Market direction for the next few days is uppermost on traders’ minds, as the action of last week, and particularly Friday, began pushing the technical calculus toward the bears.
To that end, we’re going to take a look now at a few charts to see where we stand in the macro realm. After that, we’ll attempt to drill down into a few sectors that offer what we believe is a choice trade into the next sixty or so days.
We’ll begin with the Dow and S&P 500, both of whose charts are developing similar bearish patterns. Have a look.
This is the Dow.
A few things to be aware of here.
- First is the descending triangle (in red) that began forming six trading sessions back. A descending triangle is always a bearish pattern, indicative of constant selling and a diminishing number of bulls over time. When support at the lower red line (18,000) is finally broken, capitulation will be signalled, and traders can expect a strong wave of selling to ensue.
- The appearance of over twice the daily average trade volume (in black) here and on the S&P 500, indicate that the selling wave may already be starting to break over the bulls.
- Finally, the bearish thesis is given additional strength by the RSI and MACD indicators, the first of which broke below its all-important waterline some ten days ago, the second of which confirmed just three days back.
Call it, therefore, a high probability bet that the Dow retraces to its long term (yellow) moving average in the 17,600 range before basing.
At that point we’ll be watching several markers to see if the move lower is complete or more awaits. As with all technical analysis, there’s no way of knowing which it will be. Whether we like it or not, TA provides us with a moving target, and we won’t know anything further until we arrive there.
We would add only one caveat to the above analysis, and it goes like this –everything depends on the descending triangle pattern developing and not morphing into some other formation that could be interpreted bullishly. As we noted above, descending triangles are always bearish.
SPOT THE GAP!
We want you to look now at a paste-up of the NASDAQ Composite for the same period.
Here the picture is somewhat different from the Dow and S&P 500, whose charts are near identical.
Have a gander –
What you find here is far more positive. The NASDAQ’s move off the Brexit bottom in late June was extraordinary, not only for the heights it scaled, but for the time frame in which it was accomplished and the complete lack of selling pressure that accompanied it. There was barely a down day to be had through all of July and August!
RSI and MACD (in green), unlike on the Dow and S&P charts, have also managed to hold their waterlines, though they have lost considerable altitude and could very well be submerged by week’s end if overall market weakness continues.
But what may be more important than all that is a tiny, technical detail that we might have overlooked if not for the keen eye of Eunice, our summer intern here at Normandy (pictured above). Eunice spotted not only the gap lower in trade some ten days ago (red circle), but also the closure of that gap late last week (in blue), when Apple Inc. (AAPL:NASDAQ) decided it would launch itself like a trouser button after 90 minutes at Wendy Doone’s All-You-Can-Eat Pork Chop and Omelette Palace.
The Significance of the Gap’s Closure
Our experience with such formations is extensive, but that doesn’t mean they’re always predictive. What we can say is that a gap closed is very often a trigger for a reversal that’s sharp and painful.
In the above example, the move back above 5250 could very well be followed by a selloff in the Composite that brings her as low as the next line of support at the long term (yellow) moving average in the 4900 region. Should the Dow and S&P 500 retreat, it’s almost a certainty the NASDAQ would follow, as so much of her recent strength is based on Apple’s outperformance last week, the upshot of which is suspect as best.
Apple may benefit from exploding Samsung Galaxy batteries over the near term, but we believe a couple of factors make the rally in AAPL shares a little overdone. The first is the strong likelihood of shortages as the launch of the iPhone 7 commences, the second is overseas sales. It appears demand from non-US markets is falling far short of expectations, and as this sector represents an increasingly important component of sales for the company, we find it hard to justify the nearly 12% jump in the stock over just three days.
In short, Apple will retreat, the NASDAQ will retreat, along with the Dow and S&P 500, and the auto stocks will positively crater.
Hey, whatcha got against Detroit?
Love the Red Wings, but Ford’s another story.
Look at the chart –
Ford (NYSE:F) is sucking wind.
Technically, the picture couldn’t get much worse.
- RSI and MACD are sub-waterline and don’t appear to be en route to surfacing,
- Price is below all her moving averages,
- The moving averages are themselves all unfurled and trending lower, and
- We’re sitting just 2% above an important line of support.
Given that both overall vehicle sales are in decline (see below), and auto loan numbers just fell out of orbit, we see little immediate hope for the Ford Motor Company.
And if that weren’t bad enough…- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew