Today, the Stock Indices broke above important resistance based on two news events. The positive part is breadth expanded nicely and the number of stocks trading above their 50 and 200 day moving averages expanded nicely. While the Market finished the day extremely overbought, I have to anticipate some type of pause or rotation to work off the overbought condition. A divergence in market breadth on any higher high, could suggest that pause is beginning. Volume is still not as strong as I would like to see, but it needs to build on higher prices.
Author: Joe Mertes
Market Internals Continue To Weaken
As you will see in the Briefing the market internals continue to deteriorate. The NASDAQ is being propelled forward by a few highly weighted stocks. The percent of stocks above their 50 and 200 hundred day moving averages is well below the 50% range. Unless the internals strengthen, the risk is to the downside. There is simply not enough internal strength right now to sustain a rally. That can change, but for now it is a red flag to longs.
Intermarket Divergences Persist On Weak Internals
The intermarket divergences still exist with the NASDAQ certainly moving higher based on higher weighted tech stocks leading the Index. Coupled with the divergence, the internals are not strengthening. Breadth was weaker today than on Friday. However, since the majority of the Indices are at important resistance/support, any breakout in either direction will need to be analyzed carefully.
NASDAQ Breaks Out. S&P Tests Important Resistance. Internals Weaken
I have introduced a few new charts that I believe will really help in analyzing the internal strength or weakness of price trends within the Stock Indices. As you will see in the Briefing, based on previous price levels and internal strength, the Indices are rising on fumes. Volume is still critically low and it appears the Index valuations are simply a few highly weighted stocks driving price. If the internals do not strengthen on any additional rally, the risk is increasing to the downside.
NASDAQ Moves Higher, Dow And Russell Diverge
The NASDAQ moved higher today, continuing its breakout move. However, the DOW and Russell were down, followed by the S&P that was up slightly. Volume is still significantly low and breadth today was negative in all three Indices. Once again, while higher weighted stocks may be carrying the rally, it is unsustainable if the number of stocks in the index continue to trade lower. Eventually, they will drag the index lower.
Stock Indices Follow-Through And Trade Lower
Stocks continued the decline from yesterday. The internals continue to weaken. However, volume decreased today. This suggests the move is not impulsive. It may be we are simply back in the rotational pattern and closed in the middle of it. On any lower low tomorrow, look for a possible breadth divergence to signal a possible rotation up or pause.
Stock Indices Close Below Support
The Stock Indices sold off today and closed below important support levels. Those levels are now resistance. As discussed in yesterday’s Briefing, the internals were not confirming the breakout higher. This led to the decline today. Tomorrow’s price action will be very important to the next greater degree time and price move.
Stock Indices Continue to Pause On Low Volume
As I have discussed in previous Briefings, if the Indices are going to breakout of the current trading range, volume should be increasing. As you will see, volume actually declined today as price faltered. This gives me concern over the breakout and its viability.
Stock Indices Pause After Breaking Out
The Stock Indices basically paused today after yesterday’s strong breakout. The negative to the move is breadth in all of the Indices is declining. That will make a continuation of the rally difficult if it does not change. While it is common for a financial instrument to breakout and then retest the breakout point, if support does not hold, it will suggest the move is a false move and rotation down will be a higher probability. Watch support levels carefully next week. They must hold on any reversals.
SPY And QQQ Breakout
Today, both the SPY and QQQ broke to the upside. The positive is volume increased slightly today supporting the move. However, breadth in both Indices diverged and was barely positive. The Russell (IWM) put in a higher high over yesterday but volume declined as did breadth. Now, it is important for the Indices to hold above support and to continue the rally with consistent increases in volume.