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Be careful of this!

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I constantly talk about traders trying to leave some "old" trend lines on their charts. While it may be somewhat confusing to "younger" traders, eventually we overcome the confusion and soon realize how important "old" trend can be. They can also keep us out of a lot of trouble!

NASDAQ Composite Index Chart - 60-minute interval.

Concentrate on where the Attach Point was made on the NASDAQ Composite chart. Doesn't the above trend look like it is starting to act like resistance? OK, now we're alert and snugging up stops!

NASDAQ Composite Index Chart - 60-minute interval.

If I decided to "attach" my upward trend to a different point, the above chart of the NASDAQ Composite now looks very bullish! It's tough to say which chart is "correct". What we can do though is at least understand that one upward trend was broken (Chart #1) and acting a little like resistance. Now we're not going to get blindsided with a market decline as we're snugging up stops under our bullish trades. If I like the upward trend on Chart #2 then I'm watching that upward trend, with Chart #1 in the back of my mind. If we start seeing upward trends broken to the downside, hopefully we're all alert to potential weakness!

Watching the Retails and that scenario!

Earlier today on IndexSkybox.com I made the observation that the Retail Index (RLX.X) traded above the 875 and felt that was bullish! This 875 level was right at our downward trend AND our 50% retracement level from our retracement bracket. Remember our scenario of how this may help give us a pulse on what the MARKET thinks the consumer might be doing down the road? (Retail stocks usually are doing well in a strong economy).

S&P Retail Index Chart - 60-minute interval.

The above is a daily chart of the RLX.X with our retracement bracket overlaid. Today the RLX.X traded as high as 875.62. While a trade at 875 triggered an upside alert, this index is experiencing some consolidation at current levels. Four day's ago I said "this index needs to hold the 820 level and it did. Now I'm going to say, "if the economy is going to be great six months from now, we need to get above the 875 level." I'm saying this only as it relates to my scenario of a healthy economy and the role the RLX.X plays in it.

What about the Drugs?

How can the Pharmaceutical Index (DRG.X) help us out? We hear so much about rotation and defensive stocks! We've seen the drug stocks get taken apart at the seams lately as the NASDAQ Composite (COMPX) rallied from the lows. What if we start seeing weakness in the NASDAQ? Might the drugs start to rally? If we see the drugs continue to fall, might that not further fuel a rally in the NASDAQ or give us the "heads up" to the above mentioned movements? I'm putting the DRG.X near the top of my list for indexes to be keeping an eye on.

Pharmaceutical Index Chart - last five months.

Ever since the Fed rate cut, the DRG.X fell apart. Now it's forming a wedge pattern and a break should come soon. Will it be to the upside or downside is the question. In my scenario, a break to the downside gives hint that the market is becoming less defensive. A move to the upside gives hint we might see some short-term rotation out of the NASDAQ Composite, which is up better than 25% from it lows.

Jeff Bailey
Staff Analyst

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