Q2 To Q3 Is A Bit Like A Chess Game
Chris Vermeulen | Jul 01, 2021 04:50PM ET
As we watched the NASDAQ Composite and S&P 500 rally to the end of Q2:2021, many traders asked themselves “Will this rally continue throughout the early part of Q3:2021 and beyond?” Although we don't have a crystal ball to tell you exactly what is going to happen, our price modelling systems, predictive modelling tools and trend analysis systems suggest we will likely see continued upside price trending through at least July 15-21. After the middle of July, we may see another pullback in trends as the markets shift away from the reflation trade expectations and start to react to 2021 holiday/COVID expectations.
The reflation trade rally has been very impressive over the past 12+ months. One simply can't argue with the price range, trend and volatility that we've seen throughout all of 2020 and into the first half of 2021. My team and I expect that volatility to continue, but at a slowly decreasing range into the end of 2021. We also expect a price rotation/reversion may still happen in 2021 that may prompt an 8% to 12% downside price correction (possibly bigger).
Near the end of December, 2020, we published a research article (What To Expect In 2020 Part II – Gold, Silver, and SPY) showing what our predictive modelling system suggested was likely to happen throughout 2021 and into 2022 – predicting price action more than 12+ months in advance for many symbols. The ES and the NQ both suggested a moderately strong potential for an early 2020 downside price rotation – which never happened. The Dow Jones Industrial Average and SPDR® S&P 500 (NYSE:SPY) suggested a late summer/fall deeper downside price rotation – which we are watching out for right now.
Overall, our price predictions for 2021 suggested a moderately strong upside price bias/trend for almost all of 2021 and into early 2022. Yet, there were also signs that a correction/reversion event may be likely sometime between April/May 2021 and September/October 2021 for the major U.S. indexes.
As we move into Q3:2021, we believe the upward trending will continue as earnings and results continue to support the reflation trade expectations. Historically, there has never been a period where global central banks have poured so much capital into the global markets/economy. We are living through a grand experiment related to supporting the global economy at a time when a global crisis has persisted over the past 10+ years. The upward price trend will likely continue, until it breaks downward. That is the big fear driving traders into hedging and price protection trades.
h2 INDU Targeting $36,000 In Early Q3:2021/h2This first Weekly INDU chart highlights the extended upward price trend that is likely to continue throughout the early weeks of Q3. In particular, we believe traders will pile into the blue chips, technology, semiconductors, health care and various other sectors as earning data suggests continued revenue growth.
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The Dow Jones will likely attempt to breach the $36,000 level before traders start to look for resistance. As the new COVID-19 Delta strain is starting to become an issue, we may see various forms of economic shutdowns happening again in the near future. So be prepared for states and nations to act in a manner that may be counter to your expectations (again).
This eeekly NASDAQ chart highlights the extended upward trending we've seen in various sectors over the post-COVID recovery trade. Technology, chip-makers, health care, consumer products and many other sectors continue to rally quite nicely as buyers have shifted their focus over the past 15+ months. The NASDAQ will likely target the $15,000 level very early in Q3:2021 and may push even higher – to levels near $16,000 on strong earnings.
It is very likely that traders will pile into the NASDAQ trend as data is released and the markets trend on expectations. Quite literally, unless something disrupts the expectations/results, there is very little to stand in the way of this upside price momentum. Obviously, as long as traders believe these valuations are suitable and believe there is no reason to be fearful of any downside price risks, they will continue to drive the NASDAQ higher and higher.
The accumulation of volume, shown by the increasing On Balance Volume indicator near the bottom of these charts, suggests that traders are already showing their hands in regards to forward Q2:2021 expectations. We believe traders are already positioned for a rally throughout early July 2021 as earnings and data start to hit. This is why we believe the markets will continue to rally higher through at least July 15-21 as the “tail wags the dog.”
After the bulk of earnings have been processed by the markets and traders, my team and I believe a period of profit-taking will start to unfold where broader price volatility may prompt some bigger trends. Remember, the trend is your friend – until it isn't. So, stay prepared for the unexpected and watch for signs of weakness in major market sectors (like the Transportation Index and other leading sectors).
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