The Bullish Setup Hasn't Broken... Yet

[00:00:02][music] Hi, it's Frank Capillary from Cap thesis. So, today I'll be spending time on two specific areas, the S&P 500 and semiconductors. Not a surprise, but obviously driving so much of the price action and sentiment that we have to talk about it anytime we discuss the market in general. So, let's begin with the pattern work. So, looking at the live bullish patterns for the S&P 500, guess what? This bullish flag pattern target of 7680 just continues to be in play. Again, this has been a target of ours since first seeing this bullish pattern break out on April 24th. So, we're talking about being in the fourth calendar month of having this live. And again most important part of this which we've said over and over again is that we had the initial extension creating this cushion with the thought that if and when the advance or the pace of the advance were to change and slow down that it would give the S&P the ability to back and fill and to then have some time to construct possibly additional bullish formations or at least have digestive action take place without it being too damaging. And of course, that is what has happened thus far, especially after coming back from that initial June decline. And most recently, you know, as things have continued to move sideways, we identified this also potential inverse head and shoulders pattern as well, just having taken shape over about a month's worth of trading.

[00:01:46]Saw the initial breakout failed. So, this has been about a week's worth of trying to extend beyond it. So still right now below the breakout zone but the way we like to look at patterns especially from a individual trade perspective is as long as the structure of the pattern of which we're looking at holds meaning that the pullback has not violated this right shoulder of this inverse head and shoulders pattern then this target remains in play. So it's been tentative. It's got close here over the first few days of this week and the end of of last week but still holding for now. So, we're going to respect that for long as it lasts. So, there are also potential bullish patterns beyond those two as well. And the biggest one is this cup and handle pattern. Again, we started talking about a version of this as soon as we saw this first few days of the market rolling over after that very substantial, very consistent advance from the lows. So, the thought was again at some point we'd see a bid come in and then we'll see what would happen. And so again, it took a number of shakeouts along the way. And this one still isn't complete yet. Looked like it was about to happen over here. Again, no breakout just yet. Now trying to make its way back up to those highs just below 7,600.

[00:03:05]One more. So a breakout through this area would put the target, you know, just about 400 points above where this spot is. So that's a pretty substantial one that we're looking at. So let's not forget the way that this has played out.

[00:03:18]the market still hasn't done anything in terms of leveraging those bullish patterns. So, we still have to be at least aware of the potential bearish formations that could be in play as well. And this is best seen in this 2-hour chart. You we're recording this midday on the East Coast here on Tuesday, July 21st. And so again on this 2-hour chart, we could see just over the last few days as things have pulled back and held so far at 74.25 that this looks like what potential bearish head and shoulders pattern with the ability or inability to bounce near the 7425 zone being the key component of this pattern. Right? And we know there's going to be a lot of news coming out both on a micro and macro basis over the next week. So this could be completely voided by then or we could see a breakdown most if things continue the way they have been going. I wouldn't be surprised to see breakout attempts and breakdown attempts both fail in the coming week and a half at least that is one of the things we have to consider.

[00:04:27]There are additional patterns to consider again because of the fact that the S&P has been moving sideway for so long. And so we've been tracking this potential iteration of a what looks like a symmetrical triangle pattern. We can ventually call it, you know, a long-term flag, long-term pennant wedge, whatever you want to label it. The fact is is that this directionalist movement on a net basis has been characterized by lower highs and higher lows and just waiting for one side to take advantage and really see an emphatic break right either up or down. Conversely, we can also just call it one big trading box as we've seen before and the way this is extended now. It looks like again the whole area just above 7200 and just below 7600 just one big trading range.

[00:05:22]So we could really forget but everything we just talked about and just look at this box have understanding that as long as it stays combined to this area that we shouldn't really get too aggressive to any side just yet. So, if you're enjoying this content, again, I would urge you to check out CapNotes, our free Substack newsletter. This recent article got a lot of engagement, and we're talking about the risk of bullish patterns failing. We just talked about how there are so many of them in play, but what if we actually don't get that breakout? compared this time to what happened at the end of 2025 early 2026 when the marginal breakout just could not get the necessary demand to push higher and the market rolled over. Now there there are specific reasons why this happened which we go into detail in this piece. So check it out to find out what those are and what we have to look for going forward to avoid that happening. Once more again it's capnotes.substack.com.

[00:06:22]substack.com.

[00:06:25]Okay, so one thing that has been with us for quite some time of course is positive internals and and we look at this every day in our opening look piece again daily price action just in terms of a table gives us a very good indication sometimes of what's going on.

[00:06:40]We don't even need the charts. And so one of the things we know there's been a number of down moves along the way, but for the most part, we've seen positive breath. Now, nothing too substantial. We haven't had an 80% day quite some time, but most of the time there has been positive breath. And that has caused the S&P 500 cumulative advanced decline to of course make new all-time highs even as the S&P has come in. But there's one thing here that may not look too obvious, and that is we just had two pretty bad days in a row. We're talking about what happened here just on Friday the 17th and then Monday the 20th where we had 29% day and a 33% day. And we just haven't had two straight subpar breath sessions like that in quite a while. And these are the last few times that they occurred going back to last summer. Again, just happened this past two days. Last time they occurred before that, early March and before that, late October, early November. And so that's a concern because what happened after that? We had the biggest corrective price action that we've seen going back to the tariff tantrum in April. So the question is, should we be overly concerned? Because when that occurred again in March, it was the beginning of a of a bigger pullback that lasted to the end of the month and it came just as what the advanced decline topped just as it could possibly be doing now. Let's be honest, this is a very small sample size and obviously with stockcharts.com gives you the ability to extract data from this and manipulate it any which way you'd like within Excel, whatever spreadsheet platform that you choose to use. And we did just that because it became evident that there were 22 other instances of two straight days of at least 33% advancing stocks since 2024 alone. Here are all of them going back again through the beginning of the calendar year 2024. And needless to say, there is a lot of blue here. Meaning that one week, 1 month, and 3 months forward returns have been positive the vast majority of the time. In fact, look here. These were those times we just talked about right back in early March and April. And from this angle, those pullbacks, even though they're minor, were more or less an aberration because most of the time the market when those two straight bad breath sessions occur, it just tells us that it's a short-term wash out and the bid has come back every single time. And again we can see how positively tilted both the average and median forward returns are again 1 week, 1 month and 3 months later. And again this is what that looked like. Right?

[00:09:28]Those are the two times the aberrations occurred where other ones look more like what happened at beginning of August 2025 and again beginning of October where it just led to a bid and of course rallies over the next few months in terms of August and the next few weeks in October. Okay. So let's turn to semiconductors next. Number of charts to talk about here clearly. Number one, the bearish pattern. I think we all see it here. Very clear bearish head and shoulders pattern, right? That saw a breakdown on Friday. Uh an attempt to rally back above it at Monday and now Tuesday so far doing a much better job of getting back above this breakdown zone. And so the way we look at this and again this is how we would frame a short trade idea whether it was for SMH or any other stock within our our chart trades recommended stocks system is we obviously short on the break down below key support and they identify the spot where the structure would get nullified right the right shoulder here which is around 619 and use that as a stop loss and so far right is yet to get back up there even though up a good deal now from the lows on Friday so we'll We'll see exactly how this does with all this resistance here because we've seen before just now over the last number of weeks some very strong moves on a daily basis you know over the last few days but it really hasn't done much to get back up to these highs that we lost last saw in the middle of June. Now so far the draw down as of the close on Friday got down to about 16 to 17%. Now, this particular indicator, I would say that is new on stockcharts.com platform.

[00:11:11]Definitely check out Grayson Rose's update from about two weeks ago. More than a dozen new indicators to choose from. One of them being the distance from high, also distance from any movie average you want to talk about as well.

[00:11:24]So, extremely helpful for perspective because, you know, it seemed like a very big decline, but overall still not even close to the biggest ones we've seen before. Another big takeaway is that even though we've seen 29% 33% obviously even 45% off of the highs, all of this has occurred within the confines of a very longterm uptrend. Right? So talking about buying dips, well 5% dip is much different than a 45% dip. But when that bid has come back in after a pullback, of course, that is when we've seen the strongest move for the semiconductors in its history. So, we'll see exactly where this pulls back to. Right already below the pullback that it had from February to March. Doesn't seem like it, but it is. And so, obviously, it's built up its own cushion to still back and fill potentially more and still keep this long-term uptrend intact. Okay. So, what if support holds? And there's a reason to believe that it could because this all happened right near the 38.2 retracement zone of the entire rally from the last day of March of course all the way to the middle of June and so far very good job right even though it didn't come down here initially came very close in July and the only day that it pushed below SMA then closed back above it. Now we have two straight days above that same area. Right? Just as the RSI is trying to get back above 50, obviously trying to bounce a number of times from June had not worked out yet. We also look at this again from a trading box perspective, right? We can very easily connect the low from June all the way to where it's trading at now, right? Went below it initially, now back into this massive box. And so this was a basically a 20% advance. This was again 18 to 19% decline. now potentially seeing another bid from interested buyers after a dip.

[00:13:26]Now, we'll see how far this takes us, but what we haven't seen in a while is the desire of traders to step in after a rally has taken hold. Whereas, of course, during the best part of this rally, basically every bit every dip, whether it's tiny or after a few weeks worth of consolidation arrived every time, right? buyers were interested every single time. Not only that, they're rewarded every time.

[00:13:54]That's going to be an important concept that we talk about a lot. After a long uptrend is finally broken, a change of character comes back into the picture and all those buyers that initially had immediate gratification don't quite get that as much anymore.

[00:14:11]And sometimes I waste on the patience of them, right? And so eventually if this, you know, two days of rallying attempt does not yield anything more than just getting back to the midpoint and near 600, that could obviously cause more of a selling effort after that. So let's look at some long-term charts. Now, we've seen this one before the SMH because we're trying to to to show that this huge run we've seen over the last year or so from some respects is not any different than the other huge advances we've seen going all the way back to 2013, right? which all these as we can tell is highlighted in green produced overbought monthly readings using the 14-month RSI that lasted for months sometimes over a year right multiple times and again AI wasn't really part of this story back here it has been here but just shows that regardless of what the reason is we've seen this type of momentum not only take shape but extend for long periods of time so we're talking about this as it started after the tariff tantrum you know brought it back up to overbought saying that well it could actually stay there and can extend longer which of course that ends up happening now other part of it is eventually that is going to end right maybe that'll be this month maybe next month maybe who knows when that does occur as we can see here it takes a while for another rally to materialize that gets it back there meaning that the ensuing trading environment obviously be a lot tougher at the very least lead to long-term bouts of consolidation at worst of course a much bigger draw down. Now, the key is through this entire rally, right?

[00:15:58]Starting at the great financial crisis lows, right? This 14month RSI only spent a handful of months, even below the 50 level, not even getting close to 30, right? That's just gives you an indication just how strong this run has been for quite some time in the past.

[00:16:17]Now, we have to turn to the socks index to get some data going back from before the internet bubble burst. And so this really gives us an idea of how strong things were from April to May, right?

[00:16:31]69% two-month advance using closing prices, right? Which is the most ever for the socks index. The only thing that compares to it was what we saw from February from January to February 2000.

[00:16:46]As we know, two months right before the bubble burst when it was up 66%. Again, very small sample size, but sometimes hearing that alone gives us an idea of how unique this period is and probably how unsustainable something like this is as well. Now, whether that means again having some sort of really major downturn last years or just simply just an extended B consolidation to get some more bullish patterns to form would not be out of the question at all. But just know that it may be a stretch. Needless to say, see another two-month near 70% advance for the socks index anytime soon. Not surprising that two-month advance also produced one of the highest monthly RSI readings on record as well, hitting an 89 by the close again of May of this year, where we've saw other periods right before that at the end of 2021 get to 86 and again going all the way back before that hitting 89 and a half just a touch more than what we just saw back in the early part of 2000. So needless to say, these prior two times only led to an RSI eventually rolling over. We saw bare markets develop again in the ensuing year in 2022 in the major bare market internet bubble bursting after 2000. Again, past performance does not predict right now, but we just get to keep this in perspective, especially if right this rally attempt and SMH fizzles out over the next few weeks. So lastly, short-term work I think is very important. Again, I I come from, you know, being on a trading desk for for nearly two decades. And so seeing things happen underneath the surface first is important. And so this is a two-hour chart. We use this a lot for the S&P 500 analysis. Also interesting to see a few things. Number one, right now, at least again, midday on Tuesday here, the SMH is trying to test a key uptrend or a key downtrend line drawn from the end of June. Right? So, this is all part of that big bearish pattern, but right now getting very close to that. And as we can tell, it failed the last time it tried that in July. At the same time, and I found this very interesting, is that we've had a negative divergence with the 14 period RSI on the two-hour chart going on since the middle of May.

[00:19:16]Now, of course, they ended up playing out because took a while, but in the middle of June, that's when we saw the top in the SMH even as momentum was slowing all the way. And it continues to slow, at least from this perspective.

[00:19:30]lower highs the whole time touching oversold territory or coming close to it twice already in July and not being able to get that much above 50 just yet. So this is going to be an important test for this week especially as more and more semiconductor names start to report earnings whereas you know we need to see a break through this very steep downtrend line. That's clear and we need to see some movement strong enough to finally shake momentum from this perspective. Right? The best case scenario clearly is to see it bounce back up to overbought and stay there hanging near it just as we saw from that historic run from April and May. But more or less, you know, just prove the fact that we can get a rally that's strong enough to get there and then maybe oscillate a bit, form a bullish pattern and potentially test highs at that point. So that lays out both long-term, intermediate term, and short-term picture. Obviously, use the charts that make sense to your own time horizon. And that's what we have for today. Talk to you again soon. Thank you.