So Monday saw a big dump in the DOW and caused some to come out and predict a crash, but on Tuesday the stock market went green as trading robots came in to buy the S&P 500 and DOW off of support.
But today we are gapping down into the open so what is next?
It is true that the long-term risks are indeed growing as we coming towards the end of this stock market and economic expansion (indeed we’re probably going to hit 4%+ GDP growth this quarter to bring it’s final peak), but as I said last week I do not think that Trump tariffs will kill the stock market right now.
You see on Tuesday trading robots ignored the tariff news and bought.
It didn’t matter to the trading robots that Trump even threatened to punish Harley Davidson for moving out of the country and destroy it.
The robots bought, because the market held support.
So right now it is the technical analysis chart price levels that matter and not the news.
Here is the key support level to watch.
On Monday the S&P 500 hit the red line on this chart, which is the 150-day moving average and held it.
That is now the key support level.
The only thing is I do think it likely will break as we’re not likely to see a big rally until July earnings announcements bring some news for people to buy, but the next support level below the 150-day moving average is the 200-day moving average at 2665.
As you can see that moving average acted as key support in February, April, and May.
That’s the next real key support level, but it’s not a big drop from here.
If I was looking to buy ahead of earnings though I would look to buy there.
The Nasdaq of course is acting stronger than the S&P 500 so is likely to continue to stay above it’s 150-day moving average, but the DOW is already below it’s 200-day moving average
The DOW is below both its 150 and 200-day moving averages.
That isn’t the end of the world though, because current stock market leadership is mostly in two dozen big cap tech stocks not in the DOW such as Google, NFLX, Amazon, Facebook, NVDA and so forth.
The next support level though on the DOW is it’s March and May lows of 23500.
I drew two arrows on those levels and they are likely to hold for the next few weeks.
But there is one big warning sign in the market and that is the NYSE chart, which includes all of the stocks trading on the NYSE as it is well below these moving averages.
The comparative weakness in this chart compared with the three other indices that people follow shows us that most stock are acting weaker than the S&P 500 and Nadaq are.
That is what happens in a long stage three topping process.
However, during stage three tops “bad news” like tariffs is often seemingly ignored.
The reason is simple and that is people are not worried about a market drop right now.
According to Yale Professor Robert Schiller in an article by Morningstar:
Investors are are more confident in the US stock market than at any time in the past five years, according to a survey carried out by Professor Robert Shiller – despite geopolitical tensions rising and stretched valuations.
Professor Shiller helped to devise the cyclically adjusted price/earnings (CAPE) ratio in 1981, a widely used measure of stock valuation.
Professor Shiller’s Crash Confidence Index measures responses from both institutional and individual investors in the US to the question: “What do you think is the probability of a catastrophic stock market crash in the US, like that of October 28, 1929 or October 19, 1987, in the next six months, including the case that a crash occurred in the other countries and spreads to the US?”.
The index for individual investors currently stands at 24.49, the lowest level since February 2013.
People only worry when they lose money and see their account balance go down and since that hasn’t happened this year enough to hurt them they aren’t worried.
Price action is what determines market psychology and that is why charting is so important and why robots buy off support until it stops working.
If you want to know more about how to use stage analysis of markets grab my book Strategic Stock Trading.
The implications for all of this are simple:
1)We are in a transition period in the markets that will in time lead to a new bear market.
2)We are not yet in a new bear market so individual stock trades still work.
Therefore you must reduce risks as an investor and focus more on individual trades in this market.
I’m 40% long in individual stocks and long ETF’s my own accounts as Power Investor members know, but I also have some short positions as I’m acting as more of a hedge fund than the typical American investor who remains 100% invested at all times.
Pair trades where you short some sectors or stocks and go long others make the most sense to me in this market.
For long traders the trick is to focus on where the strength is.
Last week I did a video outlining 5 big cap tech stocks with good charts patterns for a July rally. To grab that update just click here.
Again (as you do not want to miss this):