Tale Of Two Markets
This is not about NASDAQ vs. Dow, but rather reality vs. mood swings.
Let us start with reality. Reality is that semis are fish in a tank with a sinking water lever (TMTA, JBL, SLR, MU, SANM this week alone). Reality is that the rest of the world is starting to experience a slowdown too. Reality is that interest rate cuts are not stimulating the economy as much as hoped and that layoffs are still rising. Even notably accurate Fed-watcher and Washington Post reporter, John Berry wrote a piece today that spells out the Fed's concern that the economy is resisting past rate cuts. Reality is that consumers are slowing their spending, but still digging deeper into debt. Reality is that business cycles have not likely seen a bottom.
Reality is that my logical brain cannot fathom why anyone in his or her right mind would want to be long this market!
Good thing I still have an emotional second half. For that is the half that reminds me that markets are not logical. Markets are driven by pure emotion that swings investors' moods like a pendulum, bullish to bearish and back again, which can be seen in oscillators and candle charts, aka technical analysis.
Having been bearish long enough, investors moods are starting to focus once again on the presumed rate cut to be offered next week. Not only that, but with oscillators in oversold territory from negative sentiment, it is about time some anticipated good news reversed the trend. A Fed rate cut will do, as will soothing words from Larry Ellison. And do not forget fewer than expected jobless claims of 400K vs. 425K est. A wink and a promise in the minds of investors is a much better combination than reality at raising markets.
To heck with reality. Let us be grateful for the bullish signs we have and trade accordingly. We do not need to be right; we just need to make money! As we outlined in the Tuesday Wrap, it was a statistical improbability to keep sinking anyway after practically eight days of losses on the NASDAQ. It is rare that investors can be that perpetually negative.
Shall we take a peek at the charts?
Dow Industrial (INDU) chart:
The Dow had a relatively good day by posting a 68-point gain on 1.47 bln shares traded on the NYSE. Advancers outpaced decliners by 17:13. But the best news was probably technical in that the Dow managed a close back over 10,700. It was a tough win, but we can see the highs getting higher along with the lows in the last two days. What's more, the weekly chart is showing some firm support at its 20-pma.
Looking at oscillators, finally the Dow has given us a bullish fast over slow stochastic cross on the daily chart. I would tend to use that as the guiding light for the bigger trend going forward, especially into the Fed meeting next week. However, the 60/30 oscillators are over-extended and will likely fall back to earth. . .earth coming in at around 10,700 (optimist), or 10,650, a level of previous support in prior days. There may be added downward pressure tomorrow since some traders will lighten their load for the weekend. But with little upward profit this week, the only profit taking is mostly likely going to be done by bears not wanting to remain short going into what looks like a bullish trend.
NASDAQ-100 (NDX) Chart:
Now, about that NASDAQ 100. Ignore the COMPX, which closed for the second day back over psychological resistance (now support) at 2000. The NDX closed back over 1700 for the second day in a row at 1751 on over 2.1 bln shares. Five to Four was the ratio of advancers to decliners. Not a bad showing, but difficulty lies in piercing resistance at 1775
Why 1775? Just a point of previous support, now resistance. The next challenge will be in cracking the 20-dma (thin wiggly red line) at 1825. The final hurdle is around 1875. That is where horizontal resistance and descending trendline resistance meet. The daily oscillator though says that NDX is poised to break out of oversold, and the upper Bollinger band near 2000 says NDX has room to run. The 60/30 however, says to expect some overbought weakness to emerge, perhaps down to support of 1690-1700. If the 60/30 charts can make it to oversold, and turn back up in unison with the daily chart in an attempt to cycle back up, that could be a nice bullish play. Stay tuned.
S&P 500 (SPX) chart:
Same story with the SPX - nice gain of about 14 points on the day. The chart looks bullish right now with the daily stochastic oscillator poking out of oversold following a fast over slow cross, yet 1240 held as resistance with 1241-1248 a likely range of overhead congestion. While the emerging daily oscillator suggests it will break through, 1248 will also pose a point of resistance from the declining trend line. Nonetheless 1300 is the upper Bollinger band, which leaves room to run before traders consider it an extreme overpricing.
Looks bullish, but a word of caution is in order. Once again we see 60/30 oscillators in overbought and rolling over territory. It is reasonable to expect some weakness in the early hours at least, and who knows from there. Support can be found intraday on the 60-min chart at 1220-1225, which might make a good opportunity to enter put credit spreads, or go long. Just a thought.
What about that VIX? It is behaving strangely. One might think that with a reading so low (21.91 today), it is ready for a reversal following the flurry of call buying that has apparently happened recently, and which would carry it back up to its usual upper side at 30 and over. Usually, 18-22 is low indicating excess bullish optimism, and that signals a coming of the bears. Yet the charts above suggest the tide is turning in favor of the bulls. Emotions (charts) say the bullish side looks good, but the VIX says it looks too good to sustain for long. Hmmm - maybe just until the Fed meeting?
Hard to say for sure where we go tomorrow, but some pullback is likely in the morning just to remove the overbought condition that indexes were already leaving behind late in the session. But profit-taking will likely be limited only because there are not many profits to take from the last couple of days. Not only that, traders may be attempting to get in the way of a rally that could erupt leading into the Fed meeting, not to mention institutions starting to dress the ownership roster as the quarter comes to an end in three days. Bias is to the upside, but not likely right out of the gate.
Any bounce from selling tomorrow morning could be just the ticket to a profitable bullish trading day. Still, play with prudence as we have been burned many times on a reversal in these rangebound markets just when we think we have it right.
See you at the bell!