MARKET GAUGE: Confirmed Uptrend Under Pressure
SECTORS EXHIBITING RECENT STRENGHT: Computer Software (Enterprise), Computer Software (Security), Computer Software (Desktop), Computer Software (Education), Commercial Services (Staffing), Retail (Internet), Retail (Restaurants), Retail (Shoes/Related)Medical (Products), Medical (Systems/Equipment), Financial (Regional Banks), Electronic (Semiconductors).
SECTORS EXHIBITING RECENT WEAKNESS: Building (Residential/Commercial), Automobile (Manufacturers), Mining (Metals/Ores), Oil/Gas (Refining), Oil/Gas (International Exploration/Production), Oil/Gas (Royalty Trust), Chemicals (Basic), Medical (Managed Care), Computer (Hardware/Peripherals), Transportation (Truck), Retail (Major Discount).
OVERVIEW: The market reversed three days of intense selling with a positive reversal on Friday however, we have moved to “confirmed uptrend under pressure” in our TTP Market Gauge. Market Indices confirmed a February 9th rally attempt on February 14th that transferred us from a market in correction back to a confirmed uptrend. During that time the major averages reclaimed much of those losses, but last weeks bearish action is putting pressure on that uptrend and any further selling next week on increasing volume can put the market back into correction territory. That said, Fridays reversal and some action in individual stocks may be showing some support underneath the surface. Additionally some of the fear indicators, such as the Put/Call Ratio, have reached extreme levels that often accompany a short term bottom. We have mentioned here countless times over the last several months that the 2018 market was not likely to exhibit the same behavior as the 2017 market and that theme has played out so far, mainly in the form of increased volatility. This years market may end up being more of a “stock pickers market” where traders will have to dig deeper under the surface and be much more nimble in finding solid trade opportunities. Our clients should continue to track the price and volume activity of the major indices to determine the level of aggressiveness they should proceed with in their trading accounts and be willing to go into cash, short individual stocks, or widely traded inverse ETFs that track the major averages if necessary. Routinely assessing the health of the major averages will help keep you on the right side of the market however, your main gauge should always be the price and volume action of your individual positions. We are still net long with four long positions and one short position and we are still roughly 50% in cash, and will slowly deploy that cash as index and individual stock action dictates. Newer and less experienced traders tend to pack things in and walk away at times like this, but markets like the one we are currently experiencing are more common then the trending markets that presented themselves over the last year or two. We would encourage these traders to stay in the game during these times, even if much of that time is spent on the sidelines watching the action and observing price behavior. The knowledge you gain during these types of markets will last you a lifetime and be extremely beneficial to your trading career. Being able to sit tight waiting for solid opportunities, keeping an open mind, being able to see the market from both sides and routinely assessing the market landscape are paramount to a traders success. Never give up! Well, enough of the soapbox for today, let’s take a good look at that market landscape through four of our favorite indices.
SPY- The S&P 500 rallied sharply from its 2/9 bottom and was turned back hard this week at the 78.6% Fibonacci Retracement level. A pullback near this level is not too surprising, in fact we alerted clients that this retracement levels usually presents a solid line of resistance, at least in the short term. What is noteworthy however, is the aggressive selling on the pullback with the index registering three straight distribution days. These three days, along with the distribution day the index registered on 2/21, marks the fourth such day in only the last eight sessions. Fridays rally on above average volume was a positive, but anymore distribution days next week will really put up the caution flags. Additionally, we would like to see the index remount its 50 day exponential moving average soon. Next weeks action will be important and will likely give us a large clue as to where we are headed.
NASDAQ- The Nasdaq Composite’s recovery from the correction has been slightly stronger than that of the S&P 500 as it ran past the 78.6% retracement before pulling back. Additionally the index has found support at its 50 day EMA over the last two sessions closing well above that level at Fridays close. Unfortunately the index is strapped with the same distribution picture as the S&P. The ability of the index to stay above its 50 day EMA will present a positive development.
IWM- As for the Russell 2000, which for the most part has been the laggard of the group, it was turned back near the $155 level that we identified over the last few weeks. Volume levels had been weak on its recovery signifying it was going to have trouble mounting the resistance. Fridays rally stopped shy of reclaiming the 50 day EMA and although the distribution picture is slightly better than that of its counterparts, a possible bearish head and shoulders pattern presents another variable that should be watched closely by traders. A rally back above the 50 day and push through prior resistance levels will squash the patterns development.
QQQ- Lastly we look at the Nasdaq 100 which has been the strongest of the group since the 2/9 bottom as the index was able to rally just shy of a full retracement from the recent correction. Friday mornings sell-off found support right at the 50 day EMA and the index closed firmly above that level by the closing bell. It also has posted four distribution days recently, but they have been a bit more widely spread out and have stretched over nine days as opposed to eight for the Nasdaq Composite and S&P 500. Like the Nasdaq Composite, we will be watching for the index’s ability to hold above its 50 day EMA going forward.
That’s all for today. We will be back later this weekend with our Weekend Portfolio Review as well as our Weekend Watch List. Until then, enjoy your weekend!
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