Happy Taco Tuesday Traderade family! It seems that the bear market rally may be faltering here, and as a result I'd like to share two areas of the market that seem rather weak and are worth watching for further downside.
First let's take a look at some intermarket dynamics that suggest downside is likely, particularly in longer duration growth factor risk assets, like NASDAQ stocks, and particularly those that don't make money.
The relationship between QQQ (black) and TLT (red) once again suggests that there's room to 'catch down' as rates are on the rise and the 30-year bond price action of late seems to suggest that there is the increasing potential for further downside, which would also mean it's likely that rates head higher.
Tech stocks have seen aggressive short covering, the likes of which we haven't seen since early 2021, when the last speculative bubble in unprofitable growth and tech burst rather unceremoniously, leading many stocks to fall 60, 70, 80, even 90% from their all-time highs to the ultimate troughs reached last year. But this short covering, like the frenzied buying, seems to be closer to an end than a beginning having reached such extremes.
For more on other areas we're watching that suggest the bear market rally is closer to an end, check out this video.
Cathie Wood's ARKK seems to be springing a liquidity leak again.
The ETF is trading below its EMA(8), point of control, and RSI is turning lower. There is a lot of supply overhead that suggests former trapped buyers may become motivated sellers at these levels if they should be reached.
I think we may see continuation to the downside based on ARKK being chock full of long duration unprofitable growth stocks, and their rally likely running on fumes. Adding to that, the higher rates rise, the more that we see pressure rise in the riskiest parts of the market most of the time.
While 2023 has been an exception to that rule, so far, it does seem that we're closer to that phenomenon ending for a variety of reasons, which are covered in the video above.
My downside level that I am watching for ARKK would be $30.60. I would cover any short position in it if it breaks above the EMA(8) or yearly point of control on a closing basis. I would set a 4% trail stop (yes this one is volatile and as a result quite risky) based on (IV+RV)/29.
My time horizon for this trade playing out would be approximately two months. If we reach the price target earlier, I'm closing any position. Otherwise, I will close if we don't get there by late April.
C3.ai describes itself as an "enterprise artificial intelligence (AI) software company", but it's difficult to ascertain any applications or services that are truly artificially intelligent, rather than just misappropriating a catchy technical term.
Management's propensity to jump on the ChatGPT bandwagon with no products or services that allow a meaningful entrance into the already crowded and seemingly troubled space, begs the question what investors may expect to hear in March when management promised to unveil their ChatGPT-like offering.
The company's fundamentals seem to be deteriorating, with slowing sales, falling free cash flow, and rising stock-based compensation as if the management should be patting themselves on the back for causing material harm to shareholders since it IPO'd and traded shortly thereafter as high as $183.90.
The stock currently trades at $22.58 per share, down over 87% from its all-time high. Just looking at the CEO Tom Seibel's sales are rather illuminating.
He rather wisely sold the majority of his stake as soon as he could after the IPO, going from holding over 17 million shares to under 8 million.
So what makes the company a hot topic right now? The AI hype bubble, that is really built more on imagination than reality. But I think reality will catch up sooner than later.
With the stock below the point of control, EMA(8), and RSI turning lower, I am tempted to fade the recent rally. An idea I shared on the Traderade+ Discord server last week and the week prior as well.
WARNING: Earnings are coming up on March 2nd. That could significantly add to volatility in this already very, very volatile stock. I feel that they will disappoint yet again in terms of the trajectory of their revenue, sales, and net margins. But they could certainly either surprise or the market could react in a surprising way. So there's no need to rush. It may make sense to wait several trading days.
I would stop out with a close above the point of control, EMA(8). The current volatility regime suggests setting a trail stop around 8%, meaning the market expects massive volatility. This is a maximum beta play, meaning very high risk, so I will take on a modest position size (as I often do with any single stock play anyway).
$12.15 would be the downside price level I am watching closely, suggesting that the stock could have a rather hard fall from here if I am correct that such a level may be reached.
The AI euphoria rally, and the broader rather in unprofitable tech and growth, may be coming to an end. If it does I believe there may be opportunities for further downside to be realized in the space. The ideas above are meant to help educate our viewers about how we may look at taking trade setups and the process to navigate them from both the risk management and profit objective sides.
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