MARKET GAUGE- Confirmed Uptrend
OVERVIEW- The major indices confirmed an attempted rally that started on 10/30 Wednesday by rallying over 2% on an increase in trading volume. It remains to be seen how much traction this rally receives but I think its important to note a few things. Firstly, the market high of September marks a top and a possible change trend until that high is taken out. So, in spite of the newly confirmed uptrend we have to consider we may possibly have new longer to intermediate term trend in place as all signals should be taken seriously. Secondly, we are in a historically positive seasonality period that may help propel this recent rally into the end of the year. Lastly, we also have to recognize that these V-shaped recoveries that print on the charts can be hard to sustain on a shorter term basis. Furthermore, these recoveries are running into some important support/resistance zones on the charts. As usual, the market prints a grey area for traders to navigate thru and as a result they should continue to monitor the health of the general market on a daily and weekly basis, as we do here, while also paying close attention to the action of individual leading stocks. Although our Market Gauge is in “Confirmed Uptrend” mode we feel it would be prudent for bullish traders to get long slowly until the indices prove themselves further, rather than jumping in with both feet. Now, let’s take our weekend run thru the four index charts we monitor here.
SPY- Our confirmed follow thru signal on Wednesday sent the S&P 500 ETF right up into an important support/resistance zone near the $280 level that dates back to March of this year. This V-Shaped recovery that is marked on the chart below traveled over 8% off the corrective lows, registered on 10/29, in just seven sessions. This is a large move in a short period of time and these sharp retracements can be hard to sustain without some type of consolidation over the shorter term, especially as they run into prior support resistance zones on the charts. I think the next couple weeks will prove to be very interesting as positive seasonality may be enough to push prices higher, however, many bears lick their chops when they see these type of set ups on the charts. With a confirmed uptrend in place we will now monitor distribution days in the volume pane and we can see that the ETF did register its first day of distribution of this rally on Friday. Occasional distribution days are normal and acceptable until they start to mount to 5-7 days within a 20-25 session period which would start to put us in a cautionary stance. It is also important to note that distribution days that register quickly on the heels of newly confirmed rallies can raise the odds of failure. Confirmed uptrend or not, cautionary trading may still be the best route into the end of the year.
NASDAQ- The Nasdaq Composite underperformed on Friday losing 1.65%, however if we were to overlay these two charts on top of each other one would be hard pressed to tell the difference. Both charts are challenged by their 50 and 200 day EMA’s as they trade up into resistance areas. The congestion zone for the Composite is a bit wider than that of the S&P 500 ETF ranging from near 7500 to about 7630. Interestingly, the Nasdaq did not register a distribution day while the three other indices we cover here did, which is important because distribution days in close proximity to follow thru days raise the failure rate of newly confirmed uptrends.
QQQ- The Nasdaq 100 rallied hard on Wednesdays follow thru session blasting thru the 200 day EMA and trading right up to the 50 day EMA. This is an interesting area for the index as the 50 day EMA is running concurrently with a major support/resistance zone near $175. Once again we have a sharp V-shaped retracement rally that printed on the chart with plenty of overhead resistance to work thru. The 100 did register a distribution session on Friday as well and closed right on the 200 day EMA after slashing thru it intraday.
IWM- The underperforming Small Cap ETF has been staging a fierce recovery of its own after a nasty decline of over 16% in a short period of time. The index is facing an area of resistance near $160 with plenty of overhead supply above that level that could possibly plague the index down the road. The index also sports an extra bearish development on the charts that the others don’t in the form of a bearish moving cross over of the 200 day and 50 day EMA’s. The index did register a distribution day on Friday in a rather ugly session with a loss of 1.85%. A heavy challenge lies ahead for this index.