As I have suggested in previous recent Briefings, the intermarket divergences and lack of strengthening market internals all were adding to the risk of some type of move lower, not higher. Today, much damage was done in the Indices in terms of taking out important support levels, especially in the S&P. With that said, we reached a point of being extremely oversold by the close. This suggests the higher probability of some type of rotation up tomorrow to work off the oversold condition. How that move develops will be extremely important, as discussed in the Briefing.
As I discussed in this week’s Briefings, the breakout in the Stock Indices was one of two events: 1) the beginning of a move back to test the highs; 2) a false breakout that would be retraced and lead to a test of the February lows.
The breakout was on extremely low volume, suggesting it was not impulsive. Breadth never strengthened, adding to the probability we would see a rotation back down. However, often times a financial instrument will breakout and then retest the breakout point before accelerating back in the direction of the initial move. That possibility still exists as of Friday’s close.
The Indices have all moved lower to test and close the breakout point. Volume increased on the rotation down and breadth supported the move. Finally, they closed near the low of the day. This all suggests we will see lower prices on Monday. However, there are many earnings announcements next week and that can change the perception of value and the analysis.
Any additional move lower the first part of the week on increasing volume will move the probabilities in favor of a continuation of the move down. If most of Friday’s decline is retraced on any day, then the probabilities will have changed to suggest the move down was a retest of the breakout and we should see prices accelerate, assuming volume increases on any move higher. I certainly have to consider both events in front of the earnings announcements. While thee are two possible scenarios, the Markets should give us enough information on Monday to determine which will be the greater probability.
The Stock Indices simply cannot generate enough strength to trade through and breakout of resistance areas outlined in the Briefing. Therefore, the higher probability is for rotation down to test, and possibly take out, current support levels. While a news event could change the current structure and probability assessment, unless or until that happens, use caution on all long positions.
Today’s trading was a good example. If you had bought the early breakout above resistance and not looked at the internals, you would have experienced a nice loss, as the rotation down was significant. Use caution on all long positions at this point, and lean toward the short side of the market. That analysis will only change if there is a price breakout above resistance and the internal components support the move.
As discussed in last night’s Briefing, the Stock Indices did make a lower low and then paused. The pause was extremely weak and suggested, once the oversold condition was worked off, there would be another thrust lower. That thrust did not come next week, as I anticipated, but came in the afternoon. Breadth was positive during the pause, but then collapsed, supporting the move down. Volume was extremely good going into today’s low. Finally, the Indices closed at the low of the day. This suggests there will be follow through on Monday.
Just as there were signals the January high and March highs may be coming to an end, so too there are signals now the move lower may be waning. It will be important to monitor those signals next week. I fully expect the end of the week, month and quarter to be fairly volatile. It will likely be a strategic week in regard to the longer term development of the Indices.
Up to today’s trading, the internal structure off of the February 9 low has been weak. However, with the employment numbers today, some of the internal components are beginning to strengthen. While one day does not make a trend, it will be important to see follow through on Monday and a continuation of increasing market structure.
The development of price must be respected. There is much good news to continue fueling higher stock prices, but it is extremely important to recognize the internals are not yet that strong. Therefore, the risk is still to the downside, unless the other internal components begin to strengthen.
The Stock Indices are now at an important decision point. The NASDAQ is at resistance. The S&P is not quite there but approaching. Volume is extremely low and while price in today’s trading appeared impulsive, the rally is very weak structurally. Either they will continue higher on Monday, or we will see a retracement of most, if not all of today’s move. If they continue higher, it will be important for the S&P to trade above resistance and for volume in all of the Indices to begin to increase. At this point, the rally is not attracting new buyers. I believe those standing on the sidelines will have to make a decision the first part of next week.
Understanding the development and structure of price in multiple timeframes, suggests the current rally off of last Friday’s low is countertrend and the main trend will exert itself for one more leg lower at a minimum. The just posted Newsletter analyzes the probabilities of the recent selloff being countertrend to the rally off the 2009 lows. The question facing traders and investors is whether that countertrend move is complete or not.
In the next few trading days we should get a good indication of whether it is complete or we will see another thrust lower. Market internals suggest, at this point, there will likely be another leg down. Unless the internals change, have protective stops on all long positions. It will always be easier to re-enter at lower prices.
As expected, the rotation higher that began on Friday continued through today’s trading. Important to the move is the fact that it appears to be countertrend, suggesting the possibility of a move lower. The Indices are short term overbought. Therefore, how any move lower tomorrow develops will be very important. Additionally, anticipate an early move above today’s high on weaker breadth. If that were to occur, the Indices will likely trade back through today’s high. This would be a signal of weakness for the day.
Any move above today’s high on stronger breadth and volume, suggests the probabilities increasing for a test of the highs.
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As discussed in last night’s Briefing, the higher probability was for a move back to the downside to test or take out Tuesday’s low. That is exactly what occurred in today’s trading, except for the Russell. With that said, I have to expect a continuation of selling at the open tomorrow because the Indices closed at the low of the day. However, there were some structural components that were slightly stronger than on Tuesday. This could suggest a strengthening of the internal components that will lead to some type of rotation back up.
Look for signs of continued strengthening in the internals. Unless they continue to weaken, I expect we may be near a short term low. Do not buy this market yet. Wait for continued signs of strength and/or capitulation on the part of sellers. Since tomorrow is Friday, there may not be many traders who want to be long over the weekend. Therefore, it may not be until the first of the week that we see some type of rotation up.
We know that markets run and then pause in all degrees of time. Certainly, the move lower over the last few days has been a very impulsive and strong run. Yesterday and today saw the Stock Indices pause. The probabilities, after today’s close, suggest we will likely see lower prices tomorrow. Just as it was important to see how the current pause developed, so too, it will be important to determine how any additional move lower develops. If it is strong internally, then it is another run and yesterday’s low will be taken out. If it appears weak, it is part of a greater degree pause and we will likely take out today’s high.
On any move above today’s high, if the internals are not strengthening, expect lower prices when the pause is complete.