MARKET GAUGE- Market in Correction
OVERVIEW- The indices put a temporary stop to the intense selling late in the week, and in the process registered an attempted rally on Wednesday. It was good to see the indices finally firm up, but there is much work to be done before any type of victory can be claimed by the bulls. History shows counter trend rallies in corrective, or bear markets can be fierce. Short sellers need to respect the ability for the markets to wipe out any gains they may have racked up, or worse send them scrambling to cover momentum style positions they may have taken at losses. Conversely, long traders need to let markets prove themselves, at a minimum with a follow thru day after an attempted rally, before getting too aggressive as we have already seen two confirmed rallies fail in November. The recent 12/26 attempted rally can set up a potential follow thru day as soon as Monday, but again, not all attempted rallies ultimately lead to a tradable uptrend. Additionally, an new lasting uptrend will need a group of leading stocks to ignite the move, and unfortunately many potential new leaders are still in the earlier stages of setting up reliable base formations, so perhaps more healing time is needed before any meaningful rally can develop. The current IBD industry group leaderboard is still being dominated by defensive type names however, some software groups have been holding up well, and this growth oriented area of the market may have the ability to lead any move higher in the indices, so we will be watching this area with great interest. There is no doubt that we are in a clear downtrend until proven otherwise, and the indices do face some challenges on any move higher, but things can change, and what may seem to be insurmountable near term challenges can be overcome quickly, so it is paramount that traders remain flexible to any changing market dynamics. With that, let’s take a look at the charts.
SPY- The S&P 500 ETF rose nearly 3% for the week and held serve at longer term support near $240 spurring on new attempted rally on Wednesday, so we can begin to look for a confirming follow thru day as soon as Monday. The best follow thru signals occur on days four thru seven of an attempted rally, so with a holiday session on tap Tuesday, the indices will have all of next week to post a follow thru session. It must be noted however, that any new uptrend will have some serious technical hurdles to overcome. Indices are still swimming well below their 50 day moving averages, and have an abundance of overhead supply to deal with. For the SPY, that thick layer of resistance begins near $250 and runs up to the old summer breakout area near $280. Remember, while the indices may have some hurdles to overcome, focus on the leading stocks on any confirmed rally because these stocks can still perform, provided they breakout of sound basing patterns, while the indices are still chewing away at resistance levels on their recovery attempt.
NASDAQ- The Nasdaq fought off the late selling Friday afternoon just enough to squeeze out a gain, making it three straight for the index. However, the rally was turned away right at a layer of resistance between 6630 and 6800 that dates back to the 2018 February and April lows. Like the S&P 500 the Nasdaq Composite has much work to do to return to former glory, but most new leading stocks will originate from this index, like the aforementioned mention software group, so as always we pay particular attention to this area of the market for new trading ideas. In the meantime, the index has plenty of overhead supply to deal with between 6800 and 7500.
QQQ- The Nasdaq 100 cut hard thru the $150 support level on Tuesday, but quickly recovered during Wednesdays rally attempt. The index followed thru late in the week, but was also turned away right at resistance near the 2018 April lows. It too will have a thick layer of resistance to fight thru on any recovery attempt. The 100 may present the most interesting case going forward as it tries to mount a new, lasting uptrend. The prior bull run was primarily fueled by the heavily weighted FANG stocks, but in most cases, new uptrends that commence after bear market conditions will be led by a new group of leading stocks, rather then the prior leaders, so it will be interesting to see where this potential new leadership will come from when a new uptrend emerges.
IWM- The small caps have been locked firmly in a downtrend since September and recently put the finishing touch on a round trip that saw the index give back all the gains chalked up dating back to the 2016 post election breakout. The good news is that the selling stopped there, aided by Wednesdays rally attempt. The index has posted three straight days of advances gaining around 7% in the process. However, the advance was turned back Friday afternoon near the $132-$134 area that marked a firm area of support for the index from late March to mid-August of 2017, so this area does have the ability to provide some resistance, at least in the short term.
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