MARKET GAUGE: Confirmed Uptrend, However Some Caution is Warranted
As you can see from our Market Gauge we are still in Confirmed Uptrend territory, however, I feel some caution may be warranted at this time. This means to ratchet down your trading activity a bit, keep a bit more cash on hand, and perhaps tighten some of your stops. The indices have come back to test prior breakout support, or longer term trend lines, and in some cases have broken thru these levels. Markets may very well successfully test these levels and bounce back strongly, but a cluster of distribution days, particularly in the Nasdaq and Nasdaq 100 have gotten our attention. Strong bull markets can sometimes withstand six or even seven distribution days over the course over 25 sessions, but in the tech area we have seen five days accumulate in only the last 20 sessions which is enough to raise our antenna. It never hurts to curtail your trading a bit, but one can do serious damage to their account when they ignore possible warning signs, again I say possible. No one knows for sure where we are headed, but we can pay close attention to what’s right in front us and that’s what we do here. So let’s see what the charts may be telling us.
SPY- The S&P 500 ETF has the better look of the four indices we track here with only three distribution days on the books, however it did narrowly escape one on Friday by a whisker as losses stopped just short of the 0.20% requirement. The index is still well within the uptrend channel but has come back down to test the prior breakout support. These pullbacks can be healthy and necessary to sustain a bull run, so hopefully this is all we are seeing here. A break thru this support area around the $286 level can still be contained by the 50 day EMA and longer term five month uptrend line keeping the longer term bull trend in tact, however any new purchases can take a hit on a sharp pullback to these levels stopping traders out with quick losses. We like to use the ETF here, but the S&P 500 index itself has five distribution days on the books so this, as well as the recent distribution we have seen in the tech area, dictates our cautionary stance at this time.
NASDAQ- The Nasdaq Composite doesn’t currently have the margin of error the S&P 500 enjoys. The index has already broken thru previous breakout support and also threatened the five month uptrend line on Friday. Additionally the index doesn’t sit too far from the next line of support at the 50 day EMA. Adding to the dilemma, the index has been hit with a sudden cluster of heavy selling days racking up three day of institutional selling in short order. This now gives the index five distribution days over just the last 20 sessions, enough for us to raise some caution flags. To a lesser concern, the channel that the Nasdaq has carved out is not as clean as the S&P 500’s as it has just the slightest appearance of a more broadening top pattern.
QQQ- The Nasdaq 100 has a bigger issue as it has clearly cut thru the five month uptrend where it had previously found support on four prior occasions and has tallied four straight distribution days, clearly enough to get a traders attention. The 50 day EMA is now in play, and should the index not hold that mark, a move down to the previous breakout level near $175 is possible. This represents potential of 3% to the downside.
IWM- The small caps have also come down to test an important converging area of support at trend and prior breakout near $170. The index has a more spread out pattern of five distribution days spanning a full 25 session period. This means the 8/23 day was removed from the count due to time after Fridays session, in essence leaving the index with four days officially on the books heading into Mondays Session. We will be looking for any further selling here to be contained at the 50 day EMA which sits right near $168.
Join us at our Premium Site http://www.ttptrading.com where you get access to both myself and veteran trader Greg Krupinski of GK Trading. Get real-time stock and option trading alerts as well as all the other benefits of membership including nightly analysis of the major indices and reviews of open positions, weekly chart videos every weekend highlighting new potential trade opportunities and more. All for only $69 per month. See you there!