It took its sweet time but the selling has finally arrived. We started the day with a small gap down and never really made an effort to shoot higher. Some small attempts but they were quickly knocked down. It took over a month at being overbought but the market finally caved in. It’s important for a market to unwind, of course, and I know it’s no fun being in some plays while the market is selling off, but if we had not ignored overbought over the past many weeks we would have missed out on some wonderful plays. We’ll just deal with what we have until the market finished off its selling. The market didn’t collapse today by any means, but it was consistently red all day with the commodity world taking the brunt of the selling as the PowerShares DB US Dollar Index Bullish (UUP), the proxy for the dollar, was higher throughout the day. Commodity stocks rarely do very well when the dollar is moving higher although the connection hasn’t been as pronounced over the past many weeks. It was as much a move down off of overbought as anything else.
The market closed poorly allowing for a good full day’s worth of selling and this should be just the beginning. We are no longer overbought on the daily charts as all RSI’s are now below 70, but we need deeper selling to set up a better base to move up from again. When you get very overbought on the daily charts for a prolonged period, it usually takes a little longer to finish off the selling once it kicks in. No exception here I would think. Some 60-minute charts are getting close to oversold but not quite there yet. A little bounce can occur but we will need to move a bit lower still.
When selling finally kicks in it feels like the bull move is over. I get that for sure as selling always plays on one’s head because it just feels ugly. Now, is there any chance the bull market ended up here? That we simply put in a tail over S&P 500 1151 to bring in the last bulls? Well, of course, that’s always a possibility.
Anything is possible in the stock market.
However, there are absolutely no signs that this is the truth. No massive moves down today. Nothing close in terms of losing the ultimate support of those 50-day exponential moving averages. You need selling and there’s nothing from today’s action to suggest this is anything more than normal selling within a confirmed up trend. Always watching closely for some signs but let’s be real here, the market had to sell at some point from massively overbought and when you get this overbought it’s actually a sign of health. Now we need to wash some of this overbought away and thus we’ll need time, and every day we don’t blast off will play on the emotions a little more. So goes the game.
The selling was basically across the board today and that too is good to see. Folks, you want it to be everywhere so that everything can cool off some. However, other than commodity stocks, not much was hit all that hard. Just your normal selling from deeply overbought conditions. This is important because you want to see individual sectors hold, on to their recent breakouts and not just give up right away. Slow methodical selling is fine. Today we did see the dollar move up and the commodity stocks fall but if you study the chart, it simply hit the top of the wedge and came flying down at deeply overbought. You’re not breaking out nor do you want to break out this overbought because it’s likely to fail. Best to set a lower base to work off of before trying to move out again.
Great support exists on the Nasdaq at the 2325 number where the 20-day exponential moving average lives. It rises slowly each day. Below that there’s gap support at 2300. I do think the 2325 area will try to hold because there is some decent horizontal support just above at 2330/2335 but 2325 is the real area of strong support. The S&P 500 may have to cough up 1151 for a while although I would expect anything below 1130, however, I doubt we go that low. If we start to lose Nasdaq 2300 and S&P 500 1130 then that will raise a red flag that needs deeper studying but that also has to be on a closing basis. For now this looks to be the tonic necessary to unwind what desperately needed to be so. A good start. One day at a time and if it plays out the way I think it will, there will be good buying opportunities appearing in the not too distant future.
Peace,
Jack
