This Dip, Don’t Count Your Chickens Before They Hatch

Yesterday, we focused on the inside days in the indices posted on Tuesday, and what that implied for today.

We also looked at the Modern Family, Phases, The Dollar, Commodities, Interest Rates and Sector Rotation.

As far as the inside day pattern I wrote, “What I like about inside days, is that when instruments are trending lower, the inside day often means some short covering before resumption of the move lower.”

Today, the trading patterns in both the Dow (DIA) and S&P 500 (SPY) were not nearly as clean or pretty.

Yet both also began with strong opens, trading above the outside day’s price.

They both eventually turned red but did not trade below the outside day’s low.

SPY returned to an unconfirmed warning phase.

Subsequently, we must look at all the indices before committing to long positions.

The Russell 2000 (IWM) and the NASDAQ 100 (QQQ) painted a much clearer chart pattern.

IWM did break the outside day’s low, while the QQQs held on a bit longer.

More importantly, the last few years have trained the bulls to buy every dip. After all, it’s worked out well.

Nonetheless, buy this dip?

Seems different this time and certainly a time that needs proof before the bulls count their chickens before they hatch.

The most classic follow through from the inside day pattern was the chart pattern we saw in Semiconductors (SMH).

SMH opened slightly higher than the previous day’s close, and then sold off, eventually breaking the outside day’s low.

This capitulation to the downside, after SMH also had an inside day, is textbook.

Updating the other macro factors:

The Modern Family– Semiconductors and Transportation went into unconfirmed distribution phases. Retail (like the Russell 2000), is still bullish, yet it broke the pivotal area of $50.00. Biotechnology went from an accumulation phase to an unconfirmed recovery one.

Phases-The Family’s daily phases have deteriorated. Biotechnology just traded below the 50 week moving average. Otherwise, the weekly bullish phases are still intact in the rest of the Family. IWM and QQQ did not change daily phases. They remain the market’s best hope.  But, if Transportation (IYT) closes this week below 184.23 or its 50 WMA, it will be the first time since May 2016. IYT is my go-to lead indicator.

The Dollar-U.S. Dollar strengthened again. There is speculation that to sell the tariffs to the public, we need a weaker dollar to make our goods more competitive. That is a slippery slope and yet to happen. The dollar put more pressure on some agricultural commodities and gold. A strong dollar makes our goods more expensive.

Commodities-Except for copper, wheat, oil and cotton, all were red today.  We will continue to watch the historically low ratio between equites and commodities. Soft Global demand is another concern for the whole market.

Interest Rates-a flattened yield curve is perceived as negative for the market. However, rates have eased a lot today (30+ year T-Bonds). Hence, that could spur buying in commodities, especially if the dollar softens.

Sector Rotation-Money flowed out of nearly everything except oil, energy, bonds, utilities and the dollar. There is an incongruity here. A run to safety makes sense. However, strong oil and cotton prices impact consumers. The strong dollar helps the U.S consumer to some degree. Though, if short-lived, we all might be heading to the chicken coop.

S&P 500 (SPY) 271.00 pivotal resistance. 269.10 Monday’s low then not much until 267.75.

Russell 2000 (IWM) 164.14 Monday’s low now pivotal with 161.55 the 50 DMA support

Dow (DIA) 240.70 Monday’s low. If holds next resistance is 243. If not, 239.20 the 50-week moving average

Nasdaq (QQQ) 169.34 the 50 DMA support to hold and if not, 168.34 weekly chart support. If does hold, resistance at 173.00