Memorex used to have a commercial where a glass was broken by a high musical note.
The point to the commercial was it a real live singer or a recording on Memorex cassette tape. In this case was Thursday's decline the beginning of the real Aug/Sep decline or was it just a temporary imitation? The accurate answer to that question is worth a lot of money.
To answer that question I am going to refer back to the A/D line on the S&P, which closed at a new 5-week low. If this is not the real deal, it is a very good imitation. Actually, the S&P and the Dow A/D lines, while negative, are significantly better than the Nasdaq and Small Cap lines.
The Nasdaq and S&P-600 are significantly more bearish and note that they both peaked in late July while the Dow and S&P peaked in August. The large cap generals retained their strength while the troops were deserting in large numbers.
Note the MACD on all the charts is very bearish.
The percentage of S&P stocks above their 50-day average fell to 41.6% and a TEN-MONTH low. If this were a stock chart would you buy it? I seriously doubt it since the broken support at 45% suggests it could go into freefall.
The percentage over their 200-day average fell to 63.8% and an 8-month low.
The broadest general market index, the Russell 3000, came within 3 points of critical support at 1,425 on Friday and closed right on the100-day average. The index has not closed under that average since October. This confirms it is a broad market decline rather than just a couple of sectors or just small caps or just the big cap techs. This is a broad based market decline and that suggests it will continue.
There are some significant support levels on the R3K, Dow and S&P that could be tested this coming week and that will determine if the decline will continue unabated or take time out for a short squeeze.
The S&P dipped almost to the 100-day at 2,417 with multiple support levels in play. Those are 2,420, 2,417, 2,410 and 2,400. If the 2,400 level breaks, it could be a fast drop to 2340-2350.
The Dow remains the strongest index with support about 175 points lower at 21,500. The index is not even close to its 200-day average. The surge by several stocks in late July, early August added 500 Dow points and they are resisting the urge for profit taking. Boeing is holding up very well with a 56-point gain since early July. That added roughly 300 points to the Dow. Initial support on the Dow is 21,500 and it should produce at least a temporary rebound.
The Nasdaq is the second weakest index behind the Russell 2000. With support at 6,100 the line in the sand has been drawn. A breakdown there should target 5,800.
The Russell 2000 is in danger of breaking below the 7-month post election consolidation pattern with support at 1,340. That is 110 points below its recent high and could be just the start of a larger decline. That 1,340 level needs to hold or it could drag the rest of the market lower.
It is all about market breadth and it is shrinking daily. The big cap techs can move the Nasdaq around on any given day but if the majority of the other 2,000 Nasdaq stocks are negative the eventual index direction will be lower.
The same goes for the Russell 2000. The financials are currently about 15% of the index and they can determine short-term direction but it is the majority of the stocks that determine long-term direction. The small cap market breadth has turned significantly negative.
There may be another relief rally short squeeze on Monday but I expect the market to eventually turn lower. The market lows for the second half are typically set in late September and early October. That is a long way off with a lot of minefields in our path.
Unless you are a short-term trader, the risks of holding long-term positions over the next 8 weeks are very high. If you have them, hold them but I would not add any new ones until we see a buying opportunity.
There is always another day to trade if you have money in your account.
Enter passively and exit aggressively!
Send Jim an email