Any and every forecast is necessarily a product of what just happened, and what’s been happening recently, through the prism of a longer lookback.
This week’s Capital Wave Forecast, while always incorporating multiple lookback timeframes, is heavily weighted on what just happened.
Last week stocks took it on the chin on Tuesday and substantially more so on Wednesday. Over those two days the Dow dropped more than 3%. All the benchmark indexes were hit hard over those days.
The recession is coming narrative was to blame. Specifically, the ISM manufacturer’s index coming in at 47.8 set the negative tone.
Most investors don’t realize that the greater danger than recession talk is hiding in plain sight.
On Wednesday, after the service sector index came in lower than expectations at 52.6 and the Dow fell 300 points, a rebound later in the day rallied the Dow back. It ended up 122 points.
Thursday and Friday’s big comeback rally mitigated the ostensible damage done earlier in the week as the majors, the Dow and the S&P ended down only .9% and down .3%, respectively.
The Nasdaq Composite, however, ended the week up .5%, to most everyone’s amazement…
What happened on Wednesday when the majors got hit so hard was the direct result of technical levels being reached where a lot of stop-loss orders were resting. Those stops getting taken out caused ugly and quick downdrafts. Stocks ended near the lows of the two-day selloff.
Once the selling was exhausted on Thursday morning, after more stop-loss levels were reached and stops hit, which was scary, the climb back was possible, and actually happened.
The good news is once the stops were taken out selling pressure came to an almost standstill on Thursday and with nothing going on, as traders looked around to see who might be doing what and which way to go next, the computers took over.
They started probing offers and seeing fewer and fewer of them, took them. By taking what little stock was out there for sale the computers triggered the comeback rally and they kept stepping up and nibbling at offers, hence showing buying interest after stops had been cleared out.
Traders saw that, institutions saw that, and they joined the bottom-fishing buying spree that culminated on Friday with the Dow up 1.42% that day, the S&P up 1.42%, and the Nasdaq Composite up 1.4%.
The Bad News of the Exhausted Climbing Markets
The bad news is the damage was worse than what it appeared to be by Friday’s close.
Taking out stops gets scary but rallying back from ugly drops is encouraging to most people. Just not us.
Those stop levels that were hit and resulted in lower levels mark where the new stops will be.
And they’ll be a lot more important than the old levels. That’s because new buyers will use them as bailout points if the late week rally doesn’t hold.
To see specific trades for these opportunities, Money Zone subscribers can read on here.
Harping back to last week’s forecast, we’re watching necklines on the majors.
Last week we got close to the Dow’s and the S&P’s, less than more. But, not so the Nasdaq, we almost got there on the Composite.
Those necklines are now more important than they were before.
That’s because with stocks rallying at the end of the week, the bar higher which that rally left on charts, makes the necklines even more pronounced.
This week’s forecast remains the same as last week’s.
Volatility is raging, make it your friend not your enemy.
Watch those necklines and beware of rallies on thin volume.
Because there are potentially huge walls of money that could potentially making a pretty big difference in your life.
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