Markets concluded the volatile month of February in a bearish way as they fell hard into the end of the session Wednesday as the Dow and Nasdaq slipped below their 50 day SMAs (the good news is we are heading into the best two months historically for the markets). Both of these indexes can now be viewed as bearish rising wedges breakdowns which aligned with the 50 day SMAs (keep in mind a lot of stops are hit just above and beneath this line). The leading Nasdaq is still above its 50 day SMA by 1.5%, but the weight of the averages certainly has some forgetting the powerful rally that ended just two days ago. The Russell 2000 not only broke further below its 50 day SMA losing 1.6% today but fell below its bull flag breakout from this Monday and we know the best breakouts tend to work out right away. The VIX which we spoke about yesterday tested its 50 day SMA, and also went deep into yesterdays bullish engulfing candle and ultimately produced a bullish hammer. Its CLOSE above the very round 20 figure today, something it has done just twice in the previous 9 days since falling below it on 2/14, should have the bulls losing some sleep.
Looking at individual groups there was no hiding, but it was the cyclicals that behaved the “best” lower by .5%, following through after yesterdays 2.1% slump on heavy trade. The XLK fell .7% and is showing some negative signs with the bearish dark cloud cover candle Tuesday, and also followed through after Tuesdays softness and the ETF is also having issues with former highs after such a rapid recovery near the round 70 number. Lagging was the energy group as the XLE fell by 2.2% as the greenback gets a bid. It is now down 3% heading into Thursday and it feels heavy as it has had time to recoup some of the 14% combined losses the weeks ending 2/2-9, but has been reluctant to do so. It is a bit premature but any more weakness will have the 50 and 200 day SMA starting to slope lower. The XLV traveled back below its 50 day SMA, and has now CLOSED above its 50 day SMA just 3 times since undercutting the line on 2/5. That makes it now twice in this month it quickly fell back below it, a red flag.
As technicians we believe PRICE tells us all we need to know. Fundamental information and everything else one can think of is baked into the cake. And after all we are paid and judged by price action, so why not focus entirely on that. I have yet to hear of any traders being paid on anything other than P&L. Today Herbalife rose powerfully more than 6% after Bill Ackman reported he gave up on the short. PRICE however was acting well BEFORE this revelation. Was the strong volume and superb movement in the stock supported by his covering over time? Who knows, and who cares. Below is the chart of HLF and how it appeared in our Wednesday 2/14 Game Plan. The name traded very taut, a hallmark bearish characteristic, and acted well POST breakout from a cup base trigger of 79.74, another positive as the best breakouts will work often right away. It now trades just 5% off recent all time highs. That is something long shareholders could digest, pun intended.