Another day of selling took markets further away from their highs and into more well defined profit taking. Near term, there should be a rally to mount a retest of October highs, and how this rally behaves will determine if this is a pullback or just a relief rally.
The index to guide this differential will be the Russell 2000. Friday saw a finish on former declining resistance trendline, turned support. Technicals are weakening, and another couple of days like Friday would be enough to shift this net bearish technically. As it stands, the current sell off could still be viewed as a bullish pull back and Monday is nicely set up for a rally.
The S&P hasn’t quite made it back to declining trendline which is also near support of the 50-day MA. Friday’s selling ranked as distribution, the second day of such selling in a row. The S&P was attempting a relative recovery against the Russell 2000, but lost ground on Friday’s action. For Monday. watch for a intraday spike back to the 50-day MA, it might offer bulls a chance to fish for an entry opportunity.
The Nasdaq also registered a distribution day. Friday saw a loss of the 200-day MA with just the 50-day MA left to lend support before there is move back to declining trendline. The Nasdaq had been outperforming the S&P, but last week saw a shift away from this index and towards Large Cap indices. This may lead to further underperformance for the coming week.
Nasdaq breadth is mixed. The Nasdaq Summation Index reversed off declining resistance, but other breadth metrics aren’t as conclusive. The worry is in the Percentage of Nasdaq Stock Above the 50-day MA, which broke declining resistance but subsequently dropped below this line in a ‘bull trap’ style move.
Monday will be about pre-market, and how – if sellers maintain control – how 50-day MAs and/or declining support play as demand. If markets open close to where they finished on Friday, then watch the first half-hour of action; losses could offer a buying opportunity at 10:00 am with reversals common at this time. A strong pre-market will make it difficult for bulls to get involved unless there is a sell off in the first half hour of trading.
