Markets fell precipitously Friday with the Nasdaq, S&P 500 and Russell 2000 all slipping more than 2%. The old adage “they don’t ring a bell at the top” comes in handy as markets have been showing signs of fragility for weeks now. The volatile action we have been witnessing is very indicative of topping behavior, the exact opposite of round, gradual smooth trade at bottoms. The Nasdaq dumped 6.5% this week, its largest weekly drop since the week ending 1/8/16 that fell 7.3%. Looking on its weekly chart one can see clear distribution since the beginning of February, so it is not like the market has not been telling you to take some money off the table. It CLOSED just below the very round 7000 number, an area that recorded a bull flag breakout in the first few days of 2018, and that seems so long ago and has no real relevance any longer. The S&P 500 CLOSED right at its 200 day SMA where a lot of stops will be just below and should accelerate some selling pressure and it now sits 2% above the 2/9 lows. On a YTD basis now the Nasdaq is UP 1.3%, the Russell 2000 down 1.7, S&P 500 by 3.2 and the Dow by 4.8%. The VIX had a huge week CLOSING above its rising 50 day SMA everyday this week, and today nearly climbed above its 26.32 double bottom trigger, although it did record a spinning top candle.
Looking at individual sectors Friday it was energy that was the “best” performer although it lost .6%. The staples and utilities were the second and third best actors as the XLP and XLU fell by 1.2 and 1.4%. Lagging badly today were technology and financials as the XLK and XLF dropped 2.7 and 3% respectively, and if you turned the leaderboard upside down it would have been very bullish. For the week it mirrored what happened Friday as tech and finnies were the worst behaved as the XLF and XLK slumped amazingly by 7.1 and 7.7%. For all the retest talk the XLF tested the lows this week with a low of 26.77, which was nearly identical to the week ending 2/9’s 26.76 low. The ETF is now just above its rising 200 day SMA where it found a strong bounce early last September. Other notable moves were the 5.3% weekly decline for the materials as the XLB slipped underneath its 200 day SMA for the first time in 2 years.
I am a big fan of making a watch list to see what names are holding up well on the type of tape we are experiencing at the moment. But most importantly PRICE action must confirm on a CLOSING basis. Below is a great example of finishing above the pivot with the chart of CARS and how it appeared in our Monday 3/12 Game Plan. On Thursday when the market when the S&P 500 dropped 2.5% the stock was actually UP .3% on firm volume. That made it a very strong watch list candidate, NOT to purchase, but to see if it could CLOSE above the round 30 number, something it was unable to do once since falling below the figure on 1/24, even though it touched or traded above intraday TEN times after that date. Anyone who tried to front run the idea learned a very quick and valuable lesson as it cascaded lower by 6% in more than double average daily volume.