A Tale of Two Markets (QQQ,DIA,SPY)


Executive Lounge, Options Trader Elite / Thursday, March 15th, 2018

A Tale of Two Markets (QQQ,DIA,SPY)

Here’s some technical puzzlement to lead off the day…

What’s to be made of the dichotomy between the Dow and S&P 500 on the one hand, both of whom have failed to better their former all-time highs from late January, and the NASDAQ, whose fashion-forward tech names have easily managed to best those levels over the last few days?

Does it mean we’re headed for a retest of the February lows, as the charts of the Dow/S&P would suggest? Or are we rather headed higher, with any dip in the coming weeks or month just a chance to gather ye marbles, while ye may.

The answer to that question may reside in the finer detail of the charts, and for that reason we’re now going to show you four indexes, and share a little of our thinking on each. We do so because immediate market direction is dependent upon a number of key resistance and support lines that we’re now about to show you.

To start, here’s a look at the Dow Industrials for the last six months.

What’s most prominent here is the unfolding pennant formation (in red), a continuation pattern that’s consistent with higher prices upon any upside breakout above the upper red line.

Of course, that’s anything but guaranteed. The coming price action may turn the pennant into a pom-pom.

How Likely is that?

The last three days trade have brought the Dow successively lower in a staircase pattern that the Japanese technicians call ‘Three Black Crows’ (insert, in black). It doesn’t sound very auspicious, and, indeed, the formation generally signals a reversal of the most recent trend.

Mitigating the severity of the formation are 1) the lack of convincing volume on the down days (red circle), and 2) the existence of ‘shadows’ on the crows. On an archetypal Black Crow one would prefer to see a long ‘body’ without any tails.

Be that as it may, we’re concerned, and for that reason, we’re keeping a close eye on the following price levels:

First, the 137 day moving average (24,000 and rising) was the previous line of support, from which the Dow bounced some 2200 points (1st blue line). Any close below that level would put a significant dent in our faith. Beyond that, a daily close beneath the last retracement low of 23,490 (2nd blue line) could create a selling frenzy that would precipitate a prompt reordering of our priorities.

Beyond that, the extended overbought RSI readings through December and January (in green) should be understood as a red light until a sub-20 oversold signal comes along to balance things out. It’s not a hard and fast rule, but it keeps us wary.

Now have a look at the NASDAQ for the same time frame.

Here we see roughly similar price action, except the bounce carried much higher and led to new highs.

Have a look –

Over the last week we broke above January’s all-time markers (in red). But the action of the last two days created a bearish engulfing pattern that could signal a retreat.

That said, the NASDAQ is in far better technical shape than the Dow (and S&P500) insofar as the lead-up to the former highs was not as reckless and manic. The NASDAQ’s RSI overbought phase lasted but a couple of days, compared to the Dow’s nearly eight weeks!

More than that, price action remains above all its moving averages and the MAs themselves are unfurled and headed higher.

Entirely bullish.

In terms of the coming days or weeks, then, we wouldn’t be surprised to see further upside from the NASDAQ, so long as no one else crashes alongside her, and the index maintains some height above her moving averages.

With the Dow leaning lower and the NASDAQ higher, we would offer one more extremely important observation before offering our trade for the week.

And it goes like this –

All three major indexes registered overbought DAILY, WEEKLY and MONTHLY readings during the run-up to the February highs. This is an event that happens once in a decade – if that. It is almost always associated with a major market top.

Not only that. But we would also add that while American markets were hitting new all-time highs, the Shanghai market, as represented by the iShares China Big Cap ETF (NYSE:FXI), was faring far worse.

Have a look here –

This is a monthly chart for the Chinese big-caps going back a decade, and it clearly shows a triple top formation (in red) that will have to be bested forthwith if there’s any hope for China’s index in the near term. Three strikes is precisely how traders will view any failure by FXI to deliver a home run breakout above 54.

We discuss the Chinese market because without a strong move higher in Shanghai, there’s little chance a slide in American equities will be stemmed.

Close one down, Open up another

We have one trade to deal with today. It was opened on the 22nd of February and saw you selling the SPY April 20th 255 PUT for $3.01 and buying the SPY April 20th 240 PUT for $1.64. Total credit on the trade wa$1.37.

And today? The short 255 goes for $1.11 and the long 240 for $0.51. Buy back the former and sell off the latter, and you net $0.77 on nothing spent. That’s a profit of 413% (accounting for minimum commissions).

Now for the big one.

Today, we feel obligated to move in bearish fashion, considering all of the foregoing and the small chance of a general market breakdown.

We’re partial to the NASDAQ, as we alluded above, and skeptical regarding the Dow.

And that’s precisely why we’re taking the following action –

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Many happy returns,

Matt McAbby

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