MARKET GAUGE: Confirmed Uptrend
OVERVIEW: After a mid-week shakeout, the indices strengthened late in the week. News of some possible progress in China trade talks helped stoke the fire on Friday, but markets starting showing some resiliency prior to this on Wednesday by holding some key support levels. Additionally, distribution pictures in the indices we monitor here are showing some improvement. The Russell 2000 small cap ETF, which we have been very cautious, if not bearish on lately, looks to be firming up quickly. As traders, we must learn to be flexible and objectively look at the current price action, if not, we risk taking losses far beyond what our trading plan laid out due to stubbornness and the desire to “be right.” At the same time, we may be passing up solid opportunities in the opposite direction. This creates a two headed monster, that in combination, negatively effects our returns. Now, let’s take our weekly look at what the indices may be telling us.
SPY- After approaching all-time highs in early August, the S&P 500 ETF sold off sharply. The sell-off was highlighted by two distribution days on 8/10 and 8/15. In keeping our distribution counts, we always highlight the fact that we must keep these days in context. The volume on the day of the decline, the percentage loss on the day, and where the index finished within the days range are three of the main details we must take into consideration. In looking at the loss the index suffered on 8/15, we can see that not only did the index bounce off support offered by the prior breakout area, but it also finished in the upper third of the range for the day. We have highlighted that day in the volume pane with a pink arrow to remind us that this day, although technically a distribution day by definition, may not have had quite the bearish overtone as it appeared at first glance. The index now has a very manageable four distribution days in the current count, including the 8/15 day which now appears to be more a sign of institutional support than distribution. The current confirmed uptrend that began in April now rides comfortably above its trend line, as well as the 50 day EMA painting a bullish picture heading into next week.
IWM- We will go right to the Russell 200 ETF today as it looks like the index may be trying to firm up. After being saddled with mounting distribution days in July, the index eventually broke thru a trend line it had carved out since April when a new confirmed uptrend began. The ensuing recovery attempt that was finding resistance at the bottom of that trend line has also been finding support at the 50 day EMA. We have also drawn in a second trend line this week that starts back in May where the index found support on the first pullback after the confirmed follow thru day of the current uptrend. The index seems to be finding support here as well and despite the recent bearish signs the index has flashed, it is still in very close striking distance to all-time high territory. Additionally, distribution days have been weaned down to a more manageable five over the last 25 sessions as the 7/16 day came off the books at the close on Friday. The index is still in a precarious spot technically, but we would advise caution to those who have built up bearish positions in this area.
NASDAQ- While the S&P 500 found support on Wednesday at its prior breakout level, the Nasdaq Composite has been finding support along a rising trend line and 50 day EMA. The index came under pressure in late July after being saddled with a cluster of distribution days. This led to a sell-off that also found trend and 50 day EMA support that was also aided by prior breakout support. Since then distribution days have become more of the exception than the rule and the index is currently working its way up into a narrowing ascending triangle. This bullish technical pattern may set up a breakout scenario to new highs in the not too distant future, but these patterns can break both ways. Should the index break lower in a bearish resolution of the pattern, we would be watching to see if the index quickly finds support near 7640, or the prior breakout area.
QQQ- Not much to add here as the Nasdaq 100 paints virtually the same picture to that of the Composite.
DIA- We normally don’t review the Dow Jones Industrials, but we think it is important to note that the index may be on the verge of a breakout. After a big run in late 2107 into January of 2018, the index suffered a steep decline that culminated with a double bottom that formed from February to April. But while the rest of the market went on the establish a confirmed uptrend the Dow has trended in a sideways chop for five months. Perhaps some clarity, or resolution to the current trade dispute will be the impetus to drive the index to breakout and challenge the old highs.
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