CORRECTIVE PHASE ?
Here is an important article By Fernando Gonzalez
Ever since broad selling in mid-April, the market has gone into a zig-zagging corrective that still continues as I write this. Over the last week and a half, it seems that it has been groping for direction and bracing itself for a very probable continuation of the selling from earlier in the month. This is very evident as the market has been gapping and experiencing very fast moves in both directions, and not gaining much ground either way.
However, enough time has passed so that the market is ready to break out of its short-term corrective phase. Let's take a look at some short-term charts, beginning with the Naz. Later we'll take a look at the long-term Semi-Conductors, which affects momentum on the Naz:
The 30-min Intraday chart of the Nasdaq-100 above addresses the Short-Term time horizon. We go all the way back to the beginning of April here, so that we see the entire decline that occurred towards the middle of the month.
As discussed earlier, notice that the market has entered into a corrective phase since April 15th.
The market has given us large gaps and fast movement in both directions, but cannot seem to gain any ground to either way.
This corrective phase is lasting twice as long as the prior impulsion. The time is ripe for a break-out away from this short-term corrective phase.
At this point, the strength and momentum of the decline in mid-April still lingers as the market has been suppressed below the 50% retracement line (red).
Also, notice that the market is still trading below the Trendline anchored at April high (blue).
So long as the market is trading below the primary short-term Trendline and the 50% mark, the market is still more likely to go to new lows, rather than rally.
The 30-min Intraday chart of the S&P500 above addresses the Short-Term time horizon. We go all the way back to the beginning of April here, so that we see the entire decline that occurred towards the middle of the month.
Our comments on this chart are just about the same as the preceding commentary on the Nasdaq-100.
The only notable difference is that the S&P500 has a stronger retracement during the corrective phase than the Naz. Notice that its corrective path reached the 50% retracement mark, while the Naz has been suppressed below. Thus, the S&P500 is carrying higher relative strength.
When the market is ready to turn up, the long-side on the S&P500 and related individual stocks that closely follow its movement is likely to be more fruitful than Naz and Naz-related issues.
As far as the short-term S&P-500 is concerned, the market is still dominated by downward momentum so long as it is suppressed underneath the 50% mark (red), and new lows are more likely, especially in light of weakness in the Naz.
The area between the 50% and 62% (green) mark is somewhat of a neutral zone, while the bullish zone, looking to take out the April highs, awaits above the 62% mark.
The Weekly Chart of the Semi-Conductor Index, or SOX as it more popularly known, addresses the Intermediate-to-Long-Term time horizon.
The price action of the SOX has a very strong influence on the Nasdaq. On the chart, we apply a simple 200-Week MA, representing approximately 4-years of price momentum.
The downward sloping direction of the MA and the market trading under it indicates the SOX is still very much in the grip of a Long-Term Bear Market.
It should be no surprise to us then, that the Naz today is weaker than its primary market counterpart (S&P500). We have identified many times in the recent past that the weakest link among the 3 major measures of the market is Naz (versus the DOW and S&P500).
So long as SOX is trading below the long-term downward sloping MA above, it will be have higher odds of making its way to multi-year low rather than the opposite.
Until next week: Good Luck! Fernando Gonzalez
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