The last week of the quarter did not follow the historic trend and the outlook is borderline bearish.

Last week I discussed what happens when your outlook does correspond with the charts. The historical trend did not appear and the charts turned out to be right. This week there is a new decision. The historical trend is for new retirement money to hit the market on the first three days of the quarter. While fund managers do not have to put it to work instantly, most of them do. I would not expect it on Monday but Wednesday and Thursday have a chance for a positive bias for that reason.

However, the charts have all turned negative and all the indicators have triggered sell signals. Since August and September are normally the worst two months of the year for the markets, we could be setting up for an early decline.

The legislative agenda in Washington is falling apart and tax reform is not likely to happen until 2018. That means holding gains in a declining market in hopes of a lower tax rate is no longer an option. Investors will see those gains shrinking and they will be heading for the exits if the markets continue to decline.

The S&P broke support at 2,420 by 15 points intraday on Thursday. That is damaging because it clears out many sell stops and makes that support weaker even though there was a rebound to close back above that level. If we move lower next week, the 2,400 level is not likely to hold and we could be looking at a test of 2,350.

The Nasdaq Composite closed at a five-week low and the indicators are dramatically negative. The Nasdaq is in danger of moving below critical support at 6,100 and it could be a long drop. There is round number support at 6,000 and the low from May but sentiment may be too badly damaged to honor that level. There is very strong support at 5,800 and that would be the target on any material decline.

The Dow is the least bearish but the MACD has triggered a sell signal. The Dow remains above decent support around 21,125 and it would take a major change in sentiment for the Dow to retest strong support back in the 20,500 range. The Dow benefits from being only a 30 stock index. The rebound in oil and financial stocks plus a random daily winner can keep the index afloat. That winner on Friday was Nike, which added 40 Dow points. Unfortunately, if the Nasdaq falls into crash mode, the Dow will follow.

I have shown this chart many times with the relationship between the Semiconductor Index and the Nasdaq. The SOX normally leads the Nasdaq when the big moves are made. The semi stocks collapsed last week with Nvidia and Micron falling sharply and leading the sector lower. This is not a good sign for the Nasdaq.

The FANG stocks are in decline and Netflix is leading the charge. The joint movement from late May has fallen apart and investors are bailing. Bank of America said investors have been net sellers of techs for the last three weeks.

The market is not yet in decline mode. The cumulative advance/decline line on the S&P has flattened but it has not rolled over. This suggests there are still buyers in the market but they are not buying the prior winners. They are buying defensive stocks and looking at the broader market rather than the narrow list of 20 stocks that led the market higher. The lack of a decline here is our hope for a bullish rebound next week.

The market surprised everyone last week with very heavy volume and dumping of prior winners. That could be a symptom of sector rotation and that would be positive. Monday is likely to see very light volume as traders take a four day holiday weekend. New retirement funds should hit on Wednesday/Thursday so look for the real market direction to appear by next weekend.

Enter passively and exit aggressively!

Jim Brown

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