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The Next Market Leaders - 10/9
Markets sold off aggressively on Friday after “good” economic news (low unemployment and an improved GDP forecast) gives the Fed more room to tighten interest rates. That’s bad news for stocks; the Nasdaq fell nearly 4% on the day and is down another 1% in futures trading tonight. Last week, I covered many quality names breaking down before the indexes, noting it as “a potential sign of ominous things to come".
Big moves aren’t going to be made on the long side until the market starts to trend up. That will be easy enough to spot when it occurs. For now, it’s a matter of staying patient on the sidelines, or shorting.
There’s a slew of economic news this week that is sure to shake up global markets, including PPI on Wednesday morning, FOMC minutes Wednesday afternoon, and CPI on Thursday morning. I’d be careful holding any exposure into these events. Most stocks will need time to form new patterns, so there are no new setups tonight other than updates. There’s a new segment at the bottom, “Study of the Week”, featuring a chart study from the 2011 market bottom. Let’s get into it!
The Nasdaq was not able to trade back above the 21EMA and is now below the rising short-term moving averages. Net highs/lows are back to red after three straight days of net lows.
These indicators never gave the all-clear and kept me cautious during the brief bounce.
The Nasdaq got clearly rejected at the 21EMA in blue last week after gapping down on Friday and closing near session lows. With the 21EMA steadily declining, it seems as though YTD lows are incoming. Below this level in orange is bearish, as a “triple bottom” is rarely a good sign.
The S&P-500 gapped down on high sell volume and is now threatening to post new year-to-date lows. All key moving averages are declining. Until the trend changes and price is at least above the 21EMA in blue, stocks will be sloppy and breakouts will be prone to failure.
The recent long setups below were predicated on continued upside in the indexes, and after sellers won the battle at the 21EMA on Thursday, I sold the small positions I had even before Friday’s selloff. As I noted last week, “It pays to either be nimble and cut both profit and loss very quickly, or stay on the sidelines while markets try to carve out a bottom”.
FREYR Battery (FREY) crossed the buy point and moved up to new highs before reversing lower and hitting stops. Breakouts are highly prone to failure without the market’s support.
Digi International (DGII) fell down to stops on Friday with the market weakness, but ended up closing above the buy point. It’s holding relatively well, so it’s still on my radar.
Paylocity (PCTY) crossed up through the $262 buy point on solid volume, but wasn’t able to hold this level on Friday as it came back down to $255 max stops.
On Semiconductor (ON) was on watch for “volume to come in above the descending trendline”, but volume never came. The weak volume was followed by a big move down on Friday.
There are no long setups tonight. Most charts are busted up, the indexes look to be heading to yearly lows and beyond, and economic news this week will make it very difficult to make any progress either long or short. Cash remains king!
Study of the Week
This is a new segment in the newsletter that will feature a printable, annotated chart of a particular stock or market cycle chart. Enjoy! Feel free to provide feedback by replying to this email or tweeting @dannydeals_.
The 2011 bottom of the S&P-500 is a good fit to start because it shows how an undercut of the year-to-date lows in October led to a rally after it failed to break lower. More importantly, a sustainable, long-term uptrend was not achieved until price was trading back above all three key moving averages.
That’s all for tonight! See you back here on Wednesday night, where hopefully there will be more setups to watch.