Please Wait Until The Dust Settles

The strong rally Monday gave the bulls some hope as some investors jumped into the most beaten down market sectors like the materials and industrials as the Materials Sector Select (XLB) and Industrials Sector Select (XLI) were up 2.4% and 2.1% respectively.

This came after last Wednesday’s sharp gains which caught even more traders by surprise, myself included. The further overnight weakening of the Chinese Yuan has pushed the Dow futures down over 100 points as the European markets are also down sharply as the Stoxx Europe 600 is down over 2% ahead of the US opening.

Though many are tempted to step in and buy some of the beaten down high yield large cap stocks one should remember that historically there are not many beaten down stocks that turn around quickly and start a new uptrend.

Just over a month ago the markets were focused more on Greece than the impact of China on the world markets but as I discussed in early July “Greece Isn’t The Real Problem” the breakdown in the technical outlook, especially the advance/decline lines was what investors should really be concerned with.

Therefore the rally in early July I felt should not be trusted and this is also true of the sharp rallies in the past week. The narrowly based nature of the Nasdaq 100’s new high on July 20th was a further warning to investors and presented new opportunities for traders.

One missing ingredient in the current market decline has been the lack of any panic selling but this may finally change this week. That does not mean that the market will immediately bottom out as the weekly and daily technical picture has to improve before a significant market bottom is complete. My longer term analysis continues to be positive for the market as it has been since the spring of 2009 with no signs of a bear market or a recession.

Let’s look at the charts

cp8-12a

The Spyder Trust (SPY) is still holding above the 3rd quarter pivot at $207.38. A decisive break of this support would set the stage for a drop to the support in the $202-$203 area.

  • There is initial resistance at Monday’s high of $210.67 and then in the $211.45 area.
  • The daily starc+ band and major resistance is in the $213 area.
  • The S&P 500 A/D line formed a slight negative divergence, line b, at the May highs.
  • This resistance was tested in July as the SPY made a new high. This created a more pronounced bearish divergence.
  • The A/D line now needs to move above its downtrend and the July high to signal that the correction is over.
  • The OBV was strong in July but was still well below last December’s high. The OBV has now broken short term support.

The PiowerShares QQQ Trust (QQQ) has led the market higher in 2015 as it is up over 7% versus just 2.5% in the SPY.

  • There is trend line support as well as the quarterly pivot at $107.43.
  • If this level is broken there is additional support in the $104-$106 area
  • The Nasdaq 100 A/D line moved slightly above its downtrend, line e, on Monday before reversing Tuesday.
  • The A/D line was much weaker than prices at the July 20th high and this level (see arrow) needs to be overcome to signal that the correction in the QQQ is over.
  • The on-balance volume (OBV) has dropped below the support, line g, that goes back to the January lows.
  • The flat 20 day EMA is now at $111 with further resistance art $113.

cp8-12b

The markets were waiting for the earnings from Alibaba Group (BABA) which reported before the opening Wednesday. The stock lost 3.9% on Tuesday and is down another 5.5% in pre-market trading as they missed badly on revenues.

  • The technical outlook for BABA did not favor buying the stock ahead of its earnings as the last rally failed at the quarterly pivot at $85.03.
  • The downtrend from the May highs, line a, is just below the starc+ band at $83.26.
  • Before the opening BABA is trading below the July low at $76.21.
  • The monthly projected pivot support and the weekly starc- band are in the $70-$71 area.
  • The relative performance broke support in June and started a new downtrend.
  • The RS line made another new low in July confirming that it was weaker than the S&P 500.
  • The daily OBV dropped below its WMA in June and by the middle of the month its WMA was in a clear downtrend.
  • The OBV has continued to make new lows forecasting new lows in price.

Cisco Systems (CSCO) reports after the close on Wednesday as it was down 2% in Tuesday’s trading. CSCO is up 2.94% YTD and the weekly chart shows a trading range over the past four weeks.

  • CSCO is trying to hold above the quarterly pivot at $27.85.
  • There is weekly chart support, line d, at $27 with the weekly starc- band at $26.17.
  • This also corresponds to the monthly projected pivot support.
  • The weekly relative performance broke its uptrend, line e, in May and by July had started a new downtrend.
  • The rebound in the RS line to the declining WMA was a sign of weakness as it is now in a clear downtrend.
  • The weekly OBV has dropped to its WMA but is acting stronger than prices. The daily OBV ( not shown) looks weaker.
  • There is more important OBV support at line f.

What to do? Most traders and investors suffer from a lack of patience and those who got caught up in the two sharp rallies of the past week are likely regretting it. If you are not short already now is not the time to chase the short side of the market unless there is an oversold bounce

As I reviewed in Friday’s Week Ahead column I am watching some of the well diversified ETFs for future buying opportunities once the correction runs its course. If you are looking to buy I would be watching for stocks or ETFs that are acting stronger than the S&P 500. Be sure that before you become an aggressive buyer be sure there are clear signs that the correction is over.

I also post regular  charts and commentary on  both Twitter and StockTwits