Did The Nasdaq Top
The market declined once again yesterday. While
the total damage was miniscule, it was the third straight day of
declines. Volume picked up a little as the SPX consolidated around its 50
day moving average.
Although SPX is now below its 50 day moving average, which is
bearish, it is only “strike 1” against the index. Recall, that
trend can be determined three separate ways from a moving average.
1. If the moving average is rising, the trend is considered up. If the moving average is declining, the trend is considered down.
2. Another trend identifying method is to compare the price to the moving average. If the price is above the moving average, the trend is considered bullish. If the price is below the moving average, the trend is considered bearish.
3. A third way to spot the trend is to compare a short term moving average to a longer term moving average. If the shorter moving average is above the longer moving average, the trend is considered bullish. If the shorter moving average is below the longer moving average, the trend is considered bearish.
Currently, the 50 day moving average is still increasing (at a decreasing
pace). And the 50 day moving average still resides above the 200 day
moving average.
Moving averages cannot predict price movements. They function as a
lagging indicator. At best a moving average can confirm something you
already know to be the case.
For our purpose, the commonly used 50 and 200 day moving averages
indicate the bullish trend (intermediate term) is well in tact. But
shorter moving averages like the 5 or 20 day moving average do confirm
near term weakness in the market.
In addition to the bearish activity that developed in the moving average,
you may have also noticed an island top formation in the Nasdaq.
An island top occurs when a gap up takes a stock or an index to new
highs. The price action stabilizes at the new highs before slowly pushing
down to the gap. Then a big gap down occurs and takes the stock or index
below the prior gap up. The gap down completely erases the prior bullish
move and often results in a prolonged period of selling.
Well, that’s what the text book says about an
island pattern. But in my experience, island tops or island bottoms are
rarely a major swing point. Island patterns will typically function as a
great short term reversal, but rarely will become a major top or
bottom.
And the Nasdaq has too much support above 2500 for me to think that
the pattern will successfully act as a top this time around. In fact, I
think the Nasdaq finds support near 2715 and rallies back above
2800.
The gap down on Monday needs to be respected. Additionally, the gap
down took the Nasdaq index below the 50 day moving average too. Much like
the SPX, that is strike one against the Nasdaq. But the bears have a lot
of work to do before I turn my bias against the bulls.
Yesterday I had advised to watch $100 resistance on oil. A break
past that price should result in a pop to $108. But the bears held steady
once again and crude oil could not take out the $100 mark. I am looking
for a rally in oil and commodities over the next few weeks. And I believe
that if we get that rally it will provide the momentum the indices need
to get back to new highs.
But I still also believe SPX needs to come down to 1301 before it
can make a decent rally higher. A pull back to 1250 is also a risk, but I
plan on buying a few stocks at or around SPX 1301 support - for a list of
those stocks click
here.
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