The Market Has Started 'Resistance' Training

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It was a dull day and we’re getting a small pullback. That’s pretty much the sum of the trading day on Monday. But I want to discuss the chart of SPDR S&P Biotech fund (XBI) , an exchange-traded fund for the biotech stocks.

Back in May, XBI, which had been a disaster for nearly 18 months, made a low. Then when it came down again in mid-June and for the first time in 2022, it did not make a lower low (which the major indexes did).

Then it lifted off in that late June rally. It gave hardly anything back when we pulled back again into July 4 (blue line). It then had a terrific surge right into the holiday.

But in July, when tech and growth stocks found their footing and rallied, the first group down in 2021 and the first group to hold in May and June, sat it out. In fact, if it wasn’t for that surge during the first few days of July, biotechs might have been flat or down on the month.

Why does this matter? Why am I fussing so much? Because in early July, folks glommed onto biotech. Everyone praised the group. And now they have disappointed. Now they are on the verge of breaking down, giving back all those July gains.

Another highly speculative group, the cannabis stocks, as represented by the AdvisorShares Pure U.S. Cannabis ETF (MSOS) , made a low in early July and enjoyed a 30% rally. But those stocks stopped going up two weeks ago and are now heading down.

Why am I picking on these two groups, when I could be focused on software or semiconductors? Because as I noted here two weeks ago, all rallies begin with short-covering, but at some point, it takes real buying to keep pushing them up.

Here are two speculative groups that had terrific runs. Was it short-covering? Who knows? What we do know is that two weeks ago, the pot stocks, and a month ago, the biotechs, stopped going up. There are two parts to base building. There is the lower part, where stocks stop going down and buyers keep stepping in at a price. Then, there is the upper zone, where we wait to see if buyers are willing to push the stocks over the resistance.

With that in mind, let’s revisit Walmart (WMT) , which we looked at last week when it announced, before earnings, that numbers wouldn’t be ideal. The stock held — and held well. I had said $117-$120 was the level it needed to hold and it didn’t even break $120. It has since climbed all the way back. Unless it breaks up and over that $137-$138 area, it’s still just working on a base.

It is quite impressive that it held and buyers stepped up to the plate near the lows. That’s bullish. But will buyers be willing to push it back over the prior highs or will this turn out to be like the biotechs, where the buyers seemed to have dried up?

That’s what we should watch as the market digests its overbought reading.