Last week, prior to the swoon, I wrote about bonds breaking down and leading stock prices lower. Maybe I should have put that in bold or italics or I should have just made it the headline.
Of course, as mere mortals, there is no way to know when the market is going to vomit like a hungover zebra who lost his stripes in a rigged game of Old Maid.
What happened?
I think the stock market just priced in bonds (TLT) going to 109. The fact that multi year support (TLT 115) was broken and the 10 year went above 3% is no reason for stocks to sell off 5% in two days, however, I think it’s the fact that there is little support to hold bonds from falling to 109 that really exaggerated the selling.
There is really no support to hold up bond prices unless price gets over TLT 115 again. So, it’s not so much the fact that interest rates went up a few basis points but the fact that TLT 115 was busted and there is no safety net until 109. Remember the air pocket?
This is what I wrote last week…
So, will bonds lead stocks lower or will stocks lead bonds higher? Right now, it looks like there is a higher chance bonds will lead the way down as there is no real support between now (113.04) and 109. That is a pretty big air pocket.
It wouldn’t be out of the ordinary for SPY to get sucked down into the yellow support area I drew in many months ago before resuming another leg higher. If this rising yellow support zone that price has been trading in from the bottom in February doesn’t hold we will have even bigger problems.
This definitely has my attention and everyone has their eye on SPY 286 again. If that breaks I would expect price to test rising yellow support.
I think it’s time to begin trimming the sails.
Well, now we have bigger problems and “trimming the sails” was a bit of an understatement but the evidence we had one week ago did not justify selling everything. It still doesn’t.
SPY 286 was taken out in the blink of an eye then cascaded down into prices we haven’t seen since June. The 10 minute chart shows the selling pressure created when 286 couldn’t defend. Once 286 was taken out they took her all the way down and through 2018 support (yellow rising line) that triggered the buy in early July (green arrow). See daily chart.
SPDR’s S&P 500 Trust Series ETF (SPY) 10 minute
SPDR’s S&P 500 Trust Series ETF (SPY) daily
The same thing happened with Nasdaq (QQQ) and technology (XLK).
This is what I wrote last week…
Also, QQQ, the ETF that tracks the Nasdaq 100 index just broke 2018 support and settled just above minor support (yellow) that may or may not hold…doubtful. XLK, the technology sector ETF, looks just like QQQ breaking 2018 support and settling just above minor support that probably will get taken out…very soon.
Minor support did not hold and was taken out quickly to say the least. The algo like selling took out two more support levels before getting a bid Friday to close just below the high made in March. Price has a chance to grind higher along weak rising support but if QQQ167 can’t hold there is an air pocket down into QQQ 151-156. That is about 13% below current price. XLK looks mostly the same.
Invesco QQQTrust Ser 1 (QQQ) daily
The fact that all of the major US domestic indexes have violated some sort of intermediate term support is not good. Couple this with the fact that the German, China, Hong Kong and Japan indexes have done the same thing along with emerging markets breaking multi year support it appears the tide has turned for awhile. The only country index that hasn’t busted below important support is the United Kingdom. God Save the Queen.
So, now what? Buy or Sell?
I would not recommend wholesale selling. I would recommend a continuation of light trimming.
Hold all recommended open positions except the following…
Please note the following buy recommendations were for 1/5 position size.
Citrix Systems Inc (CTXS)
Sell
Broken support. Loss of about 7%.
Intuit Inc (INTU)
Sell
Broken support. Gain of about 3%.
Motorola Solutions (MSI)
Sell
Broken support. Loss of about 2%.
Verisk Analytics Inc (VRSK)
Sell
Broken support. Gain of about 3%.
Fidelity National Information Services Inc (FIS)
Sell
Broken support. Loss of about 4.5%.
IDEXX Laboratories Inc (IDXX)
Sell
Broken support. Loss of about 8%.
Keep an eye on Amazon.Com (AMZN) and Facebook Inc (FB). They both have settled on important support. If they break down from here there will be more pain to follow (and a sell signal) as they both have pretty good air pockets to fill.
Amazon.Com Inc (AMZN) daily
Facebook Inc (FB) daily
Panic and overreaction are not in the game plan. Events like this are not common, however, they do happen. What’s important is how we react. I don’t think anyone can say the bull market is over but it sure looks like there is some turbulence ahead. I think selling into strength will be the new game plan until new highs are made.
Trade Smart,
Don
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