Market Pulls Back After Strong Run
The market fell last week and paused to consolidate a very strong rally. Remember, it is perfectly normal (and healthy) for a market to periodically pullback, providing the bulls show up and defend support. For now, the next level of important support to watch for the major indices is the 50 day moving average line. I’m often asked, why is that level important? The answer is because big institutions use that level to increase their positions and accumulate (i.e. buy) more stock. In a healthy market, it is perfectly normal to see the market rally, then pullback, find support near the 50 DMA line, then rally again. Conversely, if the 50 DMA line is broken, that is not the end of the world but may open the door for lower prices, if the damage is not quickly repaired. Moreover, if support holds, this will likely turn into another favorable buying opportunity.
Stocks were closed on Monday in observance of the Labor Day Holiday. On Tuesday, stocks opened lower but spent the day rallying back and closed in the upper half of the daily range. Typically, that is a bullish sign because it shows you that there are not a lot of sellers. Separately, Amazon’s stock topped $1 trillion market cap for the first time and is now the second most valuable company in the world behind Apple. On Wednesday, stocks ended mixed after a slew of tech stocks fell on heavy volume. Tech stocks fell after Jeff Sessions said he will meet with State Attorney General’s to tighten the grip.
Thursday & Friday Action:
Stocks ended mixed on Thursday as the Nasdaq fell and the Dow rallied. Once again, tech stocks were under pressure as the Nasdaq composite pulled back from overbought conditions. Before Friday’s open, the Labor Department said U.S. employers added 201,000 jobs in August, beating estimates for 191,000. Meanwhile, the unemployment rate held near a generational low of 3.9% which is near full employment. Stocks ended lower after President Trump said he is ready to announce another $267 billion in tariffs against China.
Market Outlook: Pullback Mode
Once again, the market is pulling back after a big rally. In August, they showed up and defended support (50 DMA line) which was a big sign of strength. After the 50 DMA, the next big level of support is the 200 DMA line, then February’s low. For now, as long as those levels hold, the longer-term uptrend remains intact. Conversely, if those levels break, look out below. As always, keep your losses small and never argue with the tape.