The dam broke open last week and bears poured out, knocking the NASDAQ below its 200-day moving average. It’s not surprising to see the index rebound a little following a slide of more than 1000 points since mid-October.
But don’t let the small recovery fool you. The recent selloff continued the pattern of walking down the stairs, as we’ve discussed in last week’s newsletter. Lower highs, followed by lower lows is technical confirmation of a downtrend.
Now, there is a lot of talk about last week showing signs of capitulation. In other words, the selling could be over as investors throw in the towel and give up hopes of an uptrend. However, there is a major hole in thinking the selling is done. Capitulation is usually accompanied by a spike in volume. As you’ll see from the chart below, recent downtrends ended, or at least paused, following a spike in volume.
Look at the last red days associated with the current slide, average volume. Of course, nothing is 100 percent, but we’ll always play the odds and rely on history.
If recent history repeats, continued upside to 13,000-13,200ish, maybe even to the descending 50-day moving average of 13,454, is possible. However, investors cannot get wrapped up in the idea that there are no more sellers, no matter how many times the smart men and women on TV say capitulation.
In fact, our experience says to expect the trend to continue until it breaks. If that’s the correct call, then investors might be wise to raise cash as the NASDAQ works its way towards resistance at the levels outlined above.
Odds are, selling will capitulate at some point, marked with robust volume, followed by a higher pivot point, and switching from going down the stairs to walking up the stairs.
SPDR S&P 500 ETF Trust (SPY) outperformed Invesco QQQ Trust (QQQ) for the third week in a row. As regular readers know, it’s our view that stocks do their best when the NASDAQ leads the way. With the S&P on top, the scale continues to tilt towards continued weakness.
Industries/sectors considered defensive like Utilities Select Sector SPDR Fund (XLU), SPDR S&P Metals and Mining ETF (XME), and Invesco Food & Beverage ETF (PBJ) were the top three performers and Wall Street headed to asset classes that tend to outperform (which can mean going down less than everything else) during tough times.
However, we’d feel it’s best not to enter anything new until the selling is over and a new uptrend is confirmed. At the very minimum, if we get head faked, it could limit downside as we’ll know the exit point.
There is no chance we’ll add anything here for the foreseeable future.