Weekend Stock Market Update: Cautionary Signs

If ripened fruit has not been picked from a tree, it will eventually fall.

For those unwittingly standing beneath that tree, falling fruit can cause a nasty bump on the head.

Considering how overripe the market and economy have been, not surprising many traders got a nasty bump on their heads.

Let’s begin with the 4 potential scenarios in the Russell 2000 IWM, we watched for a setup on Friday:

  1. Some sort of bottoming formation on the daily (the 150 price level)-a classic reversal pattern with confirmation-til then don’t take a risk.
  2. Then, if we get good volume buying, after days of negative floor trader pivots, we need a close above R1.
  3. If no bottoming pattern (no reversal but could still digest with an inside day or some level of consolidation), watch for a move near 150.
  4. If number 3 happens, then watch for a bounce, which could be more of a deadcat bounce. If so, that will be the bounce to sell into.

Number 1 – Nope-IWM made a new low for the week and struggled to stay green.

Number 2 – Nope-IWM never cleared R1 even when it was green.

Number 3 – Nope-not an inside day but did get closer to 150.

Number 4 – Can we still see a deadcat bounce?

falling stocks_fruit signOn Friday morning I did an interview on Benzinga’s morning prep show. The host asked me why I am so focused on the Russell’s versus the S&P 500 or NASDAQ?

Great question.

The S&P 500 has a huge impact on the market as well. After all, it represents the Fortune 500 companies and is the most used benchmark. For instance:

SPY versus Commodities ratio, which I wrote about last week.

How one’s portfolio performs versus the SPY. A traders’ success or lack thereof is measured by his/her’s overall performance relative to the performance of the SPY.

Investors look at the number of stocks above or below the 10 day moving average in the SPY as an indicator of strength or weakness.

The Russell is comprised of 2000 small cap stocks that are 99.86% located in the United States.

Henceforth, the health of the US economy is more readily measured in this index than in the SPY or NASDAQ.

And, since we are on the subject of SPY, if we used the same criteria as we did for IWM, it actually met number 3.

SPY had an inside day. That means we can still look for a bounce on Monday, especially if it clears over last Thursday’s high of 278.90.

Even so, without IWM, can we really think that the bottom is in?

This was the first time IWM closed under the 50-Week MA since March 2016.

If it follows the lead of Regional Banks KRE, or the Modern Family’s Prodigal Son, then we have more downside in store.

However, considering the new low that IWM put in (since last June), we could, should SPY clear that 278.90 level, still see some kind of bounce.

IWM would have to clear 155.76, right now, a tall order but not impossible.

Until then, fruta puede caer prudence!

My interview on Benzinga pre-market show Friday morning. Go to minute 35:30.

Key levels for stock market ETFs:

S&P 500 (SPY)– 273.89 is the 50-Week MA this closed above-so even with the inside day, it’s possible to see more upside-but that means it has to clear 278.90

Russell 2000 (IWM)– 150 is next best level. Unless it closes with some reversal pattern-which could happen with strong volume and a close over 155.76

Dow Jones Industrials (DIA)– Inside day here too-and unlike SPY closed just above the 200 DMA taking it from Distribution to Warning Phase-improvement.

Nasdaq (QQQ)– Like DIA, improved to a Warning Phase and of the four, has a bona fide reversal pattern with volume. This index could lead, but without IWM, only for so long.

KRE (Regional Banks) – Not only was this the first to break down under the 50-WMA, it is now below the 23-month MA. 58 pivotal now.

SMH (Semiconductors) – Best news is the hold of the April low. However, before we holler double bottom, it is a long strange trip from here-still a sell rallies unless it clears 105.

IYT (Transportation) – Inside day. If clears/closes over 191.75 it still has 192.50 as major resistance-plus a failure of the 50-WMA.

IBB (Biotechnology) – 111.25 is the 200 DMA.

XRT (Retail) – 46.91 the 50-WMA which it held and closed above. With the inside day, if clears and holds over 47.75, would consider an active long-looking for a quick pop or gone.

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.



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