he stock market last week had plenty for both bearish and bullish traders but unfortunately, investors likely ended with a greater fear of the stock market. The market closed very weak on April 29th with the Nasdaq Composite down 537 points and the Dow Jones Industrial average dropping 939 points. This created a negative tone for the markets when stocks opened last Monday.
The S&P 500 did not disappoint as after the morning rebound it dropped 100 points to a low of 4067 before closing at 4155 up 0.57% on the day. As the illustrating chart from AdvisorsPersepctives.com illustrates the Tuesday’s rise of 0.48% was followed by a 2.99% gain on Wednesday. The S&P reached 4307 on Wednesday in reaction to comments from Fed Chair Powell ruling out a 75 basis point rate hike. The market internals were strong enough to turn most of the daily A/D lines positive.
However, the strong gain was followed by a sharply lower open and a 3.56% decline on Thursday. I was surprised that the enthusiasm did not last long as the S&P 500 and Nasdaq 100 had already recorded several selling climaxes. On Thursday 95% of the NYSE Composite volume was in declining stocks, another selling climax. Some attributed this to forced selling, but it is too early to tell.
Many were thankful the heavy selling did not carry over to Friday as for the week the S&P 500 was down just 0.2%. The Dow Jones Utility Average was up 0.7% for the week and the Dow Jones Transportation Average also managed a small gain.
After the recent disappointing earnings from the big tech stocks, the Nasdaq 100 Index and iShares Russell 2000 were down 1.3% for the week. The SPDR Gold Shares opened lower on Monday and lost 0.8% for the week.
The weekly chart of the Invesco QQQ
The QQQ has closed below the 38.2% support at $315.96 with the 50% support now at $287.31. Since the start of the year, QQQ has only closed above its 20-week EMA (in red) for one week. QQQ closed Friday 10.5% below the 20 week EMA at $345.99 which is now strong resistance.
The Nasdaq 100 Advance/Decline numbers were just slightly negative last week so the AD line did close a couple of points above the March low. It is well below its declining WMA and the resistance at line b. There is next good support at line c which goes back to the May 2021 low and February 2021 high.
The last similar negative period for the Nasdaq 100 A/D line occurred in the fourth quarter of 2018. The Nasdaq 100 A/D line analysis has been negative since January 21st which is now one week longer than during the 2018 correction. The market’s decline has lasted longer and gone lower than I expected at the start of the year when I wrote “How Low Can Tech Go”.
For example, Microsoft
The on-balance-volume (OBV) analysis had also deteriorated as volume increased as MSFT declined with the OBV dropping below its WMA. The OBV closed above its WMA for one week but not two which is what I normally require to signal a turn. There is important resistance to watch at line e.
With MSFT at $309.56 on January 7th there was converging support in the $304-$305 area and stronger support at $279.16 which was the October 2021 low. So far the low has been $270 with next support at $261.06, line b, and then at $243.60, line c. The weekly RS and OBV need to move back above their WMAs and resistance to turn positive.
My targets for the Technology Select (XLK)
My support levels for XLK were not revised as the daily chart and technical studies have remained negative since January. Therefore I have not been interested in buying. There is a well-established downtrend, line a, at $157.51 which encompasses the late March high at $163.65. The daily RS has formed a series of lower highs, line b, as it has continued to be weaker than the S&P 500. The daily OBV has also been leading XLK lower, line d, with major resistance now at line c.
There have been markets I have liked in 2022 such as the Invesco S&P 500 Pure Value (RPV)
The weekly chart of RPV shows an upward sloping trading channel, lines a and b. The upper boundary was tested three weeks ago before it corrected sharply. The close last week was below the monthly pivot at $84.01 which is now the first resistance with the weekly starc- band at $77.98.
The weekly RS completed its bottom formation at the start of the year as the resistance at line c, was overcome. The OBV also broke out to the upside in January completing a long-term trading range, line d. The volume increased last week with the higher close.
So what should you do when a market correction lasts longer and goes lower than you expect? If you are holding long positions based on the view that the support levels will hold during the expected correction then one should use stops under the support level. During corrections that last longer one needs to be patient and weight for clear sign of a turn which is often not easy.
In my view, stops should be used on all trading positions but for investors, it is always a more difficult decision. I rarely recommend more than a 70%-80% commitment to stocks in a retirement account even if the technical outlook is strongly positive. This does not eliminate the pain but does give you some room as I often do not use hard stops on retirement positions.
I am still looking for a strong multi-week rally that should take the QQQ 10% higher or even back to the highs. However, I have been expecting such a rally for the past two months and thought it would happen by April but that has not been the case.
The current sentiment readings in my view are consistent with the middle of a recession as are many stock prices. The New High New Low analysis warned in November that the average stock was not supporting the new highs in the S&P 500. This analysis has improved over the past month but is still negative. It is a lagging indicator but is one I watch and will update you next time.
In addition to waiting for a turn in the market internals, I am also watching for a confirmed top in the 10 Year Note yield and the VIX to help signal a sustainable rally. The week ahead is full of new inflation data which is like to again challenge the market
Credit: www.forbes.com /