As expected, it's becoming increasingly difficult for the market to maintain its
bullishness. It's technically still doing it, but we're seeing more and more signs of
investor hesitance to keep buying into an already overbought market. Last Friday's
highs are the key levels to watch; we need to get above them to prove this rally
still has some life left, which is going to be a challenge in the face of today's
selling.
NASDAQ COMMENTARY
While this Monday's drop could be described as uncomfortable, it really wasn't a
cause for alarm. Instead, it was a partial correction of last Tuesday's and last
Thursday's surges. We gained most of it back yesterday, but now find ourselves today
fighting to hang on to those gains. The picture at this point does not look good.
We're taking our cue from the long-term support line we've been mentioning for weeks.
With one exception in early August, this line has pushed the Nasdaq Composite higher
again five distinct times. It's tough to go against those odds, but as of today, that
support level may have been broken. We're currently under it, and have traded even
lower than current levels. Where we close will be critical. Closing under the support
line (dashed) and the 10 day EMA line (red) would be bearish, while a close under the
20 day EMA line would be even more troublesome.
The ultimate test will be getting back above last Friday's high of 1913.74. Only then
will we be making multi-month highs again, which is going to be a much needed event
to convince a large portion of investors that it's ok to keep buying. Until we see a
close above 1914, we're keeping a lid on a firm bullish opinion. As we mentioned,
this will be tough to do considering that stocks are largely overbought at this
point, with the stochastic lines hovering near 80. It's true that we've entered the
80+ threshold three separate times in the last five weeks only to continue moving
higher a few days later. However, one of these times will eventually signal a
pullback, and we don't want to be on the wrong side of that signal.
Potential sell signals at this point include a cross under the long-term support line
and/or a close under the 20 day EMA (in blue). That would be confirmed with a fall of
the two stochastic lines back under the 80 level. Although we have included a DMI
analysis chart today, you may not want to use this as an exit indicator; it will only
give a signal several days after the pullback has begun. If you're looking to use a
momentum indicator to time the pullback, try a MACD chart. But until you start seeing
these indications, the trend remains marginally bullish. We're making some of these
sell signals today, but you may want to make sure these sell signals stay intact by
the end of the day and tomorrow before taking action.
NASDAQ CHART
S&P 500 COMMENTARY
The S&P 500 chart isn't nearly as encouraging as the Nasdaq's chart. The same hurdles
lie ahead of it, but the S&P seems less likely to cross those hurdles. Namely,
there's a strong resistance line from last Thursday's and Friday's high around the
1040 level. But that's only going to be an issue if the index can manage to get above
the resistance at the 1030 level, where we've also topped out a few times on the last
couple of weeks. Based on today's action, neither of these seem likely, but we're not
giving up hope just yet.
The big concern here is that the S&P 500 is currently trading under its 10 day EMA
(red) as well as the 20 day EMA (blue). However, where we close in relation to the 20
day EMA is far more important, so take note whether or not we manage to get back
above the 1019 mark. A close under 1015 would make matters even more bearish
Our other concern is that the stochastic lines have already given a sell signal. As
you can see in the lower portion of your chart, both lines are now well under the 80
level, indicating that the index was overbought, and is now starting a correction of
that condition. Obviously we crossed under the 80 line a few times in the last few
weeks too, only to head higher again within a few days. However, you can also see
that this time, the stochastic lines aren't even threatening to reverse. In fact,
both stochastic lines have fallen under the level where they reversed last time. This
does not bode well for stocks.
As for momentum, the indecisive MACD lines (and multiple crossovers) in the middle of
your chart tell the story well. Momentum has wavered, not staying bullish nor bearish
for more than a few days at a time. As of now, the MACD crossunder is technically
bearish, but you may want to use other tools (or at least some time) to confirm that
signal.
S&P 500 CHART
BOTTOM LINE
How do you reconcile a occasionally-strong Nasdaq Composite with a weakening, almost
bearish S&P 500? One thing to keep in mind is that the Nasdaq is more apt to lead the
market, while the broader indexes are more apt to follow the Nasdaq's lead (in
bullish and bearish trends alike). In other words, realize that all the indexes
should be moving together, at least to some degree. If the Nasdaq happens to break
above last Friday's high, you should expect the other indexes to do the same within a
couple of days. That will build some momentum to push all stocks generally higher. If
instead they don't follow the Nasdaq, then the Nasdaq may be the errant index, and
fall back to rejoin the others. Likewise, if the Nasdaq falls under support, check
and see if the other indexes do also. In any case, last Friday's highs are going to
be important levels for all the major indexes, as well as the 20 day EMAs.
Have a Great Trading Week Ahead!
Price Headley, CFA, CMT, President
With James Brumley, Research Analyst
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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