Every correction starts with a down day, but of course, not every down day is the beginning of a correction. So just how important was today’s market retreat?
On the surface the today’s action seems rather benign, but there are a few caution flags that the bulls should consider:
1. New Lows out-numbered new highs today on NYSE!
2. SPY and DIA had and inside day on Monday that resolved itself to the downside today.
3. All 4 major stock indexes closed lower than the prior day’s low.
4. Complacency as measured by the VIX hit as significant “overbought” level on Monday.
In other words, the market has gotten complacent, it consolidated, its breadth has eroded over the last several weeks, and today all four indexes slid lower because there was a lack of buying. The light volume suggests that the selling was not strong, but what remains to be seen is whether “big volume” will be buyers or sellers.
The result is that today was not just any old “down day”. Today’s lows are likely to be a significant inflection point if they are tested. There are significant risks for the bulls building, but the price and volume action is not decisive.
My plan is simple. If the DIA, SPY, QQQ, and IWM trade below today’s lows in the near term, I will take a very defensive posture. Until then the market’s momentum is still up.
S&P 500 (SPY) Inside day resolved itself to the down side. The close lower than the inside (and outside) day low is bearish, but it still sits on support. Avoid long below today’s low, watch out for resistance at 170.35.Subs: Key level for move to upside is 170.40
Russell 2000 (IWM) Sling shot pattern means it has the same analysis as SPY. Until its clears 105.15 decisively, the bulls should wait.
Dow (DIA) Thekey level to break on the upside is 105.60-.70.
Nasdaq (QQQ) Thishas been the leader and still looks the best if you are looking for a long, but same thought applies with regard to its Tuesday low – beware. Aggressive longs over 76.70.
ETFs:
XLF (Financials) Broke key support at 20.65. Needs to clear the 10 DMA before making an attempt on the high from 7/23. Moderate support around 20.50.
SMH (Semiconductors) We have a gap overhead and some solid resistance to clear with 38.20 level support to hold
XRT (Retail) Gapped lower and tested the channel previously mentioned. Closed above the 10 DMA.
IYT (Transportation) Correcting and trading inside the big green bar from August 1st.
IBB (Biotechnology) Well, this is no longer resting. This dropped a little over 2% today and broke the 10 DMA. Moderate support around 195.00.
IYR (Real Estate) Bear phase now after last week’s death cross. Continuing its downward slide.
XHB (Homebuilders) Broke down from its inside day. Also broke the 50 DMA, bringing this into an unconfirmed warning phase.
GLD Gapped lower and continued the direction of the phase.
USO (US Oil Fund) The topping candle from 7/19 remains intact. Broke the 10 DMA and filled the gap from 7/31.
OIH (Oil Services) Filled the gap from 7/31 and closed under the 10 DMA.
XLE (Energy) 84.00 is key. But first, needs to clear the 10 DMA.
XOP (Oil and Gas Exploration) New highs today, but closed lower. 63.10 is support.
TBT (Ultrashort Lehman 20+ Year Treasuries) As this came in higher, it keeps the notion that higher rates are the sentiment of the market.
FXI (China) Subscribers: Needs to hold 34.08.
SGG (Sugar) Subscribers: Inside day
Longs: On categories: Gap higher days we go to all categories and choose ones with lowest risk that break the opening range. On weaker days, we look at Category 3, especially if the picks hold S1, previous day lows or a major moving average and have a good risk on the reversal. The difference between Category 1 and 2 is the stock condition-a Condition 1 is strongest stock and more likely to make a parabolic move.
Note: Anything that is on this list is a candidate for a swing trade-(of course market condition is a factor) -use the max risk mentioned along with an opening range stop using fudge factor and time confirms. I suggest you decide on 1 or 2 that have a risk you like and then position size accordingly
Category 1: (Aloha) Positive Phase, Condition 1, 2 days under the FTPs, Risk to Previous Day low, Can buy ½ over FTP and ½ over R1, Target- Day to at least 3 ATRs from entry:
COF Compressing with good support. Needs to clear R1, which lines up with today’s high.
AFL Needs to hold the 10 DMA and clear today’s high which lines up with R1.
INVN Correction down to the 10 DMA. R1 needs to clear.
QCOM Two inside days. Watch for today's high to clear and the low to hold.
Category 2: (Pipeline) N/A
Category 3: (Double Up) Positive Phase, Condition 1 through 4, Positive Pivots which means can eitherbuy a opening range breakout or candidate for Opening Range Reversal, with Risk S1 or previous day low, whichever is lower unless noted differently, Target- Day to at least 3 ATRs from entry: (Opening range reversals are good on anything above S1)
NFLX Cleared a lot of recent resistance over 252.25, which is now a good support area. Has a slingshot high to contend with, but like the risk. This is a good candidate for an opening range reversal.
CL R1 and today’s high line up. A defensive name that could be good for an OR reversal. 60.70 max risk.
PEP Improved in condition. 85.30-.50 is resistance 84.30 max risk.
MCK Inside day. Needs to clear 123.81 and hold today’s low.
ESRX Improved in condition. Support on the 10 DMA. 65.78 max risk.
K Watching this for an ORR or breakout. Good support on the 50 DMA.
Category 4: (Rip Tide) N/A
Phase Change and/or Slingshot Lows:
TXN I like this over today’s high, which lines up with R1. 39.30 max risk.
SYNA Unconfirmed phase change to bullish. Must hold the 50 DMA. Watch for a breakout or reversal.
Shorts:
Category 5: Titanic-Bear Phase, Negative pivots, not oversold, Risk R1 or previous day high. Target: Day to swing
JOY The 10 DMA is overhead resistance and max risk. Watch for breakdown or reversal against the 10 DMA.
OXY 88.68 level resistance. See this weakening since 2011 and if stays weak, can eventually break the 80 monthly. R1 max risk.
CAT Resistance at the 50 DMA 84.27. Looks heavy.
NFX Three converging moving averages are overhead resistance. Use the 50 DMA as risk.
X 17.45 is max risk. Looks heavy
Category 6: N/A
Best wishes for your trading,
Geoff & Matt
