Mid-week market update: Is time to sound the all-clear? The market staged a relief rally after last week’s weakness. Is the stock market ready to resume its uptrend?
A rally to new highs from these levels is unlikely. Last week’s pullback inflicted significant technical damage that, at a minimum, a period of sideways consolidation and base building will be necessary before the bulls can take control of the tape again. The S&P 500 violated a rising trend line that stretched back to April. As well, the 8 day moving average (dma) fell through the 21 dma, which is a bearish crossover. Repairing the damage will take time.
A similar pattern can also be seen in the NASDAQ 100. The NDX exhibited a similar breach of a rising trend line and a bearish crossover of the 8 dma and 21 dma. In addition, NASDAQ 100 implied volatility, as measured by VXN, rose coincidentally with NDX. This is another indication of a nervous and jittery market, which is not a good sign for stocks that had been the market leadership.
Sentiment is still frothy
Sentiment models are still showing signs of frothiness. Macro Charts pointed out that QQQ call options are still being bought aggressively in the face of last week’s sell-off. The bulls haven’t capitulated yet.
Moreover, single stock option volume is now 120% of share volume. Market wash-outs don’t look like this.
Today’s market action was distorted by the FOMC announcement, and it’s always difficult to get a decent read on the market on FOMC meeting days. Nevertheless, one possible sign of market direction is the inability of equities to hold their gains even after a dovish FOMC statement.
In the short run, the NASDAQ 100, which were the market leaders, came into Wednesday overbought in the short-term. While overbought market can become more overbought, the odds favor either some form of pullback or consolidation at these levels.
Disclosure: Long SPXU