Whenever the Nasdaq decides to take profits it is always painful.

The Nasdaq has now had three major decline days in the last four months. The one in March dropped -143 points and the May decline was 173 points. Friday, the Nasdaq 100 was down -228 points intraday but rebounded to lose 143 points for the day.

I discussed the various reasons in the Option Investor commentary so I will not repeat them here. We know what happened and what factors caught the blame. Now it is time to predict the future. Drag out those old crystal balls and brush off the dust.

The Nasdaq is either going to rebound on Monday or it's not. We cannot know for sure this weekend. If your crystal ball is better than mine, I have a job for you.

The Nasdaq 100 declined to 5,657 with major uptrend support at 5,600. There is more than likely going to be some follow on selling on Monday morning as margin calls are satisfied. There could be an attempt by the bears to force the markets lower but they have been very ineffectual in those attempts in 2017.

If this is a repeat of the March/May declines, we should have a minimal dip on Monday morning followed by a decent rebound that could take days. We cannot heal the pain of a flash crash in a couple hours of buying. If you look at the prior declines, it took a week or more before they recovered their losses. Traders lose capital in major declines and more importantly, they lose confidence. They will start out buying smaller positions and be more cautious on their entry points. They want to be sure there is a rebound in progress before putting money at risk again.

The ideal situation would be a drop back to that 5,600 level on Monday but I seriously doubt it will happen. That would be another 141-point decline intraday. If this was a garden-variety drop, we would be lucky to get a 30 point dip on Monday. If there is more to this decline than just a one-day dip, then the 5,600 level would be decent support.

The indicators were bullish on Thursday. The MACD was at a cycle high but the RSI was flattening because of the lack of forward motion on the index for the prior four days. Both indicators turned negative but that is a false negative until the index confirms with more losses. The indicators could spring back into positive territory almost immediately if we were to see a snap back rally. These momentum indicators are good for looking at a trending market but they are terrible at deciphering a flash crash event.

With the S&P neutral and the Dow at new highs, we only need to concentrate on a single level on the $NDX to determine market direction. The rebound from the 2:50 low hit 5,752 on three consecutive bars before sellers reappeared in enough quantity to push the index lower again. If the NDX can move over that 5,752 level on decent volume, the buying will accelerate. That is the go, no-go signal for the market on Monday.

Conversely, a drop back below 5,715 and the late afternoon support would be at least a temporary sell signal. We could see that happen on the morning margin call selling. I would not recommend trying to trade that level because the drop could be sharp. I would only recommend buying over 5,750. If the market moved lower or stays lower for a couple days, we could develop a new signal from a lower level but you might not go wrong watching the 5,750 buy point for the rest of the week.

We also need to remember the VIX is at a 24 year low. It cannot go much lower but it can go a lot higher. Eventually we are going to have a selling event that last longer than one day and involves more than a couple dozen big cap tech stocks. There is no way we can tell in advance if Friday was a one-day wonder or the start of something bigger. We just have to wait it out and see what the market gives us.

Our insurance policy for market direction is the lack of material movement on the Russell 3000. That is the broadest tradable index and it only closed fractionally lower. The stocks in the broader market are still positive despite the beating the big cap techs took on Friday. The R3K is telling us the market is still healthy and there is no reason to panic.

The cumulative advance/decline on the S&P is also telling us there are no problems in the broader market. The line is almost at a new high despite the tech weakness on Friday.

The percentage of S&P stocks over their 50-day average rose to 69.8% and a three-month high. This is another indicator telling us the market is not sick.

I cannot guarantee you the market is going to rebound next week but every indicator/chart I looked at with the exception of the Nasdaq indexes, suggests the rally is still in progress and the dip will be bought.

Normally, if we follow what the charts are telling us rather than our own emotions we will be on the right side of the market.

Enter passively and exit aggressively!

Jim Brown

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