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June 25, 2016

Posted by Tom in Thoughts.
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June 24, 2016 – Every once in awhile I think it’s a good idea to step back and evaluate the “big picture”.  By that I mean looking at the market in a different (typically longer) time frame.  With the market in so much turmoil it seems that now would be that time.  The chart below is the NASDAQ Composite in weekly bars; that is each vertical bar represents a week as opposed to a day.  (click on chart to enlarge)

NASDAQ

I’ve (attempted) to apply Wyckoff theory labels in the bigger, boxed letters.  Here is a POSSIBLE market structure scenario:

Did we have a Buying Climax (BC) in July of last year?  Followed by and Automatic Reaction (lower) to the 4290 area?  And then a Up Thrust After Distribution (UTAD) in November / December?  Lastly, was the last market rally (June of this year) a Last Point of Supply (LPSY) ?  For the purist, the answer is NO because these points are not spot on classic Wyckoff points, but IMHO Indexes are the hardest structures to call.  The reason is they are . . . averages of many stocks, and thus don’t necessarily follow pure Supply / Demand structures.  In my opinion, if you wait for a perfect structure . . you’re going to missing many important inflection points during the wait.

The red horizontal line just calls out that since November, 2014, the NASDAQ Composite has not made a lot of progress.  Volatility yes, in hand fulls, but no sustained upward progress.  So where does this lead to?  Well the markets closed at a previous swing low, and we can see that price support level going back years now.  Likely, if we can’t hold this level, we’ll re-test the 4290 area (lower).  I keep reminding myself of the definition of an Up Trend: higher Highs and higher Lows, while a Down Trend is lower Highs and lower Lows.  It all depends on your time frame, but on a weekly chart, I’m not seeing higher Highs right now.

What next?  Monday & Tuesday should be interesting.  Are retail investors selling after this weekend of news and / or are the big guys nervous enough to sell into this already significant decline?  Let’s pay particular attention to how the market acts in the afternoon and what volume is being generated.  I don’t doubt the possible buying opportunity, but we’ll need to see institutions coming into this market in a significant way and I doubt that will happen quickly.  Folks are nervous and more inclined to wait for a direction to be established.

No need to talk about what’s doing well.  It’s precious metals, US bonds, utilities and some real estate . . . all defensive.  These have gone up significantly over the past 6 months, so they are getting extended.  The big question is whether this is just a summer slump or a structural change.  If it is the later, my Wyckoff label may look pretty good.

Have a good week.  …………  Tom  ………….

price chart by MetaStock; used with permission

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