Cast, In Order Of Disappearance

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Simon Brett

In the ongoing miniseries, The US Stock Market and He’s Not Heavy, He’s My Brethren Market, after wild swings, huge volume patterns, reversal candles on top of reversal candles, the week ended promising for the bulls in the Dow, QQQs, marginal in SPY and not nearly as promising as one would hope in the small caps.

As we headed into last Friday, we wondered whether or not the protagonist (IWM) would continue to lead the charge for more upside, while the antagonist (QQQs), would roll over and die under the 200 DMA.

But that would be too easy, my devoted readers! Like a, Simon Brett novel, intricate plot twists prevailed! The QQQs cleared the 200 DMA for an unconfirmed improved phase change to warning. The Dow, gapped higher leaving a potential island bottom-needs a second day confirmation. The S&P 500 held its own, but could not get close enough to its 200 DMA. And our hero, the IWM, took a rest or maybe worse, returned as the herald of possibly a much nastier outcome as this week begins.

My eyes will primarily focus on the indices, particularly if the SPY or DIA break Friday’s lows or IWM continues to show weakness. Conversely, we will watch to see if the DIA looks like it will confirm the island bottom or if the QQQs endure.

Some of the sectors and groups also merit close eyes. The Financial sector (XLF) tested but did not close above the 200 DMA, yet Semiconductors and Transportation did. Biotechnology closed just shy of the 50 DMA. Retail remains a weak link. The rest of the sectors are in Distribution or Bearish Phases-certainly have yet to offer reasons to be cheerful.

Basically, we enter the third week of October thinking that this rally will be short-lived and the market will resume a more hearty correction to the downside, eventually cycling through the phases til all indices are bearish (like the IWM already is). However, we are equally open to watching for signs that the ginormous volume indications from last week and the potential island bottom in DIA are yet another extraordinary disregard of bad news with the possibility of a strong quarter ahead. That’s Entertainment!

S&P 500 (SPY) 190.67 is the 200 DMA to clear. Otherwise, a break of 187.50 should prove ominous

Russell 2000 (IWM) Best news is that the red close happened on way less volume than the green days did. 106.90 is support to hold or trouble. And, No it needs to really clear 108.80 for a stab at 110

Dow (DIA) Coming into last Friday, I wrote this had 3 possible scenarios. This was the first one: 1. Gaps up leaving an island bottom. Now, if Friday low holds and we get a second day confirm, I would just follow without thinking too much about it.

Nasdaq (QQQ) This was clean-after the inside day last Thursday under the 200 DMA, it gapped higher over the 200 DMA. Now, 91.95 key support. It still though, must clear 93.89, the August lows as well

XLF (Financials) Doji day right on (slightly under) the 200 DMA. Key to the puzzle after the banks reported well for the most part

KRE (Regional Banks) Marginally held the reversal candle

SMH (Semiconductors) Sitting like Humpty Dumpty on the 200 DMA and has to stay there

IYT (Transportation) Best confirmation I see of the reversal day from last Wednesday

IBB (Biotechnology) 260 pivotal with 269 the 50 DMA and now, Friday’s low closest support

XRT (Retail) Best case for why this market seems to be in trouble-couldn’t close above 83.00

IYR (Real Estate) One more push will get this over the 50 DMA

ITB (US Home Construction) One more push will get this too over the 50 DMA

GLD This looks like its coiling to see a move over the 50 DMA

USO (US Oil Fund) Inside day but no real confirmation that it bottomed more than a weak short-covering rally

XOP (Oil and Gas Exploration) Don’t really like how much this retreated after the 2-day rally last week

TBT (Ultrashort Lehman 20+ Year Treasuries) TLTs 120 pivotal