Traders need to buckle up. We're about to be hit with more than 500 companies reporting earnings this week.
Yes, we officially kicked off earnings season last week with several major banks reporting, but the real fireworks begin in the middle of the week.
We've been waiting for a rudderless ship to find direction, and this week we may finally get it, but it's important we don't anticipate. As easily as the SPDR S&P 500 ETF (SPY) , Energy Select Sector SPDR (XLE) or Invesco QQQ Trust (QQQ) could break out, the iShares Russell 2000 ETF (IWM) or SPDR S&P Regional Banking ETF (KRE) could breakdown despite bigger banks acting a bit better at the end of last week.
It's worth mentioning the biggest tech names will report near the end of the month and the first week of May, so taking a breakout trade or even a breakdown trade this week will be very short term. I don't want to be holding onto a trade into the days when Apple (AAPL) , Amazon (AMZN) , Alphabet (GOOGL) and the majority of the biggest companies in the world report their earnings.
The immediate draw on a breakout sits with the QQQ because we need to go back to the August highs to look for resistance as opposed to the SPY or XLE, but there's an interesting divergence with XLE to consider here, and I'm not talking about a technical divergence, but rather a fundamental one.
Last Wednesday, we received news that crude inventories rose by nearly 600,000 barrels, which was the inverse of an anticipated drop of 600,000 barrels. Crude prices popped and held, as did many of the big energy-related names. This is a short-term fundamental divergence worth noting, but there's more under the surface.
The surplus was driven by a release from the Strategic Petroleum Reserves (SPR). Crude prices have risen 20%-plus over the past month, so there's some small logic to the release, especially with a White House trying to distract us from inflation worries. However, the fact that we also heard the government might start refilling the SPR in the second half of the year throws a bigger question mark into the current release.
Markets are forward-looking, so telegraphing government purchases of oil may not be the best strategy, especially if inflation continues to rise and discretionary income feels the pinch. That said, this explains the strength in energy names. Traders are looking ahead and want to be positioned in front of any second-half buying.
For this reason, from a short-term swing trading perspective, we should have our eyes focused on energy right now as we do on technology. If you want to be less focused on a single area, then the SPY makes for a consideration as it is roughly 25% tech with a single-digit allocation to energy, although I'd prefer to trade QQQ and XLE rather than trying to identify a proper hybrid. It would be simpler to cut the underperforming portion of the duo. In addition, if energy is the outperformer, it won't be reflected well in the SPY.
I've said it before, and I'll say it again -- this market still lacks conviction, so keep stops in play and losses to a minimum if the market turns against you. Live to trade another day when the momentum allows you to avoid severe punishment, even when you're wrong.
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