The NASDAQ-100 looks poised to test its October 2nd intra-day low of 1656.57 on Monday. Here is a daily NDX chart (click to enlarge):
Notice that the red uptrend line is converging with the blue support line.
The NDX is closer to testing its October 2nd low than the SPX is, and the signal it gives will also likely apply to the SPX since the NDX usually leads the SPX.
This test may occur Sunday night in the futures, so the equivalent low for the NDX futures (NQ) is 1652.75; only 13 points away, which is a small daily move for the NDX. The equivelent level for the SPX futures (ES) is 1012.00.
This is a daily SPX chart of closing prices. Thursday’s rally is starting to look like a bear flag (red lines on chart). If that proves to be the correct interpretation, a 100% completion of the pattern (blue line) implies a test of the October 2 intra-day low at 1020 at some point within the next few days.
The market plunged on both September 1st and October 1st. Perhaps that was because the big funds finished their month-end window-dressing. Are we seeing the same thing now? Monday will be the first trading day of November.
SPY rallied on light volume Thursday, so bulls must be cognizant of the possibility that the market is constructing a bear-flag retracement of the plunge. However, volume in the futures (ES) was not light, so this may be a bullish indication if traders were reaching for something leveraged rather than boring old SPY.
But even it does turn out to be a bear-flag, bears must be careful not to short it too early. Flags are similar to wedges in that they are sharp and pointy. They keep pushing up to a pinnacle, blowing out all your stops in the process.
Breadth ramped up to a very high level on Thursday. If the market can stay roughly flat as the internals unwind a bit on Friday, that will be a bullish development. All the bulls need to do is keep it flat and they win.
SPY didn’t leave any gaps behind on the way down, so when looking for upside targets for the market, the next one would be the QQQQ gap on October 28th at 42.35. The XME was halted at its 10/28 gap on Thursday, so maybe the Q’s will be stopped at their corresponding gap today. The XLF has two gaps above also.
All the major ETF’s left un-filled gaps on Thursday. That’s a very bullish sign, in the short term. As I write, the overnight futures are in a bull-flag formation, so that is bullish if it lasts until the open. It is ironic, but short-term bull-flags can construct a bear-flag on a higher time-frame.
Keep an eye on the BKX banking index – its 20-day moving average is poised to cross below the 50-day if the banks don’t rally strongly today. That could be a bad omen for the market. It just doesn’t seem like the sort of thing a fabulous bull market should be doing. The banks appear to be worrying about the FOMC meeting next week.
I have three scenarios in mind for today:
1) It will be a re-run of Tuesday where the market eroded the support at the October 8th gap (105.79 for SPY) by going mostly sideways with choppy action. Today, it would be eroding the support at the October 6th gap (104.05 for SPY), the top of which stopped the decline on Wednesday afternoon.
2) SPY will “echo gap” under the October 6th gap, and the SPX will proceed directly to test the October 2nd low at 1019.95. It could bounce and print a bullish hammer candle there.
3) A sharp short-covering rally, possibly triggered by an upside surprise in the GDP report that would retrace some of the plunge.
As I write this, the futures have held the 1037 level, making a low at 1037.25 just before 7pm, Wednesday night. So, that’s some solace for the bulls so far.
Let’s see what the GDP report is and how the market reacts to it. GS has likely lowered the expectations to very low levels with their downgraded estimate Wednesday morning.
The advance/decline line has not cracked yet (click chart to enlarge):
But that doesn’t mean that the bulls shouldn’t be praying to the breadth gods tonight.
I was surprised to learn that the Taliban only has 25,000 fighters. Story here.
Mutual funds are still bleeding from the eyeballs. In the latest week, outflows increased again for funds that invest in US stocks (“Domestic” in that table). I have been tracking this data since they began the weekly reports several months ago, and this is the worst outflow since the March bottom, though it is nowhere near the outflows at that time so far. Heavy outflows often signify a bottom as the public panics, but it’s hard to say what “heavy” is. Was the March plunge a once-in-a-lifetime event? Or is that the standard now?
The market made its first lunge downward last week on Wednesday afternoon. The talking heads on CNBC said it was a “mistake” – as if some trader at an i-bank pushed the red button on his trade-bot by accident. When the market bounced back on Wednesday, they claimed vindication. Not once did I hear the word “triangle” on CNBC.
Now these same traders have declared that they all got short on Monday. Imagine getting bearish after the McClellan Oscillator plunges below -200, and the VIX spring has already sprung. Ridiculous! The market may continue to fall, of course, but the odds are with the bulls for an oversold bounce.
The market pushed the lower line of George’s triangle downward so that it is now parallel with the top line. However, the market needs to rally very soon to hold onto this potential pattern. It still hasn’t hit the triangle target, and since this was such a large, powerful pattern, I would be shocked if the target wasn’t hit by the end of this week. The bulls would be lucky to get off with just a downtrend channel.
George’s triangle was a dramatic pattern. We probably won’t see another triangle of that magnitude for a while, but they are worth watching out for, right?
The IWM bounced at its October 6th gap on Monday. The bottom of that gap is at 59.09, and that is an important level for the market. Small caps and banks have been getting a beating, so if they can find support, the overall market has a better chance.
The futures held up well overnight, and the market is attempting to run back up to the top line of George’s triangle. If the move up is lackluster in terms of speed and volume, then that may be a sign that it will fail to break out once it hits the top line, assuming that it does get there.
When George first spotted this triangle on Friday, it was a neutral symmetrical triangle. But by the end of the day, it degraded, and is now looking more like a bearish descending triangle (click chart to enlarge):
The height of the triangle, the dotted linen between “A” and “B”, gives us the projection if the triangle breaks to the downside from this point. The blue line below the triangle is the same length as the dotted line, so “Target” is calculated as somewhere down in the 1050’s.
Ironically, that level is where another triangle formed on October 6th-7th.
Another wave up to the top line of the triangle might be a dream scenario for bears.
NDX futures are testing their rally high on Microsoft’s earnings “beat”. But there is no growth at Microsoft. Year-over-year, both revenue and earnings were down double-digits.