The bounce off the low resembles a V-Shaped bottom currently. However, the volume was light due to the holiday week. That doesn’t change the chart pattern, but it does create a feeling of suspicion for many investors. Thus, we have to watch for the possibility of a reversal off the November 15th low. No chart goes straight up or down, they tend to set a series of higher highs and higher lows if the trend is to shift. If we are in an overbought situation short term then a test of the move would be in order. That prompts the next question… would the bounce be buy-able? For now the answer to that is yes, however we have to produce the pullback/test of the current bounce to turn it into something more than a lower high for the downtrend in play off the October 17th high on the S&P 500 index. The bounce is just a bounce until we reverse the previous trend. It is easy to get caught up in the move off the low and forget the current trend. A move above 1420 and 1430 would be the key to a reversal short term. A test back towards the 1386 level and then a follow through on the upside would be a entry point for the broad index. Be patient and let this play out and define any potential entry point.
The NASDAQ 100 index is in a steeper climb than the S&P 500 index. The bounce off the low at 2524 on November 15th has resulted in a 5 percent gain. That is expected when you consider the index retraced nearly 100 percent of the move off the June 4th low to the September 19th high or a 15.5 percent gain. Look for some resistance at the current level for the index and a test back near the 2600 mark. As with the S&P 500 index above, the potential for a move higher is in play, but the upside trend has to be established first.
Retail, Technology, Basic Material, Financials and Consumer Staples have been the leaders on the upside. As we approach the end of the year we would expect the retail or consumer services stocks to continue to provide for some to most of the leadership. That leaves the other sectors to step up their respective games if the upside move is to gain traction.
XLY, SPDR Consumer Discretionary ETF broke through the downtrend line on Friday, held the move on Monday and is in position to lead the broad index higher. The previous highs near the $47.75 mark are well within reach for the index.
XLK, SPDR Technology ETF has defined the V-bottom formation with an aggressive bounce off the lows. A test of the $28.35 mark would be a positive, but the need for the semiconductors to lead the way is important. Networking has been the strongest component of the sector, but lacks the punch (size) to carry the broad index higher. Internet has helped, but like networking lacks the size to impact the broader index completely. Thus, software and semi’s have to pick up the pace on the upside to combine with other components to lead the sector higher.
XLF, SPDR Financial ETF tested the support at $15 and bounced back into the previous trading range. The leadership has to come from the banks for now. Bank of America, Wells Fargo, Citigroup, etc. have to set the upside pace for the leadership to impact the broader markets overall. This remains one of the sectors to watch as the sellers are quick to jump on the negative news and take the stocks lower whenever possible. Test of the $15.50 mark would be an good entry point short term, assuming we hold support.
VIX index shows no signs of fear stepping up or taking control of the market. If anything if would appear that some traders are unloading their hedge or protection following the recent downtrend move. The put/call ratio is also turning off the recent highs showing a reversal in the sentiment. These data points are not buy or sell signals by themselves, but they do lend support to the bounce turning into a trend versus just a bounce, and they are worthy of our attention going forward.
Bottom line… patience. There is plenty of work to do for the major indexes overall to shift the downside trend. It will not happen in one day nor will the opportunities develop in one day. The goal is be focused, disciplined and aware of what opportunities exist and which warrants the risk to own the positions. One day at a time.