A Tale of Two Markets
The decoupling of the Small Cap indices, the Mega-Cap Dow and S&P continued this week. As the Dow Industrials continue posting record high closes, the Russell 2000 and NASDAQ continue to languish.
Tuesday's trading exemplified these divergences: the early morning release of the favorably perceived inflation report sparked an early morning rally of all the major indices. As the trading session progressed it became clear that not all stocks were going up. The Russell and the Nasdaq began to falter mid-day, closing near their lows with the Dow finally succumbing to the selling pressure in the last hour. The Dow still managed to end the day positive, closing at an all-time high.
In last week's article I expressed concerns about this type of market behavior. I laid out both Bull and Bear scenarios and so far, it looks like the bearish case seems to be playing out. Though there hasn't been much technical damage done to the longer term charts, if these negative divergences persist, I believe it will be just a matter of time before these will be manifested in the way of a broader correction.
In my opinion, one of the advantages of being a technician is that if we pay close attention to the technical readings, these will lead us to trade in the path of least resistance, regardless of the fundamental reasons why the market should do this or that.
Volatility is starting to pick-up. In one sense this is a good thing because it will provide traders with more opportunity, but this will also require traders to make those all important adjustments which I write about frequently. I find that when traders are slow to acclimate themselves to a new market environment they tend to suffer through their biggest draw–downs. If and when we have a major trend reversal, traders that are used to buying dips may have to start selling rallies.
We'll start this week's chart review by looking at the daily chart of The ER2. Note that we have been range-bound (839 to 810) for about five weeks now. A close below the 810 area would give further confirmation to the trend-break seen highlighted on the chart. Another salient point is the fact that the stochastics are starting to roll-over. This hasn't happened since the February sell-off and may portend a further decline in the near–term.
In looking at the Daily chart of The YM (e-mini DOW) below we see the uptrend remains intact. We would need a break below 13300 to have any kind of deleterious effect on this chart. This is a rare example of a linear trend which has become quite extended.
The bottom line: we are in the midst of options expiration week. Trading in these types of weeks can be erratic and skewed because of the impact options have on particular stocks, stock indices and futures. My judgment is that the market is going through a transitional phase now. Going forward, this means strategies that may have worked in the past may have to be re-examined.
So until next time, I hope everyone has a profitable week.
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Gabe Velazquez is a professional
trader with 14 years of experience. His focus is intra-day and swing trading the
ER2 (Russell 2000 e-mini) using technical analysis as his primary tool. Gabe has
managed both stocks and futures accounts as well as conducted educational seminars
on technical analysis for the past ten years. He is a frequent guest on Biz radio,
where he shares his market knowledge and utilization of technical indicators.
Gabe also teaches the