Pleasure or Pain? Index at Key Zone
The NASDAQ index sits exactly at a key price support zone, the break of which will increase the odds for significant downside, but should the index support at this level, can an “all clear” signal be given?
I’m sure you’ve seen prettier charts, but the fact remains that the NASDAQ sits at a key level that bulls have a second chance to defend.
The index is in a confirmed daily downtrend, but this level served as key support in the past in the form of a Key Reversal day on significant volume.
Should the bulls (buyers) fail greatly at this level, it would be difficult to conceive of a scenario where the odds would favor continued price advancements.
Let’s look at the weekly chart to see if we can gain any additional insights:
Actually, the weekly chart looks much more bearish than the daily chart, in terms of the dual trendline break combined with a significant “two close beneath” the 50 period (roughly one year) moving average.
This means that price is beneath the average price gathered over a one-year period, and the 50 period MA has served as key support for any major price corrections.
As you can see from the May/June market correction of 2006, the 50 period average was shattered yet price failed to make significant new lows and then shortly meandered its way back above the 20 and 50 period averages, setting the stage for a new rally.
The same could absolutely happen this time, but as always, we take what signals are given from price, volume, time, and key indicators, and at the moment, it seems the momentum is clearly on the side of the bears (sellers).
In terms of the price/trend structure, weekly price has formed a lower high AND a lower low AND broken support from key moving averages.
I must note that the orientation of the moving averages is still currently “very bullish,” but recall that virtually all indicators lag price and give late signals.
A “Very Bullish” orientation of the moving averages means that the 20 period is above the 50 period, and that both are steadily above the 200 period average.
Gosh, we live in fun times, don’t we?
INDU
INDU found support this week around 12500. The 20 & 40 moving averages are about to cross which is a bearish signal. The MACD is below zero for the first time in two years. When the 20 SMA crosses the 40 SMA, it will confirm the official downtrend of the INDU. In the upcoming week, look for either a break of Support at 12600 or a pullback up to 13000.
SPY
Along with the INDU, the SPY has made a new lower low and is in an official downtrend. The 20 SMA is now under the 40 SMA a very bearish signal. However, there is a semi-big bottoming tail. Look for a slight pullback to 142 – 145 levels. This may lead the market higher in the upcoming week.
Comp
The COMP followed the INDU and SPY in creating an official downtrend. The 20 SMA is flattening to the 40 SMA. Notice the extra large volume with a slight bottoming tail. 2400 was a key level of support between Nov 06′ & Feb 07′. We may see some short cover at this level so look for a pullback to 2500 – 2550.
Short Term = Slightly Bullish (next week)
Long Term = Bearish
Overall: The market, over the past two weeks, have created new lower lows. I’m slightly bullish for the upcoming week, but definately bearish for longer positions.
I try to use a top down strategy when looking at the market. I’ll start with weekly charts to get the overall direction. I trade a universe of stocks that’s made up of the top ten holdings of each sectors’ spdr. If the market is bearish, I look at the most bearish sectors. Then I’ll look at the spdr’s most bearish stocks and look for setups to short.
I really love your blog. I look at it everyday. Tell me what you think about my analysis. Remember, I’m using weekly charts for this. Hope you had a great weekend. Good Luck!
Hey Steve,
Thank you for reading and for you excellent and generous analysis.
I like that you use the top-down approach and then segment the sectors. That’s how I view longer term analysis for longer term portfolios as well. I use Sector Rotation to help determine holdings, but you have a great approach as well.
My flaw is that I spend too much time in the smaller time frames to control risk and apply appropriate leverage for a short time when needed. I bet I would do much better to pull the time frame back and be more relaxed.
Right, we’re likely going to experience a counter-up swing but longer term, the indexes are in a downtrend on the dailies and not looking great at all on the weeklies. As I always say, it’s fun times.
I look forward to hearing from you and appreciate you reading and participating.
Corey