In last week’s Market Outlook, I posed the question, “Did stocks just put in a significant bottom?”
Last week’s market action put that thought to the test.
The IWM and DIA made new swing lows, but the SPY and QQQ didn’t even come close. And the leading sector, semiconductors, (SMH) didn’t flinch.
As a result, the question remains unanswered.
Additionally, the condition of the market is now more likely to lead to a bigger next move due to an added week of consolidation.
I’ll be surprised if I have to report here next week that the markets consolidated for another week because the Jackson Hole Economic Symposium occurs at the end to this week with Fed Chair Jerome Powell scheduled to speak on Friday.
If you were reading or watching any financial news this week, you most likely heard the big news.
We’re headed toward a recession.
The yield curve inverted, and that’s that.
The next recession is no all but imminent!
Of course, if that’s true, stocks will certainly fall, and obviously, the then big move will be down.
Wait. Not so fast.
Yes, recessions are as inevitable as death and taxes, but the timing and predictability of them is not as precise as the current media buzz would have you believe.
I won’t try to debate the timing in this post.
Let’s focus on the markets for now.
Below, I’ll cover my game plan to profit from the next move in stocks, but first, it’s worth mentioning that the other big question from last week was whether or not SLV would close over its 200-week moving average for a second week in a row for the first time since 2013.
As a result, the setup suggests considering buying the next new high. If you’re a member of Mish Market Minute Advantage, then you’re probably already long.
I don’t have a video this week, but I’ve linked my highlights to the charts in Big View that I’d be explaining if I was doing a video.
First, Friday was a snapback, slap in the face, rally that punishes the bears who sell new lows in the likes of the IWM.
But it’s not a rally to buy unless it continues.
If QQQ breaks a 30-minute Opening Range (OR) over 186, I’ll be more convinced.
For the SPY’s the inflection point is 190.
Highlights from within Big View
- IWM made a new closing low relative to June, but the Real Motion daily charts diverged, and the next day (Friday) the IWM snapped back. This is bullish if it continues this week
- The daily IWM held the 200-day average in Real Motion, which is a common level of support.
- SMH is back in a bullish phase, but really needs to clear 114.
- XLF, XLV and XLI all improved their phases from Distribution to Warning, which means they are back over their 200 DMA with a 50 DMA that is above the 200 DMA.
- The number of new 52-wk new lows increased this week on both the NYSE and the NASDAQ even though the indexes didn’t make new lows. This is bullish if the indexes go higher but dangerously bearish if the indexes make new lows.
As I mentioned in last week’s video, this indicator has not reached an extreme oversold level so it indicates weakness that could lead to a new rally but also weakness that could have the market’s give way if the swing lows and 200 DMAs are broken.
- As noted last week the McClellan Osc in NYSE and NASDAQ is still under 50. If this moves over 50 it’s a bullish sign after having been oversold.
Outside of Big View I’m also watching the Hong Kong stock market ETF, EWH, as a barometer of how bearish (not bullish) the conditions are there. As long as it stays stable and over the 22.20 level that known unknown (a topic coved in Mish’s Daily) is less concerning.
In conclusion, there are several reasons to believe that further weakness in stocks could lead to a significant decline, but the correction has gone far enough and has patterns that suggest that a confirmed rally is worth buying prudently.
It wouldn’t take more than a tweet or a statement from a Fed official to get this market moving in one direction or another.
It’s not going to be here next week.