I received several emails regarding my article, “When to Short.” I wanted to address those questions and look at the markets and where they may be heading. I wrote the article on September 17th. Since that time the markets did endure a small correction that failed to make new lows and has now made new highs.
One signal that a student offered as a bearish reversal sign was the potential head and shoulders pattern on the Dow futures. Looking at the chart below, you can see that there were two patterns that worked out well. The peak of 2007-2008 was a head and shoulders. The current pattern is NOT a head and shoulders. The right shoulder is too high and we have now made a higher low and higher high negating the pattern.
Looking at the Dow may be the wrong thing to do anyway. Going back to a technique I highlighted in my article, “Watching the Markets.” I have attached a chart that shows the ETFs that track the major market indexes. Measuring them from the low on October 9th, you can see that the leader in the uptrend is the NASDAQ.
The leader should determine when the laggards can fall. As you can see, the NASDAQ is finding some weakness recently. The Russell 2000 has already started to fall.
The QQQ’s are sitting in the middle of a weak supply zone from 2000. That is why prices have started to stumble. This is a weak zone and the fact that we haven’t dropped yet leads me to believe that price could go higher until it reaches the stronger zone above.
There is also some weakness in the sector rotation. Consumer discretionary stocks usually outperform the staples during bullish markets. When the staples start to outperform the discretionary stocks, there may be a market trend change coming.
So while the bears are still quiet, they are hiding just around the corner. Be cautious with your long positions and pay attention to the trend for direction.