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In our latest Wellington Letter (published this past Sunday, January 26), we warned of a pullback that would start this week, saying,

“last Friday (January 24, 2025), the major indices took a well-deserved breather. The market indices, along with a number of our advanced indicators, have now either approached or actually hit important chart resistance levels.

Rules of technical analysis now make a pullback, or correction, probable. That will be exploited by the algo-trading and HFT operations, which now are estimated to account for up to 85% total daily trading volume…

The charts and analysis suggest at minimum a pullback from resistance should be expected, which would be then followed by a further up-move for the broader market.”

In the same issue, we also offered our thoughts on “why” a selloff in stocks would occur soon by explaining,

“Wall Street and its “friends” may want to buy many stocks, but at lower prices. The algo-trading operations would want to create lower prices. Thus, a manipulated correction could occur soon in order to make stocks cheaper.”

As it turned out, the following day, Monday, January 27, the big AI and tech stocks got hammered. In one day NVDA plunged about 17%, Broadcom down roughly 20% at its intraday low, Himax down 28%, Semtech down nearly 22%, Vistra down 28%, Constellation Energy down 21%, among many others that had big declines.

After the carnage on Monday, we found about 60 stocks above $10 that were down between 15% to 34%. Nvidia’s stock lost about $595 billion in market cap on Monday. That is an amazing loss.

Our advanced technical analysis once again helped us identify a pullback ahead of time. Unfortunately, there are only a few master technical analysts still working, such as ourselves, who know how to detect such critical chart formations.

Technically speaking, all these stocks had huge “breakaway down-gaps” at the open. Such big gaps take time to be repaired.

These big down-gaps are designed to trap investors because most investors will not sell a stock they hold at a loss. Then they watch as their losses grow bigger and bigger.

Take a look at the short-term hourly chart of NVDA below. The huge breakaway down-gap on Monday caught all those who may have bought the stock over the past 3+ months.

The following day (Tuesday, January 28), NVDA was able to generate a bit of a relief rally, closing above Monday’s opening price. However, it still has a long way to go to recoup all of its losses from the selloff on Monday.

Taiwan Semiconductor (TSM) is another chip stock, among many others, that suffered a huge plunge during Monday’s massacre. On the short-term hourly chart of TSM below we can see the down-gap trapped traders who entered the stock since early January as it plunged over 13% by the close on Monday.

The next day (Tuesday, January 28), TSM had a similar rebound as NVDA. It closed above Monday’s huge down-gap open but still has a lot of ground to make up to get back to last Friday’s close.

These short-term hourly charts make it pretty clear that the this Tuesday’s rebound is probably just a bounce.

IS CHINA TO BLAME?: As you probably know, the alleged reason for the AI massacre is that the Chinese company DeepSeek has allegedly found a way to significantly reduce the energy consumption of AI by developing a different way to do the computations.

Allegedly the Chinese firm spent only $6 million to create an AI model that is almost as good as OpenAI’s. However, to us that number is highly questionable, especially since it comes from China.

Currently, DeepSeek is the #1 free download in the Apple app store. For those who want to use it, they must understand that the user agreement says that information on their device can be accessed by the Chinese firm and sent back to servers in China, according to DeepSeek’s privacy policy.

To blame Monday’s trillions of dollars of losses in AI stocks on the DeepSeek news is rather flimsy. Technology changes all the time and doesn’t cause such big plunges like this.

We have often written that such plunges are planned and are manipulations. In order not to have people notice the manipulation, there has to be a background reason, no matter how flimsy, as now.

In fact, the news of DeepSeek being a viable competitor for OpenAI was widely discussed last week. We explained this to our members on January 21. To see for yourself, just go to your favorite search engine and search for news items on DeepSeek between January 20-24, you’ll see a number of articles written about this topic.

So why wasn’t there a big plunge in these AI, semiconductor, and energy stocks last week instead of this past Monday?

What was not mentioned in the news was a report we saw that margins on the highly leveraged derivatives were raised substantially on Monday. If true, that would have caused margin call selling, although we could not verify this report.

CONCLUSION: In the U.S., we have just experienced what is probably the biggest change in the political scene in 120 years. Longer-term, that will draw a lot of money into the US economy and the markets.

For the next few months, beware of going bargain hunting prematurely. The first rally is often a trap.

While we believe it could be a good year for investors, we also believe there will be some nasty shocks in between triggered by algo-trading operations. They make their big money with volatility. This is why it is so important for investors to stay up-to-date with analysis on the latest market developments and access to unbiased research.

The old metrics such as earnings, P/E ratios, etc. will never give advanced warnings like technical analysis.

Furthermore, there is little correlation now, if any, between stock performance and the economy. In fact, the best time to buy stocks is often when the economy is worst, and vice versa.

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