What do you do when the charts and indicators do not agree with your outlook?
The answer is to take another look and make sure your time frame and that of your charts is consistent. For instance, I am expecting the markets to rise for the next three days. The normal technical indicators do not function on a day to day basis. Most indicators are oscillators and that means they swing from one side to the other based on a set of averages. Just the term averages should give you a clue where I am going. One day does not make an average. Most indicator averages are in the 9-12 day range. That means it takes 2-3 days for a shift in direction to show a clearly defined change in the indicators.
The Nasdaq pushed through resistance at 6,240 on Friday. There is a clearly defined series of higher lows since the double bottom dip on the 12th and 15th. The bottoms of 6,110 and 6,107 had a difference of only 3 points. In chart terms on a 6,100 index, they were identical and as close to perfect as you can get.
However, it is now six days later and the RSI is just starting to tick higher and the MACD is still about two days away from a bullish cross.
This is when we need to go with the signal flow on the indicators rather than the hard crosses. Both indicators are clearly improving.
Personally, I think the chart is all the indication you need to see the potential for a continued move higher. I like this chart. We had a decent pullback, decent consolidation and now a decent move higher. Other than the mini flash crash on the first day, all the moves have been moderate. Those moderate moves allowed investors to exit calmly and reenter new positions. Now we have a nice trend in progress that should retest the highs. Once we get there, all bets are off because the timing could coincide with a good opportunity for a double top.
After July 4th, there could be some levitation on earnings expectations but the summer curse will appear along with earnings as we head into the two worst month of the year with August and September. That means traders are going to start looking for a top right after the holiday week.
The S&P chart is far less bullish and even slightly bearish. The 2,450 level is a year-end target for many analysts and that means any move over current resistance at 2,440 is likely to be met with selling. The one fact that could help the S&P next week is the end of quarter window dressing. All the winners over the last month will be bought by fund managers and that could lift the S&P back to the 2,450 mark. Getting over that level could require a major catalyst and I do not see one on the calendar. The volume is going to fall off a cliff after Wednesday and not return until the following Thursday. Since volume is a weapon of the bulls that means upward momentum after Wednesday could be tough to maintain.
Note that the indicators are in decline on the S&P compared to the Nasdaq.
The Dow has the same negative indicators despite the new high on Monday. The index declined to fill its Monday gap at 21,384 but then failed to rebound from that level the rest of the week. While the Nasdaq is being lifted by the big cap techs and the biotech sector, the Dow has to depend on only a couple different leaders every day. There is no broad sector representation that can continue to exert upward pressure. You would think the three tech stocks including Microsoft, Intel and Apple could impart some Nasdaq momentum but it is not happening when other stocks with a larger price are tanking on alternating days. The Dow is in trouble relatively speaking. The narrow compensation can be a blessing or a curse depending on the day.
There was an interesting divergence over the last two weeks. The semiconductors almost always lead the Nasdaq. However, there was a break in that relationship and the Nasdaq is leading the semis today. This is due to the rebound in the FAANG stocks. The semis are trading flat but the big caps stocks are leading. This will not last long. Once the end of quarter window dressing is over, the semis will establish control again.
Netflix broke out of the crowd over the last two weeks. Shares really collapsed in the mini flash crash but they are now rebounding equally as strong. Facebook closed at a new high on Friday. Fund managers will be buying these stocks early next week and of the four, Netflix should post the most gains as it moves back into parity with the others.
Remember this chart. I have not changed a thing on it in over a year and we have reached the point where the market has a decision to make. The technical high as represented by the breakout should be around 2,458 and the S&P hit 2,453.80 last Monday. While I am not expecting a perfect resistance top, if we did not go higher from here that would be close enough for me, considering it was projected over a year ago. As George Peppard as Hannibal used to say on the A Team, "I love it when a plan comes together!"
I expect the markets to be positive the first three days of the week but falling volume and long holiday weekend event risk could weigh on them starting on Thursday. If you can avoid trading after Wednesday, you will probably enjoy the holiday weekend a lot better.
Enter passively and exit aggressively!
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