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Friday, July 10, 2020

Consolidation pattern continues, but 7/10

The buyers stepped up this morning and kept at it all day.

There was a tick accumulation signal today.  The first one since 6/5.  At least some people believe this consolidation period is about to end.  SPX is close to making a new rally high.  Will it follow through on the upside?  The internals are a bit suspect, but nothing the bulls can't overcome if the desire is there.

The green count is above 50, but well below overbought levels.  If the market turns back down this is a negative divergence.  If the market continues higher there is some room to run.  Same with the bottom panel, the short term indicator.  There is either a big negative divergence (it is below 50) or there is a lot of room to run before becoming overbought.

The breadth chart is not showing a lot of strength.

The 10 day advance/decline lines are positively crossed, but the volume lines are not.  The McClellan oscillator is still negative and has been most of the time for the last month.  The story is the same here.  Either we have negative divergences or lots of room to run before becoming overbought.

The key to what happens resides with QQQ.

In what seems ridiculous, QQQ is over 20% above its 200 DMA.  That is a fairly rare occurrence, but in the middle of a recession it is unprecedented.   It appears some investors believe a few big cap tech stocks are recession proof.  Take a look at some of the major stocks (AAPL, AMZN, NFLX, MSFT, NVDA, and TSLA) that are driving this move up.

Are you getting the picture?  Could these stocks be making blow off tops?  I think if QQQ had traded sideways like SPX I think the odds would be high SPX would be bracing for a break out.  The problem is the market cap of these extremely extended stocks is so large.  If they were to all correct at the same time as they often do, SPX would move down.  If you look closely you will see TSLA is up 50% in eight days (that is after doubling from the March bottom).   While these NASDAQ stocks are going crazy key sectors are being left behind.  All three Dow Jones indexes are below their 200 DMAs.  In addition, IWM and XLF are also below their 200s.  These indexes indicate that investors do not believe the recession is over. 

I believe I understand what is happening.  During the bull run from 2009 many retail investors avoided individual stocks and put their money in ETFs and index funds.  They have watched some of these stocks make huge runs over the last decade.  I suspect many people saw the crash as a buying op they did not want to miss out on.  As the stocks moved up rapidly FOMO took over and people starting piling in like mad.  I have heard stories of 10 year old kids day trading while home from school.  This is so much like 2000 I am suffering from deja vu.  A small number of stocks are driving the market higher while many stocks topped out a month ago.  Can this irrationality continue?  Yes it can, but will it?  It seems really crazy with the virus picking up all around the world and some businesses being closed down again.   We are coming up on earnings season.  Will the glamour stocks that have been rallying so strongly have good enough earnings to keep their prices up at these levels? 

A friend of mine recently mentioned this is a game of musical chairs.  When the music stops we better be quick to grab a chair.  I concur.

Have a great weekend.  Peace and good health to all.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.