This past week, we saw the market peak in some areas, while others look more like they have a healthy correction in the works. The weakest area, and one that we wrote about last Wednesday, is the reversal top in the Nasdaq 100 (QQQ).
The formation in the NASDAQ is textbook. QQQs made a new all-time high and, the next day, had more than a 2% sell-off on huge volume. Although the week ended with QQQs holding a key support area - 300 - the overall formation is there and will continue to be there until or unless the QQQs take out the all-time high point.
This could mean we see a move lower isolated to NASDAQ and not in the other indices, as QQQs were the only real topping pattern while the S&P 500, Dow, and Russells all held up. Or it could mean this will be a rare time when a textbook topping pattern does not work, as it generally yields about a 5-10% move lower. Or it could mean that the other indices will also turn lower, following NASDAQ's early lead.
Whatever transpires, there are always our outliers to look at.
First is the long bonds or 20-year plus treasury bonds, TLT. TLTs were also technically perfect. They had what is called a double bottom, which means twice, once in July and then again in November, it stopped falling in price at 155. Then, each time that price was tested, TLTs gapped up, leaving an exhaustion gap. On Friday, the TLTs rallied right to the 50-DMA and closed just below it.
That makes its next move important. A gap over the 50-DMA means a flight to safety and caution for the overall market. A retreat under 156 most likely means more optimism and a continuation of the rally or, at the very least, consolidation.
Next are what we call the Fed's playground; Junk Bonds (JNK) and High-Grade Bonds (LQD) are holding up. LQD looks strong; even as it retreats from recent highs, it holds major support below. JNK looks even better with a move to new multi-year highs last week, followed by some digestion.
If you are wondering about risk-on, these 2 bonds say yes... for now.
Finally, the sector that actually outperformed the SPY was Oil and Energy. This is interesting as it is heavily shorted, predicted by analysts to be wildly bearish and, in spite of calls for lower global demand, says in fact the opposite. Demand is expected to increase.
This coming week, we will look at the potential conflicting signals - long bonds may be warning, junk and high grade bonds happy, indices mixed.
Investors hope for some clarity. Stimulus will help. Vaccine news is already helping. And consumer sentiment, which also rose, suggests that optimism prevails, while pessimism sits below the surface.
For more on oil and energy, watch the video below.
Watch the latest episode of StockCharts TV's Mish's Market Minute, where Mish dives into her favorite Oil and Energy stocks. Some of these stocks have made a run, but be sure to put them on your watch list!
- S&P 500 (SPY): Watch for 364 to hold
- Russell 2000 (IWM): Support 180
- Dow (DIA): Holding 300 and the 10-DMA
- Nasdaq (QQQ): 300 key support. Next 288.64 support the 50-DMA
- KRE (Regional Banks): 51.71 to clear. Support 48.48
- SMH (Semiconductors): Doji Day with 214.92 to clear. 202.89 next key support
- IYT (Transportation): Holding the 10-DMA at 223.51
- IBB (Biotechnology): 151.25 to clear. 145 area support
- XRT (Retail): 59.24 support
Mish Schneider
MarketGauge.com
Director of Trading Research and Education
Forrest Crist-Ruiz
MarketGauge.com
Assistant Director of Trading Research and Education
