Opening Thoughts

With all the heavy selling occurring on the Nasdaq this week, the market status changed from “under pressure” to “market in correction”.  What does that mean for us?  How severe is this correction, how much technical damage has occurred, over what time frames have they occured, and what should we be ready for?  We’re going to discuss all of this in the analysis below.  Let’s start with the Nasdaq…

Nasdaq

Daily

To start the week, the Nasdaq ran down to the 50dma and initially found support.  On Tuesday and Wednesday it attempted to rally but found resistance both days along it’s 10 and 21dma (clearly viewable via the chart below).  On Wednesday the Nasdaq proceeded to break and close below it’s 50dma.  Additionally, it also closed both at it’s low of the day and undercutting Monday’s low (when it initially tried to rally off the 50dma).  All of this selling has occurred on heavy volume and rally attempts have come on lighter volume.  Wednesday’s action officially put the Nasdaq’s status into “correction”.

On Thursday the Nasdaq found support at the intermediate term support level of 4135 highlighted here the past several weeks.  Friday’s action showed life at the onset but was faded throughout the day and ended closing near the lows of the day.  

For now, the immediate term support level to watch is 4135.  Given Friday’s weak action, I wouldn’t be surprised if the next major levels of support are tested.  I see them as 4070 and 4000.  In about 3 weeks time, the 200dma should catch up to the 4000 level.  Presently, if the 200dma were to be tested, it would be roughly a 13.5% drop from peak.  The index hasn’t experienced a drop of greater than 10% in nearly 2 years so one can argue that we’re overdue.  However, my experience in the market thus far has been that when enough sentiment says we’re “due” and especially “overdue” for anything, the opposite tends to happen.  It’s for that reason that I’m a strong advocate of reading the signs, thinking about the “what ifs” but always ALWAYS trading the market in front of us.  Check out the chart below and then let’s talk about how things look on the weekly chart…

Nasdaq Daily 03-29-14

Weekly

Without any annotations, the weekly chart of the Nasdaq would appear to be in greater trouble than it’s in.  Over the past couple of weeks a slight character change has occurred.  Note how for over a year volume on up weeks has outpaced volume on down weeks.  Not the case over the past month.  In fact, it has reversed with selling weeks coming on heavier volume AND closing at the lows of their ranges.  Additionally, this week the Nasdaq closed at the bottom of it’s range, breaking/closing below it’s 10wk line and doing so on the heaviest volume in about 2 1/2 years!  Without any other annotations, it’s pretty easy to come to the conclusion that the market hit it’s top for now and is rolling over.  Adios!  However, once we add in our trend lines, we see that despite this action, the Nasdaq is still trading within it’s up trending channel.  

In June of last year, the Nasdaq made a similar move to what we’re seeing now, selling off in very heavy volume and running down to this lower trend line.  The following week started miserably, correcting further.  However, by the end of the week the Nasdaq rallied, closed at the top of it’s range and continued chugging it’s way higher!  

Obviously the past is the past and does not indicate what will happen in the future.  However, the past does provide us with a roadmap of what CAN happen which is why we study it.  If you’ve been reading these “State of the Market” posts for any length of time, you know that my thesis has been that until this up trending channel is broken in a meaningful (% decline) and sustainable (weeks) way, I consider the broader uptrend to remain in tact.  Check out the chart below and then let’s discuss how things look on a monthly chart.

Nasdaq Weekly 03-29-14

Monthly

Last month, the Nasdaq poked it’s nose about the 4289.06 highs set back in 2000.  Often when a market hits multi-year highs, it will hang out around that level for what could be a couple of months before heading higher.  If that were to happen, it would actually give the lower trend line on the monthly chart time to catch up with current prices.  In the chart below we see that in November the Nasdaq started to lift off this line and get away from it.  Regression back to the line is healthy and should be expected.  Now the lower trend line is sitting at around 4000.  That should provide an additional level of support should that area get tested.  If it fails, it will be all the more significant.

Nasdaq Monthly 03-29-14

S&P 500

Daily

Subtract the Nasdaq from the equation for a moment and we have a very different picture occurring on the S&P 500.  In fact, if it weren’t for the Nasdaq clearly being “in correction” the overall shorter term picture likely wouldn’t be “in correction”.  Last week the S&P 500 traded sideways, finding support at and around 1850.  In fact, it’s just below it’s 10dma and still above it’s 21 and 50dma.  Quite the different picture from the Nasdaq!

If we’re looking strictly at the action on the S&P 500 and are saying that the market fell into correction on Wednesday, Thursday’s action actually counts as a “pink rally day” where the index closes down on the day but in the upper half of it’s range.  If that’s the case, the earliest potential follow through day becomes Tuesday, ironically April fools day.  We’ll see what happens there…  In any case the S&P 500 is clearly holding it’s ground for now.

Should the S&P 500 begin to falter, levels to watch include 1850, the 50dma, 1813, 1800 (large round numbers tend to act as support), and 1775 which also sees the 200dma rapidly approaching.

S&P 500 Daily 03-29-14

Weekly

On the S&P 500’s weekly chart, it seems as though it’s business as usual.  This week’s sell off (if it can even be called that) occurred on lighter volume.  Rebounds and up weeks have continued to occur on heavier volume and the overall character of the S&P 500’s weekly chart appears to be the same so far.  We are still above the up trending lower trend line which has been an area of support for over 5 years.  This trend line now closely coincides with the 10wk line and should provide that area with an extra level of support.

S&P 500 Weekly 03-29-14

 Monthly

 On a monthly chart the S&P 500 appears to be taking a brief pause.  Look how tight the trading range was for the month.  Volume increased slightly from last month and the index closed in about the middle of it’s trading range.  The lower trend line on the S&P 500’s monthly chart looks to roughly coincide with 1800.  Should support at 1850 and the 50dma break, 1800 may serve as a strong area of support.S&P 500 Monthly 03-29-14

NYSE

Daily

It’s important to look at data points as a whole as it helps prevent us from weighing one data point significantly over another.  Despite the poor action on the Nasdaq, sending the state of the market into “correction”, the NYSE actually had a pretty decent week!  For the most part, it traded sideways and found support along it’s 50dma.  The NYSE then closed the week rallying back above both it’s 10 and 21dmas.  The index has been receiving support around it’s prior chart highs of 10400 and has encountered resistance around 10500.   

Should the NYSE encounter weakness, aside from it’s moving averages, it may also find levels of support around 10230, 10150, and 10100 all noted by the dotted lines on the chart below.

 

NYSE Daily 03-29-14

Weekly

Amazingly, despite the weakness on the Nasdaq, falling hard into correction, the NYSE actually closed up for the week near the top of it’s range!!  It appears to be receiving some support around it’s 10wk line.  Volume is still heavier on up weeks than down weeks.  Just like the other indexes, the NYSE is trading within a well defined channel and in order for this broader uptrend to be broken, I’d look for a significant and sustained move breaking these channel lines.

NYSE Weekly 03-29-14

 

Monthly

Last month the NYSE made new all time highs as it broke above 10387 for the first time since 2007.  This month it tested that prior high and held above it.  No signs of weakness yet when looking through the lens of a monthly chart.

NYSE Monthly 03-29-14

New Highs vs. New Lows, Leading Stocks, and the Growth 250

New Highs vs New Lows

This week saw the new highs vs new lows teeter and dip in the middle of the week where new lows briefly began outpacing new highs.  Given the action on the Nasdaq, this isn’t too surprising.  On Friday, the NYSE recovered posting 67 new highs vs 8 new lows.  Contrast this with the Nasdaq putting up 32 new highs vs 29 new lows.  To me, this divergence isn’t very dramatic and shows a level of neutrality (i.e. weakness on the Nasdaq but stability (for now) elsewhere). 

Leading Stocks

Many leading stocks fell and fell hard last week.  The 3 biggest decliners from the current Universe Watch List include UBNT, MDSO, and LCI.  They fell 18.8% 15.6% and 13.5% respectively.  In fact, most stocks leading the way in recent weeks fell hard including FB, NFLX, PCLN, VRX, and JAZZ to name a few.  There were no breakouts in last week’s “Top 10 in/near bases“.  The action of leading stocks contributes heavily to the “state of the market” now being in “correction”.  We’ll continue to look for sector rotation and fresh emerging leaders in this week’s watch lists.

Growth 250

MarketSmith’s Growth 250 list appears to be good at providing an early warning for short term weakness.  2 weeks ago the Growth 250 hit 299.  We’ve only been tracking this list for about 3 months but so far it’s 3 for 3 in predicting short term tops as it’s approached it’s upper limit.  For those of you who are new to ChartYourTrade, the upper limit of Growth 250 is roughly 300 and each time it’s approached this upper limit, it has corresponded with a short term pull back.  

Currently, the Growth 250 has 243 names on it which is still back to what I’d consider a healthy level.

As a reminder, the Growth 250 is a list of stocks compiled from 30 separate proprietary screens from MarketSmith.  The number of stocks in it fluctuates from roughly 150-300 and the greater the number of stocks, the greater the implied strength of the market.   225 names is roughly the midpoint so seeing 243 names on the list is still positive even though the total number of stocks on the list has pulled in.

Closing Remarks

Earlier in the week I saw the movie “Divergent” (great movie, if you liked the Hunger Games, you’ll probably like this).  The basic premise shows a dystopian society broken up into factions based on the individuals innate skill set.  Those who fit into multiple factions are “Divergent”.  Anyhow, the current “State of the Market” can be considered “Divergent” as it doesn’t quite fit into any one particular “state”.  By itself, the Nasdaq is clearly experiencing a short term correction.  Leading stocks confirm that.  The other indexes for now are trading sideways and the NYSE actually finished the week up!  DIVERGENT!

So how does one handle such a market?   I’m more cautious than aggressive at this point but for the most part, I’ve sat on my hands, letting the market force me into or out of positions.  I tweeted earlier in the week that I was forced out of a couple of positions locking in gains or coming out flat.  Other protective stops have not been touched and the stocks themselves look fine.  I’ll continue to sit with those and either lock in gains if the market forces my hand, or let them continue to go on for greater gains.  I’m continuing to roll my stops up to various support levels and am letting the market decide if the stock is held or not based on support holding or not.

Thank you for reading and I wish you all the best in Charting Your Trades! 

Mike

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Chart Legend

MIC = Market in Correction;  FTD = Follow Through Day;  IBD = Investor’s Business Daily;  ”red flags” = distribution days;  ”pink flags” =  stalling days; “gray flags” = distribution days removed from count due to age and/or price;  U.P. = Uptrend Under Pressure

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