The -143 point drop by the Nasdaq on Thursday was a warning.
It was not a warning that the market is going to crash this week but it was a not so subtle reminder that it could crash at any time. That is especially true because we are moving into the traditionally weak August/September period. Thursday's drop was not unusual. If you look back over the last several months there have been several sharp one-day declines. The market continued higher after each event. Eventually there will be an event where the direction change is longer lasting as in several weeks. The drop in June was followed by three weeks of volatility but it was not damaging. It was just a regular bout of profit taking. As long as critical support is not broken, we can live with these monthly declines.
The problem, other than the Aug/Sep period, is the recent flurry of market analysts warning of an impending correction. Obviously, nobody knows when it will happen but it will eventually happen. With those warnings, the sudden and unexplained market declines take on a more ominous tone.
The Dow gained 250 points for the week thanks to Boeing, which added 198 Dow points. There were several other stocks that added a few points on earnings early in the week but Boeing was the super star. Does anyone other than me think Boeings 29 point spike is likely to be sold? I expect there are plenty who would take that bet.
The Dow is well over resistance but it was basically a single stock rally that could collapse just as quickly as it spiked, although I expect it to be a slow bleed until the emotions fade. Obviously, some shorts were singed significantly. They may come back to try and get some of their money back next week.
The Dow Transports are crashing and the Russell 2000 fell back to support. The Nasdaq lost ground for the week. That means the Dow was the sole survivor in an otherwise weak market. That is not likely to last if the other indexes slip into their post earnings depression phase.
For the S&P, Thursday was an outside reversal day. That typically appears when the market is about to change direction. There is no guarantee the index is going to roll over but that is a typical sign of trouble. The S&P chart is still bullish until the index falls back below 2,420 and that is not likely unless we are going to get a real correction. There are no signs yet, but sometimes they do arrive unexpectedly. The A/D line on the S&P did stumble last week but it is still positive.
The reversal on the Russell is a little more troubling. The index stopped at resistance of 1,452 on three days and then sellers appeared. The Russell was heading lower while the Dow and Nasdaq were still climbing on Wednesday. The support at 1,425 is critical. A break there targets 1,400 and and the retracement of the July gains. This would be negative for market sentiment.
By the end of the week more than 425 S&P companies will have reported earnings. The cycle "should" begin to fade after Apple reports on Tuesday. The post earnings depression phase is normally enhanced in August because of the low market volume and the lack of interest in the market. With three weeks left before kids begin going back to school, traders will be taking time off to squeeze in some final vacation days.
The economic calendar is busy with the payroll reports getting the most attention. Unless there is a very big miss, they should be ignored because the Fed is on hold until December, unless there is a sudden spike in jobs/inflation. That is not likely so the reports this week are informational only and the market will probably ignore them.
The biggest risk for the week remains Washington. The Senate is still in session and the president is blasting them day and night on twitter and in speeches. There is always the risk of an unexpected political event that upsets the market. This term that is more likely than ever before.
I recommend not being overly long for the next couple of months. Maintain positions but be prepared to exit quickly if the long awaited correction appears. There is always another day to trade if you have capital in your account.
Enter passively, exit aggressively!
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