Increased volatility and wider ranges can be a symptom of a topping or bottoming process.
The increased volatility over the last three weeks could be a sign the market is topping out. The Dow has traded between 21,200 and 21,560 with alternating gains and losses for most of the last three weeks. The swings have expanded their daily range to triple digits on the Dow.
The index has been troubled by a pause in several previous high flyers. McDonalds helped lift the Dow on Friday with a $3.18 gain that added roughly 24 Dow points. When the ranges broaden at market tops, it represents indecision by market participants. Shorts increase but they get squeezed easily and the index vacillates in both directions.
In the Dow chart below there is no direction other than sideways. The index has only gained 30 points over the last three weeks after the 21,384 close on Friday June 16th. This is not a bullish chart. Consolidation normally does not produce wide ranges over a prolonged period. Consolidation is marked by higher lows or at least tighter ranges as buyers and sellers move towards each other rather than a broader range.
I pointed out last week that the MACD was already negative on the Dow and it has not improved. The indicators have worsened over the last week despite the index trading roughly at the same level. The lack of direction has not turned the chart bearish but that danger is increasing.
The S&P indicators have accelerated to the downside with the MACD expanding its bearish signal. The index closed under 2,420 on Thursday but rebounded back above that level on Friday in the payroll short squeeze. This chart is bearish. That does not mean it cannot reverse to the upside but if we trade what we see rather than what we would like to see then the trade for this week would be bearish.
The Nasdaq Composite closed below support at 6,100 on Thursday but rebounded above that level on Friday's short squeeze. However, the rebound failed to retest the resistance at 6,175. This chart is also bearish and the MACD is in full retreat. The potential is strong for a break below the 6,100 level again and 6,000 would be the next target.
The FAANG stocks have weakened and although they are volatile, the prior momentum gains have disappeared.
Another challenge for the S&P/Nasdaq indexes is the impending average cross. For longer-term signals I like to use the 19 and 39 exponential moving averages. That is roughly 4/8 weeks of trading and once the averages cross it can be several weeks before they can cross again. The cross should occur this week. When the 19 (blue) crosses below the 39 (red) it is a bearish signal.
The Russell has been trading sideways for seven months but it is only 12 points from a new high. The gains in the financial sector are providing support. The indicators are almost useless on the Russell.
The percentage of Nasdaq stocks trading over their 50-day average has fallen to 47% and the lowest level since November. This is a good illustration of how weak the Nasdaq has become even though the top 20 stocks are still relatively close to their highs.
The same chart for the S&P shows an almost identical picture even though the percentage has only declined to 60.4%. The top 20 S&P stocks are holding the S&P near the highs while the troops are falling back.
The semiconductor sector improved slightly and that helped to blunt the decline on the Nasdaq.
I would continue to be cautious next week. In theory, the holiday volatility should be over BUT there are an increasing number of warnings from high profile analysts that suggest a summer correction could be just around the corner. However, the more warnings we get the less likely we are to actually see that correction. August and September are the worst two months of the year for the market and once the first couple weeks of earnings are over, we need to be ready for a potential decline.
Enter passively and exit aggressively!
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