The major indexes fell precipitously on heavy volume all last week but finished Friday’s session with action that could be considered constructive, especially compared to their action earlier in the week. Regardless, the market is now in correction and no long positions should be initiated until a follow-through day occurs.
Remember, for a follow-through day to occur, either the NASDAQ or S&P 500 must rise at least 1.7% on more volume than the previous session. However, it’s important to keep in mind that we must also see fundamentally sound, leading growth stocks begin to form constructive bases and break out on heavy volume. Otherwise, it is likely to fail.
While there has never been a new bull market or major uptrend in history that wasn’t preceded by a follow-through day, not every follow-through day leads to a new bull market, and it will always be the action of the market’s leadership that ultimately determines its success.
The McClellan Oscillator, Put/Call Ratio and VIX Index all ended the week at even more extreme levels than they were in the last report, indicating very high levels of fear. Fortunately, extreme levels of fear often coincide with lows in the general market, at least in the short-term.
Corrections in the general market are the breeding ground for the next round of opportunities. So, continue to pay close attention to how rotation takes shape and focus on the strongest names in the strongest groups, with the best fundamentals. The first of these stocks to break out as the market follows through are often the best performers and hence, the stocks want to be concentrated in.
Now that the market is back in correction mode, most traders should find themselves down to their core profitable positions and/or in cash. Until the general market signals that a new uptrend has begun, use this time to refresh your watch lists and review old trades.
The NASDAQ got pummeled last week although Friday’s action was encouraging. It shook out below the confluence of the top if its prior base and its 200-DMA, closed up on the session and near its high for the day which is constructive.
The Russell 2000 acted in a similar manner to the DOW last week. It fell sharply on heavy volume, closed well below its major moving averages, undercut it’s low from the end of August and finished the session down 1.43%.
The S&P 500 melted below its major moving averages last week although Friday’s action was encouraging. It halted its decline after a slight undercut of its low from 10/3/19 and closed near its high for the day, although it continues to trade below its long-term 200-DMA, which is less than ideal.
The DOW acted much weaker than the NASDAQ and S&P 500 last week. It fell further below its major moving averges, came within a hair of its lows from June of last year and even though it reversed and rallied with the other major indexes last Friday, it still finished the session down 1.39% and well below its long-term 200-DMA.