Volatility is back, and the Dow wiped off intraday gains of 300 points only to go red in the final hour, declining almost 200 points. The leading Nasdaq was putting in a decent day with the tech rich benchmark advancing 1% intraday, but reversed more than 100 handles from earlier highs. If one take a closer look some bearish traits are taking hold. The last 3 days on the Nasdaq have all CLOSED well off intraday highs, beginning with the doji candle last Friday after a 700 handle range beginning on 2/9. That type of action took place 6 of the 7 days between 1/24-2/1 before the latest selloff picked up speed. The S&P 500 and Dow ended underneath their 50 day SMAs for the second straight day. The Russell 2000 flirted once again with trying to finish the day above its own 50 day SMA and eked out a fractional gain. This is not uncommon with this tug of war occurring at the important line, but generally bulls want to see a quick reclaim of the line. Any more stalling here and the bears will gain confidence.
Looking at individual sectors Wednesday the financials were the best performing group as the Fed minutes revealed the likelihood of more rate hikes this year. The XLF however rose just three pennies and has now CLOSED above its rising 50 day SMA for a fifth consecutive session. This group like technology are key ingredients to the genuine health of the overall rally. Lagging today were just what bulls want to see with the bond proxy groups like staples and utilities faltering. The XLP and XLU dropped by 1.2 and 1.3% respectively and energy was the worst actor with the XLE slipping 1.6% and it is on a 4 session losing streak and down 2.2% this week already. And perhaps most importantly the ETF seems to be losing the war with staying above its 200 day SMA, but is still within the range of the bullish engulfing candle recorded on 2/14.
I can not stress enough how important it was to have had a watch list of names that were resolute during the rapid correction were encountered earlier this month. A good start would have been any names that did not undercut their rising 50 day SMAs during the downdraft. Others may have never come into contact with that line, but may have gapped higher after earnings and then tautly digested the move. A good example of that is the chart below and how it appeared in our Wednesday 2/14 Game Plan. The stock screamed higher the week ending 2/2 by nearly 40% as the S&P 500 slumped 3.8%. It slipped 7.1% the very next week, but then recaptured all of those losses advancing 8.4% last week. On a much longer term basis it broke to news highs above the round 60 number and a 60.03 cup base trigger in a pattern 4 1/2 years long. Generally speaking the longer the pattern the better chances of success after the breakout.