MARKET GAUGE: Confirmed Uptrend, Caution Still Warranted
OVERVIEW: It was a busy week with option expiration and index rebalancing adding to normal volume levels, but in the end we ended up with only a modest week to the downside for the four main indices we track here. However, the blue chip stocks separated themselves from the pack this week with the Dow Jones gaining 2%. In the short term we have a bit of a split market with large cap stocks picking up steam while small caps and some techs running in place. These areas have been able to hang around and hold some key technical areas but have not been able to pull away, while in the meantime, the S&P 500 continues its methodical march higher. Some distribution days were registered across the indices on Friday, but as I always preach, we must take things in context. The options expiration and index rebalancing greatly effected the normal volume flow, so while we won’t totally ignore the selling on Friday we will greatly discount it in in the larger scope and I have shaded the arrow in the volume pane in pink to highlight this event. You can see that our Market Gauge is still in confirmed uptrend mode, but I still feel some caution is warranted in our trading activities. This means having a bit more patience in waiting for quality set ups, and perhaps keeping a bit more cash on hand in your account. Now, let’s take a look at the index charts and see where we are heading into next week.
SPY- This area continues to act better than its counterparts as the slow and steady uptrend from the confirmed rally that began in the spring continues to unfold. The two prior breakout levels that were tested in the summer have held and the index has not threatened its 50 day EMA for nearly three months. Distribution days have been scarce for the ETF with only two in the books discounting Fridays inflated volume figure, so there are no present concerns in this regard. I will remind you again however, that a sharp correction in the markets do not have to announce themselves in the form of mounting distribution days, so always honor you stops and trade responsibly. Traders should be prepared for a pullback should the ETF rally into the upper end of the channel.
NASDAQ- The Nasdaq Composite successfully tested a three month trendline early in the week, reclaimed its August breakout level on Thursday with a nice rally and was able to close above that level to end the week despite the 0.51% loss on Friday. I have redrawn the trendlines this week shortening up the timeframe a bit which may show the very slightest appearance of a possible rising wedge formation. Remember however, as much as trendlines can be a great aid in technical analysis, we feel that horizontal support, the 50 day EMA and the tracking of distribution days hold the most weight with our index analysis. We can see here that we have four distribution days on the books discounting Fridays inflated figure, shy of the 5-7 days over the course of 20-25 sessions that would raise caution flags for us.
QQQ- For the Nasdaq 100 we have left the longer term trendlines in place to show the resistance that has formed on the underneath of the nearly five month up trending channel. The index was able to reclaim the August breakout this week, but we do have five distribution days, plus the contextual day of selling Friday, spanning only the last 14 sessions. Another distribution day early next week would start to raise some caution flags for the 100.
IWM- The small cap Russell 2000 has been trying hard to hold the key $170 level which marks the point of the August breakout, but just hasn’t been able to pull away, and the more time it spends hugging and testing that support the more precarious the situation will get. We can see a huge spike in volume from the index rebalancing on Friday and we have four distribution days in the count for the month of September with one week to go. Should the $170 area give way we will be watching to see if the 50 day EMA, which sits close below, contains the selling.
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