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Index Wrap

Doji Week

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The Nasdaq hit 2000 and the only panic was from bulls to buy the top. The indices retreated shortly thereafter, and closed the week lower by 1.1% at 1937. On Friday, the Dow lost .7% or 68 points to close at 9862, the S&P 500 dropped 8.22 or .8% to close at 1061.50, and the Nasdaq lost 1.6% or 31 points.

Year to date, the Dow is up 18.2%, the S&P 500 20.6% and the Nasdaq 45.1%.

It was a week in which technical traders got whipsawed in both directions, and those with a bias in either direction were spared some of the false signals. Wednesday's high was not revisited, but the Thursday afternoon ramp job, fueled entirely by three nearly symmetrical buy programs in one hour, nearly did it. The selloff following INTC's earnings report took the futures back down afterhours, and Friday never came close to breaking above Thursday's close.

Volatility printed a fresh set of lows up to Wednesday, with the VXO spending most of Monday and Wednesday below the 16 level. Sentiment was overwhelmingly bullish, even amongst many bears. It appeared to be an inevitability that the Dow would print 10,000 and the Nasdaq 2,000, and the selloff that followed the Naz 2K touch was as much from bearish relief as from bullish profit-taking. The VXO closed on Friday at 17.34, near a weeklong high, and the various support breaks no doubt awoke some bulls to the significant downside risks from these lofty heights.

Nevertheless, the higher high on the Nasdaq muddied the weekly cycles somewhat, actually printing a buy signal but setting up a possible bearish oscillator divergence. The bulls used a great deal of firepower on Wednesday, and the bears only appeared to realize it after the INTC disappointment at Thursday's close.

Weekly COMPX candles

The drop on the weekly candle from a new high printed a gravestone doji for the week, portending further downside to come. This candle implies an abrupt rejection at the high and is a reversal signal. However, the close above last week's lows could result in either consolidation or further selling, and it will take a trendline break below 1930 confirmed by a failure below 1900 to suggest that we've indeed seen the top. We all know the bear wedge off the March lows by now, as well as the bearish divergences on the 10 week stochastic. This week's decline confirmed the sell signal on the weekly Macd, however, and this suggests that the Nasdaq is putting in a rolling top at current levels. A retest of the high would not be incompatible with that interpretation, and wedge resistance is now up at 2030. The oscillators suggest that such should not occur, and so next week promises to be enlightening as to the fate of this year's rally.

Weekly INDU candles

The Dow came close but did not reach 10,000. It was stronger than the COMPX for the decline from Wednesday, and on the weekly chart its Macd sell signal is not fully developed. The rise back to the highs left us with the same upward tilt on the 10 week stochastic as we saw on the COMPX, and we cannot rule out more upside for next week. Nevertheless, the stochastic is still diverging lower, and suggests a break of the lower rising wedge trendline.

Daily OEX candles

The daily chart of the OEX shows a rounding top at the current highs. If you squint, you can see the shooting star doji on Wednesday, one of the most bearish candles you'll see. The fact that the break above 525 resistance did not cause a short covering panic for longer than part of one session indicates the existence of serious overhead supply, and leaves bears breathing easier. But former resistance at 518-520 is now support and should give bears a run for their money. The daily cycle oscillator upphase, responsible for that upward twitch in the weekly stochastic above, still has room to run and could see a retest of the 528 highs. But the Macd histogram suggests that Wednesday may have been the top, and any further selling from here should be enough to turn the stochastic back down. If so, that would agree with the bearish divergences on the weekly cycles, and the ensuing downphase should do some damage. Provided that 528 does not get broken, that's what I expect to see.

20 day 30 minute chart of the OEX

The 30 minute OEX shows the wedge break with Wednesday's outside reversal day, but the selling that has ensued is difficult to read. On the one hand, it could be a head and shoulders top, with a neckline at either 525 or 522. On the other, a bull flag with resistance 526, support 522. Above 526, I expect to see the 30 minute cycle oscillator reverse to an upphase, and 528 will be within sight. Below 522, the daily cycle upphase should abort, and the bulls will have a problem.

Daily QQQ candles

The Qubes never printed a higher high this week, a clear bearish divergence from the broader Nasdaq. Friday's close near the lows was ugly but did not break any of the rising trendline supports. A decisive break of 35 will be the first sign of trouble, but 34.30 is far more important, below which I expect to see the failure of the daily cycle upphase. Given the extent of the bearish oscillator divergences, the next downphase should pack an "I told you so" punch. Until then, however, the pullbacks in this daily cycle upphase look merely corrective.

20 day 30 minute chart of the QQQ

My "corrective" comment is exemplified by the bull wedge interpretation on this 30 minute cycle downphase. However, a break below 34.75 could be construed as a neckline break, and again, we'll wait for a confirmation at 34.30 to be certain. The 30 minute cycle downphase should be good for another few hours of downside, but if it's merely sideways, we'll watch for a bull wedge breakout to the upside above the trendline at 35.20.

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