MARKET GAUGE: Confirmed Uptrend
OVERVIEW: The recent run by the S&P 500 and Nasdaq Composite came to a screeching halt on Friday. The gap lower led to the first distribution day these two indices had registered since late July. The Small Cap Russell 2000 continues to look weak as it racked up distribution day number seven over the last 25 sessions. After the recent run up, which included an eight session winning streak by the Nasdaq, a pullback was not a big surprise, but we never like to see large increases in trade on down days. Distribution days will occasional pop up, even in the best of markets, but we must be on the lookout daily for potential signs of weakening ahead. Healthy markets can withstand five to six distribution days over a running 25 session count, but anymore than this may signal some trouble ahead and may be cause for some caution. Of course, large sell-offs and reversals in trend do not have to necessarily announce themselves in such an orderly fashion, but when they do, there is no excuse not to take the proper precautions such as limiting new purchases, getting off of margin, and tightening stops. So with that, let’s look and see where the indices stand heading into trading next week.
SPY- After its recent break out of a long consolidation, the ETF paused mid-week just below all-time highs. However, the gentle pause turned into a large gap down on Friday as trading expanded to twice the turnover posted in Thursdays session. The ETF came into the week in good shape as far as the distribution picture was concerned, so we will take the late week sell-off in stride, but there is no guarantee we visit new all-time highs soon. In fact, we can fall quite a bit further before hitting the 50 day EMA, and even further yet before challenging the trend line that dates back to April. If such a pullback does occur, watch to see if it is constructive, or is littered with new distribution days. The market can often tip its hand, but we must be willing to listen to what it is telling us.
NASDAQ- The Nasdaq Composite greeted traders rudely as well on Friday, but a series of bearish tight range candles at near new highs hinted of some indecisiveness by traders at this level, and this hesitation turned into to selling on Friday. After compiling a rash of distribution days in July, the index settled down nicely in August, as Fridays losses marked only the first down session this month. Unlike the S&P 500, the index sits a bit closer to its recent uptrend line and has six distribution days already on the books so we will be watching trading closely early this week for signs of trouble on any further pullback. One positive to note is that the index will lose a distribution day after Wednesdays close due to time.
QQQ- Again, a very similar look to the Nasdaq 100 which is also straddled with six distribution days in the current count. The trend still remains up, but indices can alert to a correction long before trendlines are broken and this is why we habitually go thru this exercise.
IWM- The small caps need to be watched closely right now as they appear to be very fragile. We hinted last week that the bottom of the five month trendline may provide resistance on any near term recovery attempt and that has proven to be true thus far. We have been on caution here recently and Fridays new distribution day did not help improve our outlook. In fact, if the 50 day EMA does not hold on any new challenge, the index can fall quickly to challenge the $160 area. Seven distribution days are on the books here, but one will come off the count after Mondays close.
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