Author: Joe Mertes

Stock Indices Rally Off Support

There was a slight strengthening in market breadth today that led to the rally of the low of the day. Whether that rally is sustainable or not will likely be seen tomorrow morning. However, keep in mind tomorrow afternoon volume will likely begin falling off in front of the holiday. Therefore, anything can happen. If there are higher prices and breadth strengthens, that would be significant to the bullish case.

Intermarket Divergences And Internal Weakness Continues

Friday saw the SPY continue in a pause phase. The Dow Industrials traded lower. The NASDAQ moved higher and the Russell sold off. These intermarket divergences coupled with a deterioration of the market internals suggest the risk of another correction is the higher probability. However, we are coming into a bullish time of year. The Industrials could have just completed a three-step countertrend rotation and the Indices are all oversold. While this does not preclude additional downside, it will be important to monitor short-term support. If those levels are broken, selling could accelerate. On the other hand, if resistance is traded through and the internals strengthen, the Santa Clause rally is beginning.

Market Internals Collapsing

Market breadth in the NYSE, coupled with more down volume, are not the internals that make for a strong rally. In fact, in the NASDAQ, both breadth and net volume were negative today, while the Index pushed higher. The Russell, Industrials and Transports are all turning down, but not impulsively as of yet. Unless the internals begin to strengthen, the risk of another decline is increasing.

Stock Indices Continue In A Pause

The Stock Indices are in a rotational or pause pattern. While the daily range is not that great, a break of the current extremes should be a good move, if followed by supporting internals. Next week is a holiday week. This could have the effect of continuing the pause. One thing is clear. The internals are still deteriorating. However, we are reaching an oversold condition. On any move higher, monitor volume and breadth to be sure they are supporting the move.

Stock Indices Move Higher But Quickly Retraced

The Stock Indices traded above Friday’s high but then quickly retraced the attempted breakout. This was a result of extremely weak internals. On the open, a quick view of breadth and net volume was a clear indication the open did not have enough strength to sustain the move.

The intermediate-term question facing us is whether the current downtrend is complete. As discussed in the weekend Briefing, it appears there is a risk of at least one more leg lower. Until resistance is traded through and the internals confirm the move, use caution on long positions.

Stock Indices May Have Completed A Countertrend Move

As you will see in the Briefing, and as I have been discussing this week, the Indices may be in the process of completing the second leg of a three-step countertrend rotation. The development of price in multiple timeframes suggests there may be more downside work to be completed. If that is the case, I have outlined short-term support levels that if broken will offer a higher probability of a continuing downward move. On the other hand, the internals have been weak and weakening. If there is a breakout to the upside, and the internals strengthen, that would raise the probability the countertrend rotation is complete.

Stock Indices Test Resistance And Pause

As discussed in last night’s Briefing, the Stock Indices traded right into resistance and spent the rest of the day trading at or just below those resistance levels. The oversold condition was worked off, so they can go in either direction. The pause area formed today offers good trade location. However, if there is a breakout move, it should move away quickly on good volume.

Stock Indices Breakdown Short-term

As I have discussed in recent Briefings, the Stock Indices have been in a multiple-day pause and the market internals have been deteriorating, suggesting a possible higher probability of some type of selloff. Using the extremes of that pause offers a potentially good trade location. Strategic analysis along with tactical entries were instrumental in a good trade.

At the end of the Briefing, I discussed how I used the analysis of a countertrend move to position for a good trade and predict a potential stopping price. Keep in mind, what was support today is now resistance tomorrow.

Stock Indices Continue A Pause With Slight Downward Bias

The Stock Indices started lower after the open but then found a stopping price and spent the balance of the day rotating at that price. The internals continue to deteriorate. The lows of today are likely very important support levels. If those are broken, there could be an acceleration lower. If there is any strengthening of the internals, I suspect the last three days of downward bias will be quickly retraced.