Stock Market Trading Update: Prepare For Volatility

Mark Newton
nasdaq 100 qqq etf trading analysis demark exhaustion bearish sell_6 october

S&P 500 Trading Outlook (2-3 Days):  BEARISH

Short-term market top looks near. And an uptick in volatility (INDEXCBOE:VIX) could be on the way next week.

There’s no real change in near-term outlook despite the push back to new highs for Nasdaq 100 ETF (NASDAQ:QQQ) and above-average strength for S&P 500 ETF (NYSEARCA:SPY).

While a move to 2555-2560 on the index could certainly happen, the risk/reward here is poor. Upside should prove limited between now and early next week with a reversal of trend lower into 10/26 expected.

A close under 2525 on the December S&P 500 futures contract would be the first warning, then comes 2510 which adjoins the trend from August lows.

 

TECHNICAL THOUGHTS

Key developments include QQQ moving back to new highs for Thursday, while Transports lagged badly on FDX, UPS weakness and closed the day at a loss as increasing signs of peaking in this sector are ongoing.  Additionally, US Treasuries still look a great deal weaker than German Bunds, largely on weakness in Spain, Italy which is weighing on Bund yields. While TD Sell signals are now present in Bloomberg World index along with buy signals in the VIX from an exhaustion standpoint, these have not yet been confirmed, but are likely within the next few days. Furthermore, while Demark signals were largely ineffective in late September for SPX, they will reappear along with ones for the CCMP, NDX, DJIA and SPX all by next Monday, along with additional counter-trend buys for VIX (TD Combo) and VXX. Taken together, it continues to look tough to buy into the rally at current levels, thinking any sort of meaningful advance still lie ahead.

Cycle-wise, we’re at a juncture based on Gann’s Square of Nine chart given the 86 week spread between February 2016 lows and current prices, along with the well-known 3141 PI-Cycle which hits next week. Looking back, key anniversaries to current time zones align with 10, 20, 30, 60, 90, and 180 year prior peaks from October, which all seem to be coming together in the next week.

Bottom line, while this potentially might just unfold as a temporary period of sector rotation and not much weakness, it’s very difficult to see equities press higher given the combination of excessive sentiment, counter-trend sells arriving along with these key cycles which have been deadly accurate over the years in suggesting prices should reverse course.  The trend is naturally still quite bullish and overbought, but with all the attention on Tax reform which has ignored the recent selloff in Technology and/or waning in Transports, markets don’t look to be out of the woods quite yet.

Bears can give the trend until 10/12 to reverse course.  If no meaningful trend reversal has occurred in the next week, much of the current thoughts of serious reversals will be postponed until year-end, while just minor pullbacks can occur.

The current landscape can allow for further erosion in Spanish and Italian equity and bond markets, which might help German bunds rally, and in turn, help to aid US bond markets.  This in turn would likely spook the Financials from a very extended state at a key time for trend change.  Stay tuned.

Chart Spotlight:  Nasdaq 100 Powershares QQQ Trust (QQQ)

nasdaq 100 qqq etf trading analysis demark exhaustion bearish sell_6 october

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