Stock Market Weekend Update: Weaving the Warp and the Weft

Stocks traded lower Friday, with all four major stock market indices declining. For the week, the major indices were basically flat.

Let’s review current price levels, insights, and themes for the week and week ahead:

S&P 500 (NYSEARCA: SPY):  Still far from the January highs at 286.63. Now, must hold 277.00

Russell 2000 (NYSEARCA: IWM):  Let’s put it this way. If this does not move up over 170 and into new highs, then this was the rally to sell as it has made 3 lower highs and could not clear the reversal topping pattern from June 20th. 166 support.

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Dow (NYSEARCA: DIA):  250 pivotal.

Nasdaq (NASDAQ: QQQ):  Broke 180 pivotal area. But unless it breaks 177.28 may not mean much.

Weaving interlaces 2 distinct sets of yarn.

The longitudal threads are called the warp and the lateral ones are called the weft (which means that which is woven.)

The way the warp and the weft interlace is called the weave.

Comparing this to the weave of the market, NASDAQ is the warp and the Russell 2000 is the weft.

How the two move from here (or interlace) will determine what the weave of the market looks like going forward.

Last week, the NASDAQ made new all-time highs.

On Friday, QQQs held support or at least traded within the range from the July 17th, the day it made new highs. Range was 177.28-180.65.

The Russell 2000 traded in a narrow range and closed red.

My comments coming into Friday were, “Let’s put it this way. If this (IWM) does not move up over 170 and into new highs, then this was the rally to sell as it has made 3 lower highs and could not clear the reversal topping pattern from June 20th.”

Hence, IWM is the weft or the filling.

With comments from Trump sending the dollar lower and allowing his angst about higher rates fly, will IWM and QQQs action resemble a shedding, picking or beating motion of the market loom?

Interestingly, while the dollar fell, so did the 20+ Year Treasury Bonds (TLT).

This could have more to with the story that Russia’s plans to cut its reserves of U.S. Treasury securities and invest in International Monetary Fund bonds.

Currently, about 30% of Russia’s $400 billion worth of hard currency reserves are held in U.S. Treasuries.

As we examined supply and demand related to IWM and Transportation IYT, IWM is the stronger bull phase (supply).

IYT (demand) struggled to stay in its bullish phase (the 50 DMA is at 193.16).

Furthermore IYT could not fill the gap to 194.21.

Therefore, the delicate dance of supply and demand remaining in equilibrium at this point, survives.

A shedding market (I’m making this up), is one where weaker longs are shed from the market.

A picking market is one where certain stocks outperform but the overall breadth through IWM and IYT weakens.

A beating motion of the market is when the market declines more generally, leaving a sea of red.

Whether the market is shedding, picking or beating, will have a lot to do with how nervous Wall Street becomes, given they have previously shrugged off everything negative so far.

Moreover, we must continue to watch the dollar, rates, commodities (ready to turn up?) and of course, the Russell/Transportation dance.

Finally, watch NASDAQ, our market warp.

In weaving, the warp holds the tension while one weaves the weft.

In the market, the QQQs must hold the tension while the news weaves the IWM (weft.)

On Tuesday, I will give a free webinar on How to Profit From the Hottest Areas of the Market In the Second Half of 2018. To register please click here.


Twitter:  @marketminute

The authors may have a position in the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.