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At Resistance; Next Week Important February 8, 2014

Posted by Tom in Thoughts.
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This is a way busy weekend, so this will be blunt and to the point (even more than usual).

Take a look at the chart below.  We see the NASDAQ Composite Index breaking down from the peak mid-January at the top end of the purple trend channel.  As we know, the market tends to get extended and “soft at the top end of this channel.  But we’ve usually held above the lower purple line.

NASDAQ

Well this week was different.  The closing price did break that lower level on Monday, and it did so on increasing volume.  That marks a potential change of character in this market.  I say “potential” because what happens next week could confirm the change.  We’re at / near a resistance level (about 4135; red line) and closing solidly above that level would be Bullish.  Thus I’ve spotted in Monday (that big down day) as a possible Sell Climax (sc?) and Wednesday as a possible Spring (spr?).   Monday was a flush out on high volume (classical selling climax) and Wednesday probed lower but finished near the high of the day on lighter volume (a classical spring bar).  Thursday & Friday were big up bars (volume here is not as important).

So, how will this market react to hitting the ceiling (a.k.a. resistance price level)?  We’ll know next week.  A likely scenario is a test of the 4135 level, then a retrenchment back near the lower purple line, then a broad push higher on increasing / heavy volume.  That would be the “all clear” sign.  The other scenario is a failed probe higher and then a sharp fall on increasing volume (investors giving up and getting out).  A failed rally attempt on high volume would not be a good sign.

So, we’re at a cross roads now.  I note that this “selling off” / correction has been light in terms of volume as noted on the red histogram at the top.  We’ve gone from over bought to neutral and so I tend to favor the labeling as this being a minor correction.  Strong sectors are out there, especially after this correction.  Select Biotech and healthcare and Internet stocks have held up well.  All we need is strength in the Financial sector and we could be back in business.  But that has yet to be proven out.  As the British would say “Wait For It !”.

Have a good week.             …………..  Tom  ……………….

chart by MetaStock, used with permission

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