The indices were long overdue for a pullback, and Friday finally brought it. A bounce from the day lows restored part of the day's losses, and left traders wondering whether the move was more than just a simple, overdue, widely expected correction.
Daily Pivots (generated with a pivot algorithm and unverified):
Daily COMPX candles
Buy the time the dust settled, the COMPX was down just 10 points on the day following a better than 70 point gain since Tuesday. The move was quick and violent, and felt "impulsive", just as the bounce off the intraday low felt corrective. However, when viewed on the daily chart, it's simply premature to read more into the 10 point decline than that. The daily uptrend remains intact, not even threatened by the day's decline, and the move respected the ascending channel within which the COMPX has been trading since its August lows.
That said, the oscillators on the daily chart are in overbought territory and appear ripe for a rollover, and the rising "channel" looks like a possible bear flag. On the 30 minute candles below, the move appears to have broken the bottom of the bear wedge, following a bearish divergence on the stochastic and Macd oscillators, both of which are on sell signals.
I'm not trying to sound as ambiguous as it may appear. Friday was a corrective day that could well be the start of something more. The session finished on a bounce, however, and we'll need to see how next week begins to determine whether what is so far corrective on the daily chart will extend into more meaningful selling.
30 minute 20 day chart of the COMPX
Daily INDU candles
Again, the context of today's selling is well-illustrated on the Dow, which finished lower by 84 points after having been down triple digits. The oscillators remain aimless on this timeframe following over two months of chop above 9000. 9600 remains important resistance, having been tested numerous times this week.
On the 30 minute chart, the "impulsive-corrective" dilemma is clearer as well, as we have two possible interpretations of the chart patterns. Both patterns play out as bearish ascending wedges, which, as we've discussed, tend to break to the downside. We have no way of knowing whether today's break was the beginning of the end for this wedge, or whether it's just another pullback to lower support. The oscillators are still bearish but approaching bottoming territory, and the outlook for next week remains murky. If Friday's close was anything more than a quick round of tape-painting, we could see a bounce to reverse these sell signals on Monday.
20 day 30 minute chart of the INDU
Daily OEX candles
The OEX is set up similarly to the INDU, with Friday's decline merely a correction of a small portion of the week's significant gains. The oscillators remain ambiguous, but they do not look bearish to me yet. The 30 minute wedge is still intact on the OEX, despite the bearish divergences and strong sell signals on the oscillators. Until 510 gets taken out, bulls will remain unruffled. Below that level, there's risk to 504 fib support, followed by 493 as the bear wedge target.
20 day 30 minute chart of the OEX
Daily QQQ candles
QQQ 34 was a significant level all week, and Friday did not disappoint. Like the Nasdaq, the Qubes appear ripe for the correction that bears have been so eagerly awaiting. The steeply ascending channel on the daily chart remains intact, with the oscillators toppy and suggesting just the first hint of a possible rollover. The 30 minute chart has that same bear wedge, but the bounce looks more like a return to the scene of the crime than a true continuation of the wedge. A move below 33.60 will have bears targeting 33.20, below which I'd expect the selling to intensify. Above 34, and it will look like a most unwelcome continuation of this week's range.
20 day 30 minute chart of the QQQ
This week completed a fourth consecutive week of gains for the COMPX, a fifth for the INDU. It's difficult to say anything bearish about a setup comprised entirely of gains, other than "what goes up must (should?) go down". In all seriousness, this year has been rich with important lessons, the most important of which is to trade what we see. I believe that a deeper correction is forthcoming, but the charts aren't confirming it just yet. We need to watch the levels outlined, using the trendlines as decision points and the oscillators to highlight our direction bias at those points. Add stops into the mix and we have a way to remove the lion's share of the risk from what have been proving to be very difficult markets. See you at the bell!