Surprisingly, the market internals strengthened going into Friday’s close. That strength brought a surge in prices. Additionally, on Thursday the Russell formed a double bottom, along with positive divergences in the S&P and NASDAQ. This all suggests there should be follow-through on Monday. However, if breadth is weaker than Friday, expect a possible rotation down. If the rally that started on Thursday is to continue, it is imperative for the internals to continue to confirm price development.
Stocks are at an important juncture. The NASDAQ is suggesting a third countertrend leg lower is developing. The S&P and Russell made new all-time highs, but the internal structure of that move was weak. The price structure is more clear in the NASDAQ. However, any attempt to move higher without internal strength will lead to a false breakout. On the other hand, trading much below Friday’s low will suggest another leg down is in the process of developing. The Briefing outlines important support levels, both short and intermediate-term.
The Stock Indices finished Thursday overbought. That suggested the possibility of some type of rotation to work off the overbought condition. Friday opened with the Indices appearing to move lower, but that was quickly reversed. While the NASDAQ tried to sell-off, the S&P held firm, and the Russell immediately moved higher. Market breadth was weak but not at an extreme. New highs continued to expand, and the Industrials and Transports exploded. They all closed at or near their highs on Friday. This suggests a continuation of the move higher on Monday. However, watch market breadth closely. If it does not expand, it could suggest another pause or rotation down.
The Stock Indices gave some clues on Thursday of strength. Friday’s open continued to show strength in the internals and through intermarket divergences. That led to aggressive buying throughout the day on Friday. The Indices traded through critical resistance levels and closed at the high of the day. Other internal factors contribute to a greater probability of a continuation of buying on Monday.
If Stocks open higher on Monday, but there is a divergence in market breadth, some type of rotation lower could develop. Trading above Friday’s high on a divergence in breadth and then trading back through that high would give concern Friday’s move is false. It will be critical the market internals strengthen on any higher high.
The strategic development of prices in the Stock Indices for last week was significant. As a result, I want to review the development and structure that led to an actual trade I took on Thursday. It is not often the Indices give us clear information of a possible move, but all of the events leading up to Thursday in multiple timeframes led to a great short trade.
I hope you will understand the importance of understanding market development’s strategic implications, and seeing the tactical entries that can be used.
The anticipated countertrend rotation has occurred, and it developed in typical three steps. In the S&P, there was equality between the first and third legs. At Thursday’s low, the internals started to strengthen, suggesting a rotation up, which occurred on Friday. However, the move on Friday has some characteristics that could suggest another leg lower, making it a more complex countertrend rotation. The Briefing today outlines some short-term areas to look for in terms of trade location.
The Indices have been in a rotational pattern for eight trading days. A break to the upside with strengthening internals will increase the probability of an impulsive move higher. On the other hand, a break of Thursday’s low will possibly usher in a greater degree time and price move lower.
The behavior of the market participants drives a financial instrument. Over time, that behavior repeats itself. As a technician, we try to determine the markets’ behavior and then predict a possible outcome. Understanding previous behavioral patterns are critical to the analysis.
The weekend Briefing discusses the current repetitive pattern that has led to countertrend rotations. Critical to the analysis is whether the countertrend move is short-term or developing into something larger in a degree of time and price.
Last week, the Stock Indices’ price action displayed some of the same characteristics of the previous greater degree pause. While not all of those characteristics are present, there certainly is enough information to make what happens on Tuesday extremely important to the intermediate-term analysis.
Just as the Market internals deteriorated at the end of January, leading to the countertrend rotation, the end of last week saw the beginning of internal weakness once again at all-time highs. While the weakness is stronger than the previous decline, continue observation. Should the weakness continue and become more exacerbated, it would signal another pause or countertrend move.
As I have said previously, Markets give us information every day on their potential direction. Our job is to interpret that information and then make probability assessments as to the next directional move. The trend is up. However, if the weakness persists for the next few days, another countertrend move will become the higher probability.
Pay attention to short term support levels. If broken, it will open up possible tests of intermediate-term support.
I am anticipating some volatility for next week.
As discussed in the Briefing for the last two weeks, the Stock Indices continued to push higher but with an internal structure that was weak and continuing to weaken. Wednesday brought on the anticipated selloff. However, as discussed in Wednesday’s Briefing, the Indices reached a point of being extremely oversold. This suggested some type of recovery on Thursday.
In Thursday’s Briefing, I outlined some of the characteristics of a countertrend rotation that fit the selloff. Those characteristics suggested another down day on Friday was a higher probability. Additionally, I suggested, if there was another leg down, it should be about equal to the first leg. Both the QQQ and SPY achieved almost exactly the equality covered.
At Friday’s low, the Indices began to show some strength, suggesting a pause or some type of rotation higher.
The weekend Briefing outlines possible short-term strategies for the beginning of the week. The short-term development will then give us greater insight into the next intermediate degree move.
Last week the Stock Indices gave some mixed signals. Initially, the Russell began to show weakness followed by the Transports. However, on Friday the Russell showed more strength by testing support and then rocketing back up to test resistance. The Transports showed more weakness than the other Indices. In the past, if they begin to trade lower together, it was a signal of an impending correction.
While the trend of price is certainly up, it may be important to keep in mind support levels. As you will see in the Briefing, the structure of the current trend is weak and continuing to weaken. Unless this changes, the probability of some type of correction or pause is certainly an increasing possibility. It is always the higher probability for price to correct to the internals. However, there is also a smaller probability the internals will correct to support price. This typically occurs around a news event. Therefore, unless the internals strengthen, be aware of short-term and intermediate-term support levels if broken. Warning flags are up, but respect the trend