After yesterday’s failure by the Nasdaq to hold the 50-day exponential moving average, it seemed likely some selling would continue on today as the bears had to be feeling good about themselves. The Dow and S&P 500 held that key support level yesterday, but one look at their daily charts also suggested some deeper selling to come. It wasn’t a blood bath, but the selling was there pretty much all day. The bears were, and are, going to use that lost 50-day breakdown to pile in, thus, the bulls weren’t going to get too aggressive on the buy side. The difference now is the market is staying more on the oversold side of the ledger, whereas in the past the market was staying overbought. It’s the bears turn to feel their power.
What was good for one side is now golden for the other. That’s the game. It can turn quickly once the market snaps down. The futures weren’t bad as some buyers were trying to protect a deeper breakdown, but once the market opened, the bears came charging in. The rest is history. Again, there was nothing terrible but a persistent sell-bid all day long. This is healthy. The market has needed this as I have discussed often lately, so don’t feel badly about it. You can’t stay overbought forever. 70 RSI’s once again calling the top. We got to 72 and that started the down trend. The bears did what they needed to do today. In the end, it’s best for the market.
When these trend changes, they can last for a long time. It doesn’t mean it’s going to be straight down. Not at all. It just means the trend is down. That’s it. We had a three-month uptrend, and now it has been almost exactly a month since the market topped out. It retested the top, but in the end, the original high one-month ago was it. Try to keep in mind how long we stayed overbought and how high the bull-bear spread got. Basically 30%, which can often be a top. When you take the 30% spread along with continued 70 RSI readings for nearly a month, you know the top is about here.
Once that snaps, it’s not as if you’re just going to run back up once you’re no longer overbought. That optimism has to be wrung out over time, and it can take more time than folks would like to think possible. That also helps as those who were persistently bullish start to go neutral or turn bearish.
What the market is trying to do here is get rid of optimism. It’s working as we are now only up 20% from that 30% reading just a few weeks ago. By next week, with this week being poor price wise, we should see readings in the mid-teens roughly. Exactly the tonic the market needs. Again, don’t forget that these trend changes take quite a period of time to wind down, so be patient until a new buy signal takes place.
The market is finding itself in defense mode. That’s how you know this move lower has legs to it. Notice today what was up and what sold off. Defensive stocks such as McDonald’s Corp. (MCD), Yum! Brands, Inc. (YUM), Wal-Mart Stores Inc. (WMT) and Cisco Systems, Inc. (CSCO). This is where money runs to when the market is in a down trend that has pretty much been confirmed through loss of support such as we’ve seen in the Nasdaq, with its loss of the 50-day exponential moving average. Money wants to remain in the market, but it wants no part of high risk high beta technology stocks. The Nasdaq has been leading lower, which makes sense.
Stocks such as Amazon.com Inc. (AMZN) and LinkedIn Corporation (LNKD) with their ridiculously high froth P/E readings are no longer attractive to traders. Who would want 300 and 1000 P/E stocks is the thinking. Of course, the answer is everyone when froth and bull runs rule the roost .However, when things are short term more bearish give me lower P/E defense stocks and that’s the case here. Wash, rinse and repeat. Same way all the time through the years except in the very worst of bear markets when nothing and I mean absolutely nothing is safe.
We are oversold on the short-term 60-minute charts, and thus, some type of bounce will have to take place very shortly. It won’t be gangbusters, as they say, but it should have a little power behind it. Once we sell back down, then we start to look for positive divergences on the 60-minute charts. That may or may not occur. We’ll know about that when the oversold rally takes place.
Overall, the down trend probably has some additional legs, but take it one day at a time. We continue to watch and see how the S&P 500 does, or does not, defend its 50-day exponential moving average, and as we know, the Nasdaq already lost that key support level. The level on the S&P 500 being 1425. Keep it light as things will set up better in the days and weeks ahead. Be patient, as it’s a good exercise in learning how to play this game more appropriately.
Peace,
Jack
