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.
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.
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.
The Stock Indices took a break from their climb higher. Today was mostly a rotational pattern. Still concerning to the analysis is the continuation of weakness in the internals. Market breadth continues to decline. Net volume is declining. While total volume is down in the NYSE and up in the NASDAQ, net volume is declining, suggesting there is more selling volume gaining strength.
Once again, the trend in price must be respected, but with caution until there is a strengthening of the market internals.
The Stock Indices continued their slow move higher, climbing a wall of worry. However, the internals of the market were actually negative today in the NYSE and declining in the NASDAQ. This lack of internal strength gives me worry over long positions. Many times, I have seen the Indices reverse very quickly due to weak internal strength. However, the rally must be respected. Until there is a series of higher lows being violated, the trend is up, but with a lot of caution until net volume and market breadth strengthen.
The S&P and Dow Industrials are testing their all-time highs. The NASDAQ, Russell, and Transports are lagging. Add to this, the internal weakening of the rally off the recent lows, and I have to say there is still a reasonable probability of another rotation down. With that said, the trend of price short-term is up and that has to be respected. Most concerning is volume. With each day of higher prices, volume falls off. In fact, today’s trading produced negative net volume. This is not a market that is attracting new buyers. The resolution to the internal and Intermarket divergences will likely give us a very good move. Watch short-term support and resistance for the next greater degree possible move.
Normally, I make the weekend Briefing available to non-subscribers. However, after studying the charts this weekend, I believe the Indices are at a major pivotal point. In today’s trading, short-term support was broken. That now becomes resistance. The markets closed at the low of the day. That suggests there will be additional selling at the open tomorrow. Volume is low on rallies and high on declines. Market breadth is tepid on any rally. This is not a market that is strengthening at this point. While that can change, we must be aware of what is in front of us.
The perception of value on the part of traders can and will change with a news event. While we have to be aware of any change in valuation, I am concerned the environment for a bullish case is diminishing. If the lows made on October 4 are broken, that will suggest the market is transitioning from a weekly timeframe correction to a monthly timeframe correction.
The Stock Indices remain in a critical area. Either they will continue a rotation higher off the recent weekly low, or they are completing the second leg of a three-leg correction on a monthly basis. The key to sustaining the rally is going to be the internals. So far, they are weak and weakening. Short-term support levels will be critical in the coming week. If this rally is not sustained and weekly support is broken, selling could accelerate. To date, the internals are supporting additional downside.
The coming week should be critical as to the next greater degree time and price move.
As you will see in the Briefing, the Stock Indices are at a critical pattern development. What happens tomorrow or over the next few days will give us the information we need to determine if another leg lower is in the making. Understanding the development of price in multiple timeframes is extremely important. If the gap from today is closed and near-term support is broken, it will raise the probability of another substantial selloff. On the other hand, if today’s high is traded through and volume increases, a test of the highs may be a greater possibility. While the Indices were up today, volume was extremely weak, giving concern over the sustainability of the rally.
In today’s Briefing, I discuss the analysis from the weekend and where we are now in the short term. Next, I show the development of price in a longer-term timeframe. Using the same analysis of price patterns for the short term, you could come to a higher probability, the longer-term rotation lower is complete. However, in the short-term, if the lows of today are traded through, it will open a higher probability assessment of an even greater degree time and price move lower.