UPSIDE VOLUME FAILS TO IMPRESS -- SPY REMAINS WITH SUPPORT BREAK -- QQQQ HOLDS DOWN GAP -- IWM AND DIA FORM HARAMI
SPY TESTS NOVEMBER LOW... Today's Market Message was written by Arthur Hill. - Editor
The stock market surged on Tuesday with the Nasdaq 100 ETF (QQQQ) and S&P 500 ETF (SPY) both gaining over 3.5%. This is an impressive gain when viewed as a single day. However, taken in context, it is not enough to undo last week's technical damage. Let's look at these charts individually. Chart 1 shows SPY declining to its November low with a rather sharp decline on above average volume. In the process, the ETF broke the November trendline and support from the December low. This is the technical damage. After such a sharp decline (87-75) in nine days, the ETF was short-term oversold and ripe for a bounce or consolidation this week. In addition, SPY was testing the late November low. Despite Tuesday's big gain, SPY remains well below the trendline break and well below the support break at 80. In other words, the technical damage remains. At the very least, SPY needs to surge above 82 to recoup the support break and call for a reassessment. Further weakness should be expected as long as this break down holds.
Chart 1
Volume and momentum patterns are also bearish. The bottom indicator window shows MACD moving below its January low. MACD is clearly trending lower as momentum deteriorates. The other indicator window shows volume with the 200-day moving average. Green bars are for up days and red bars for down days. The red volume bars have been bigger than the green volume bars over the last few weeks. This shows more selling pressure on down days and less buying pressure on up days, which gives the bears the upper hand. Even though yesterday's surge was with above average volume, volume was still below the highest levels for February. Also notice that volume was not even close to the levels seen in October and November. There was a true selling climax in November when SPY declined sharply on surging volume. The current decline has yet to experience such a selling climax. It may just take another selling climax to end this decline.
QQQQ REMAINS WITH GAP... Turning to QQQQ, we can see some similarities and some differences. First, chart 2 shows QQQQ well above the late November low as SPY and financials bore the brunt of recent selling pressure. Despite showing relative strength this year, QQQQ broke down with a sharp decline over the last two weeks. The ETF gapped down six days ago and broke the November trendline. QQQQ also moved below the December low on Monday, but recovered with a sharp rebound on Tuesday. Nevertheless, the December low was technically broken. In addition, Tuesday's rebound occurred on average volume - not above average volume. This one day bounce was not enough to undo past technical damage either. The gap and trendline break remain. At the very least, QQQQ needs to move back above 31 to fill the gap and warrant a reassessment.
Chart 2
HARAMI CANDLESTICK PATTERNS... Charts 3 and 4 show the Dow Industrials ETF (DIA) and Russell 2000 ETF (IWM) forming harami candlestick patterns on Monday-Tuesday. After long red candlesticks on Monday, these ETFs firmed on Tuesday with smaller white candlesticks. The white candlesticks are completely within the range of the red candlesticks. This makes Tuesday an inside day. Harami signal indecision that can sometimes foreshadow a short-term reversal. Follow through is required to confirm these harami. Further strength on good volume would provide said confirmation and give way to a short-term bounce. For now, we are just seeing some indecision and firming, which is not the same as buying pressure and strength. Tuesday's advance simply recouped Monday's losses. Also remember that the bigger trend is down. These downtrends exert a strong bearish headwind that the bulls must fight. Last week's gap and support breaks turn into resistance zones that could limit any upside. Final note: Keep in mind that candlestick patterns are short-term in nature that are good for 1-2 weeks at most.
Chart 3
Chart 4
