Sunday, June 14, 2020
Well that was a crazy week. The Dow cratered 2,500 points from Tuesday through Thursday and managed a wee rebound late Friday with a gain of 477. As I warned in last week’s commentary, we certainly got the reset.
I wrote..
“I would, however, exercise caution at current levels. The broader market is vulnerable and will continue to be vulnerable until we get a reset through time (consolidation) or price (dip). Longer term, price action is positioned well and support zones should be treated as accumulation opportunities.”
It’s interesting to note that the reversal lower, which began on Tuesday, occurred from a resistance level (upper purple line) that matches exactly the trajectory of the new trend line support (lower purple line) established by the Corona Crash Bottom from the 2009 low. This is important to note.
While they can certainly continue to trade up from current levels (unsustainable trajectory longer term) which do provide some support let’s examine what happened last week and what would likely be a worst case scenario over the near term.
The purple line resistance established by the 2009 low and the Corona Crash bottom trajectory is obviously very important. It’s exactly where the 2,500 point collapse occurred from. It’s aligned the same for both the Dow and S&P 500 and is the same distance above Major Support (yellow lines) for both indexes. When we see alignment like this between market proxies it is indicative of an important inflection/reversal zone.
The brief move above Major Resistance (yellow line) trapped the longs with bullish action and then ripped their face off at the newly established resistance level just as they got more aggressive with the crossover above the yellow line resistance zone.
So, if we don’t hold current support levels it wouldn’t be surprising to trade down to Major Support on the Dow, S&P 500 and Nasdaq. From current levels, Major Support for all three indexes aligns well for a significant reversal higher should we get down to those lower levels. I would treat those lower support levels as nice entries or accumulation zones.
Dow futures (/YM)..from 2010
Dow futures (/YM)..2/20 peak to 6/20
S&P 500 futures (/ES)..2009 to Corona bottom
S&P 500 (/ES)..CC btm short
Nasdaq futures (/NQ)..6/13/20
Importance of Positioning and Alignment
Speaking of alignment, when buying individual stocks or ETF’s it’s important to know where the broader market is positioned. As the broader market will influence price movement in most all instruments we want to be buying individual stocks or ETF’s when the broader market is positioned at a support level where a reversal higher is likely to occur and selling when the broader market is positioned at a resistance level where a reversal lower is likely to occur.
To increase our probability of buying individual stocks or ETF’s low and selling them high we want to identify those individual stocks or ETF’s that are also positioned at their unique support or resistance levels and align with not only the broader market but with their sectors and sub sector levels as well.
Forecast and Action Ideas
While my longer term forecast is bullish, I have some concerns over the near term. The tech heavy Nasdaq has been the clear performance leader for the past ten years including during the more recent Corona Crash and recovery. Technology stocks have mostly ripped higher with monstrous returns from the Corona Crash bottom in March.
Examining Nasdaq and tech at a more granular level we can see that many individual stocks and sub sectors are positioned at or near resistance levels that suggest they are vulnerable to a pullback to lower support levels. As Nasdaq has been the leader, any pullback will also influence the Dow and S&P 500.
At current levels, trimming profits will dampen the effects of any downturn and provide the opportunity to buy more shares at lower support levels which will offer less risk with better positioning and alignment.
Stay tuned for my favorite individual stocks and ETF’s positioned and aligned to ramp higher during the next expansion phase. If you are not a premium member and wish to continue receiving my broader market commentary, research and individual stock ideas just use the contact info here or send me an email.
Don