A monster short squeeze after the Nonfarm Payrolls on Friday propelled the majority of indexes to new highs.

It would be far too early to call it a breakout although most indexes did close at new highs. In some cases, those highs were only by a couple points but technically it was still a breakout. The Dow, NYSE Composite and Russell 2000 did not make new highs.

The Dow gained +191 points to close at 18,543 but that was still under resistance at 18,550 and below the historic high close of 18,595. I know we are only talking a few points but everything matters. A close under the high is still a lower high after the lower low on Tuesday at 18,247.

We cannot gauge market direction by the Dow although most people do. The very narrow 30 stock index is easily knocked around by headline events on just a couple stocks. On Friday, Merck gained +6 points after competitor Bristol-Myers (BMY) got some bad news on a drug trial. That spike in MRK added about 48 points to the Dow.

The Nasdaq Composite closed at 5,221 and 3 points over the prior high of 5,218 back in July 2015. It would be hard to call that a breakout and it is more likely a resistance test. The Nasdaq could move higher if the biotech sector and chip stocks continue their gains. However, the Nasdaq has rallied about 650 points from the 4,574 low on June 27th. That is roughly 14.1% in only about 28 trading days. That rebound indicated by the vertical pink stripe is extremely overextended and that old high resistance would be the perfect spot for profit taking to occur.

Traders watch new high targets. When they are hit, most do not know what to do. There is no obvious target above 5,218 so they begin to get nervous and tend to close positions on the slightest weakness.

There are very few high profile earnings reports next week that could actually move the market. The only Dow component is Disney on Tuesday. The highest profile tech reporters are Alibaba and Nvidia on Thursday. The rest of the reports are filler. They are important to anyone that owns the stocks but they are not important to the market.

The Q2 earnings cycle is dwindling fast. After this week there are only a few reports left with more than 90% of the S&P already reported. With August and September the two weakest months of the year the lack of any earnings excitement will contribute that potential weakness.

The economic calendar is about as bland as the earnings calendar. The retail sales report on Friday is probably the highlight of the week and analysts are expecting sales to decline so it is not likely to be a market booster.

Despite the high closes on the majority of the indexes we need to respect the potential for seasonal weakness. Volume is going to be extremely low because summer is coming to an end and school will be starting in a couple weeks. Families will be trying to squeeze in a mini vacation over the next couple of weeks and thoughts will not be on the stock market.

August typically is down hard or wildly bullish. There is rarely anything in between. After five days the Dow is up +111 points total, the Nasdaq +58 and the S&P +9. That would hardly qualify as wildly bullish and if you take out the short squeeze gains from Friday all the indexes would have lost ground for the week.

I recommend keeping your stop losses tight and plan to reestablish positions on any September dip. Market lows for the last six months of the year tend to happen in Sept/Oct. Remember the Boy scout motto, "Be Prepared."

Jim Brown

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