I was out of town for the holidays and just wanted to post a quick update now that I’m back at home with full coverage to the markets to resume tomorrow morning. Some of the most significant technical developments that I’ve been monitoring recently are the potential positive (bullish) divergences forming on the daily charts of the Nasdaq Composite (below), the Nasdaq 100 as well as several market-leading stocks such as MSFT, GOOGL & XOM.
$COMPQ daily Nov 25th
I refer to those divergences as potential vs. confirmed as the momentum indicators, such as the PPO & RSI, are still pointing lower & very well may continue to do so until they move below their previous reaction lows from late October. Should that occur, these potential divergences would fail to be confirmed with the indicators putting in higher lows while those indexes & stocks put in lower lows.
While confirmed positive divergences are by no means a guarantee that a meaningful rally will follow, they certainly are an indication that an imminent trend reversal & rally is likely. It should be noted that as of Friday’s early market close, the majority of the U.S. stock index tracking ETFs such as SPY (S&P 500), DIA (Dow Jones Industrials), MDY (S&P Midcap 400) & IWM (Russell 200 Small Cap index) have yet to fall below their late October lows & as such, would need to take out those lows before potentially putting in divergent lows.
Essentially, I am still leaning towards another 2-6% downside in the major stock indices over the next week or two. However, the odds for a meaningful reversal & rally will begin to substantially increase with the R/R for shorting becoming less favorable if/as the stock market continues to fall from here. As such, unless some developments in the charts convinces me otherwise, my focus going forward will be on when & where to close out existing short positions along with identifying the most attractive long-side trade setups for the next swing-tradable rally.
I hope everyone had a great weekend and/or Thanksgiving holiday. Regular market analysis & trade updates to resume as normal tomorrow.
-RP