Category: Morning Reports
Last Friday, the multi-month uptrend of the e-mini S&P 500 (ES_F) finally showed a 'soft spot' for the first time since the end of November (chart 1). However, this came as no great surprise; some of the indices have been flashing subtle warning signs for weeks now. For example, on April 2nd, the SPX managed to set a new high at 1422.38, creating a bearish divergence with its e-mini counterpart which failed to achieve the same feat. Furthermore, the Russell 2000 (RUT) has acted lethargically since April 9th, and its 50-dma has mostly been on a downward slope. When an index of 2,000 stocks has something important to say, we've got to listen.
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The recent weakness should prove to be a buying opportunity in the coming few days. That's what the wave structure seems to suggest. The recent rise from 1358.79 on April 23rd is unquestionably impulsive (i.e., a 5-wave structure). Whenever price traces out a 5-wave structure, a profit-taking pullback then unfolds, followed by yet another 5-wave structure. A pipe dream? We'll find out soon.
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Stating that I'm cautiously optimistic is like answering 'yes and no' to a 'yes or no' question. There's something I'd like to draw your attention to first. Last year, on the heels of the early-August swoon, the indices wasted a couple of months moving sideways before the final descent into the October 4th lows. Interestingly, the only index that didn't make a lower low was the Nasdaq 100. In retrospect, Its bear market phase ended at a higher low.
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Today's price action opened the door to a bearish scenario that began to crystallize late last week. As I mentioned in Monday's report (see
Hanging by a Thread), most of last week's price action consisted of nothing but churning and distribution. Clearly, the Big money is selling to the small guy. This is all reflected in the charts that appeared to be coiled for some serious downside action.
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Early last week, I had reason to believe that the correction might finally be over (see
Correction Likely Over). However, except for Tuesday, every day of the week invariably fell victim to churning and distribution. Simply stated, the Big Money is not in the market.
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And I say 'likely' because there's no such thing as a sure thing in life, especially in financial markets. What's interesting about Monday's action is that the Nasdaq 100 lived up to my expectations, unlike the S&P 500 and the Russell 2000 which managed to stay above their recent lows. (See
Countdown). In retrospect, Monday's sell-off was probably an All-About-Apple affair.
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The stock market is still correcting the excesses of the recent months. As W.D. Gann once noted, corrections are a function of both price and time. In this context, prices have held up relatively well, given the recent lackluster economic data, both domestic and abroad. While there are myriad technical reasons to be concerned here (and believe me, I can see what others are seeing on the charts), my weekend analysis of the S&P 500, Nasdaq 100, and Russell 2000 strongly suggest that a bottom could be just around the corner.
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On Tuesday, the indices bounced back from an 'oversold' condition. Honestly, I always try hard to avoid using the terms 'overbought' and 'oversold' as much as possible (see
The Teflon Market) because either condition can persist indefinitely in a strong trend. However, as you shall see below, all indices, except for the Transports, managed to achieve their downside technical objectives on Tuesday per the chart patterns discussed in Monday's Morning Report,
The Water Was a Mirage.
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The selling was intense this week on the heels of Friday's disappointing NFP report, not to mention that Europe didn't exactly help either. On Tuesday, price easily breached the 50-day moving average that was largely expected to contain the downtrend. Not so! My second line in the sand, 1361, was also breached (see
The Water Was a Mirage), leading me to believe that the ultimate target is somewhere below. This, of course, assumes that the bull market is still in effect. We've got to keep an open mind.
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After initially declining to the 1392 area on Thursday morning (see
Better Days Ahead), the indices staged an impressive recovery ahead of Friday's Non-Farm Payroll (NFP) report. Apple ($AAPL) and Priceline.com ($PCLN) rose to all-time highs, all with a backdrop of a confirmed market correction. Apparently, the fact that the S&P found robust support near 1392 alleviated most concerns about further selling pressures ahead of an anticipated blowout number in what seems to be a well-established uptrend on the employment front. And so they loaded up on their most beloved names. "Watch Apple", someone tweeted, "$640 by end of day!" On CNBC, one of the usual suspects vehemently declared that "the market wants to go higher." But it was all a mirage. The 'Big Money' (aka. the other time frame) either knew what the number is going to be well ahead of time, or they were going to sell the news anyway. Come Monday, those who jumped in with both feet on Thursday will find themselves landing in a heck of a lot of sand.
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