:
TLT (now 102): As previously discussed, TLT is one of my top themes in 2023. I view any weakness into 90-98 as Strong Buys for an eventual target to 115.
GOOG (Now 94): I see 100+ within 60 days if QQQ can manage to stay even Flat. I believe pullbacks to 80 are strong levels to accumulate for long-term investment.
Meta (185): If Tik Tok is banned, I see 215+ on Meta within 6-9 months even if markets are soft. Tik Tok getting banned would be a game-changer for Meta as it eliminates its largest competitive threat aside from Google.
Disney (now 102): I see a recovery to 108-109 on Disney within 2-3 months.
KWEB (now 31.5): I see a recovery to 34 if China’s NPC event doesn’t come with significant regulation surprises to restrict pro-growth policies.
Draft Kings (now 19): DKNG is perhaps the most speculative name on this list, but I see a growing gambling problem/addiction in the U.S. and regulation that is weirdly starting to allow it. I’m interested in DKNG at the 15-16 level, and not yet today. This name has considerable upside once the economy recovers and if regulation allows for sports betting.
Gold (GLD - now 172): Once the Dollar begins to weaken, I see GLD retesting 180 or better. I’m a buyer between 163 and 168. I also like Gold as a physical precious metal long-term as Central Banking Digital Currencies (CBDCs) start to become something I am individually concerned about. Gold is going higher long-term. So as long as you’re not buying at local tops, GLD will do well over time as the Dollar softens.
Caution on these names/themes
VNQ Real Estate ETF (now 87): Any rally to 89-91 (resistance) is likely to be met by fierce resistance. It’s possible VNQ trades again below 80 within 2023.
SalesForce (now 186): If CRM is able to clear 193 (resistance), then all is well. However, I believe the gap fill at 175 is a level that could be revisited.
Broadcom (now 630): If AVGO cannot break 647 (resistance), I believe 600 will eventually be revisited. This has implications for SOXX (as mentioned above).
Ulta (now 522): Ulta has been consolidating since late January. If Ulta cannot break 530 (resistance), I favor the name to trade 500 or below in the 2nd half of 2023.
Unless the economy is exceptionally resilient, I see Consumer Discretionary XLY ETF underperforming SPY and QQQ.
Remember that all companies are highly correlated to the SPY or QQQ. It’s usually best to buy stocks when SPY and QQQ are at swing lows to maximize risk/reward (R:R).
If your view is that SPY/QQQ are going down, don’t buy individual names yet. Buying individual stocks/ETFs when markets approach support raises your R:R.
Many of my previous Downside targets in names mentioned have been met, and I covered my short positions at within 1% of targets provided: SHOP, MU, TSLA, BABA, and MSFT all hit my downside targets (or were within 1% of it). For shorts (which are far higher risk than Longs), if I see the level Intraday, I’ll close it then.
I lost on META and NVDA.
I didn’t have a chance to take a position on MGM.
I think the easy money for Shorts have been made based on my technical work, and don’t think Shorts here offer good R:R. There isn’t the euphoria reckless mood/sentiment today that existed back in late Jan/early Feb when I went Mega Bear mode on social media.
Another setup might emerge later for targeting downside, but today is not that day.
As you can see, my methodology is “Intermediate-Term” in nature and takes time to play out. My style does require patience, and at times it will feel slightly contrarian. I am not interested in narratives put out by the media, and would rather show you objective data levels that I’m looking at instead.
Will continue to keep you updated on key levels I’m watching, as well as research in the background on macro/fundamental developments to keep you updated.
The only folks who truly understand my work are you guys. Most people who watch my content on Youtube only get partial information on what we actually do, and most have no idea that we’re doing quite all right in 2023 despite all the bull and bear traps!
Please tell your friends about our work, and help us grow our network.
That’s it for now!
~Larry
P.S. - Make sure to read my recent 4-6 Newsletters if you’re new to our community. Tell friends and family about us! Tysm!
Hi Larry,
Thank you so much for the strategies! Every time when you release these kind of writing I get really excited, because I know you’ve done your research and put in the effort at the back, which I deeply appreciate!
I still remember, last year when I first started investing with your strategies in mind, and bought BABA in fall 2022 and hold on all the way through the rally till the beginning of 2023! That trade really made me realize how important to have a open mind and utilize and trust your research and process of thinking when I invest.
Since then I’ve became one of your loyal community memebers! Please keep your hard work! Look forward to seeing more your writingsin the future!
Thank you!
Kind regards,
Christy
Hi Larry. What do you think about entry points for $NIO and $BABA?