The normal Q3 market decline begins in the second week of August.
So far only the Nasdaq and the Russell 2000 have shown any indications of weakness and the potential for an August drop. The Nasdaq is right on the edge of a 250 point cliff and a break of support at 6,335 could trigger a move to 6,100 over the coming weeks.
Meanwhile the S&P is only 1 point away from a new high and the Dow has made 8 consecutive record high closes. It is decision time for investors. Are they going to hang on to existing positions in hopes of higher highs over a normally weak period or will they decide to avoid the risk and move to the sidelines?
Until we see the S&P move below support at 2,465 nothing has changed in the market. The S&P is the broader big cap index and the true market indicator, behind the Russell 3000. The various stock TV channels and the online news sites do not report on the broader R3K so normal retail investors going about their day need to focus on the S&P.
Despite the close near the high the MACD has turned negative and suggests the conviction is fading. The MACD is not yet in full retreat and the CCI is still bullish. That means there is still a decent chance, we could see a new high but resistance is strong. The key is whether or not the normal August weakness appears on schedule. The S&P has been down 5 of the last 7 years and it has only been up 5 of the last 20 years in August.
The market breadth on the S&P actually held last week. The A/D line did not move higher but it also did not roll over. This is positive for sentiment and could suggest more bullish conviction on the part of investors. There is no conviction from the sellers as evidenced by the lack of a decline.
The Dow chart is exactly the opposite. The MACD on the Dow is strongly positive and the index has closed at a new high for 8 consecutive days. Streaks always break and the key thing to watch on the Dow is the severity of the break. If we only decline 30-50 points and then rebound then investors have prevailed and the shorts will have to cover. There is no material support above 21,500 and that is a long drop from here. The Dow is living on borrowed time before we have a decent bout of profit taking.
The Nasdaq is the weakest big cap index. The support at 6335-6350 has held but there is a pattern of lower highs that appears to be headed for a new leg lower. If we get a significant close below support, we could be looking at 6,100 as the new target. The MACD is bearish and worsening and the big cap tech stocks, with the exception of Apple, all traded down for the week.
The semiconductor sector was another big factor in the Nasdaq weakness. The $SOX closed at a three week low and investors are looking at the Nvidia earnings on Thursday as a possible life preserver that keeps the SOX from sinking further.
The small cap Russell 2000 lost -3.3% over the prior 7 days and rebounded only 0.5% on Friday. That was a lackluster rebound. Support is 1,400 and the intraday dip on Thursday was to 1,402. This is a critical support level with a potential drop to 1,355 if it fails. That would be damaging to market sentiment if it occurs. The MACD and CCI are both bearish.
The Russell 3000 is an identical chart to the S&P. This IS the market. The record high close on the 25th was 1,469.20 and the close on Friday was 1,464.70, less than 5 points away from a record high. The market is not showing any signs of an impending collapse. Support is roughly 1,460.
Another factor impacting the market is the price of oil. When oil prices were rising the market was positive. However, with only four weeks left in the driving season, oil prices are poised to retreat in September. You can tell how weak oil is because the oil/dollar relationship has completely broken. Up until Q4 of last year, oil and the dollar always moved in opposite directions. Cheaper dollars means it takes more dollars to buy the same barrel of oil. The supply glut today is not allowing the price of oil to rise against the falling dollar and that will be a cloud over the market in September.
The market has ignored every seasonal trend so far this year. Time will tell us if it is going to ignore the normal Aug-Sep weakness this year. The more analysts calling for a correction, the less likely we are to see one.
If you have money you are planning on putting to work in the market, it would be worthwhile to wait a week until we see if the market is going to change directions.
There is always another day to trade if you have money in your account.
Enter passively and exit aggressively!
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