Well, we have seen a few days of wild action in the stock market. Earlier this week Bitcoin blew up to give all of us a warning sign about the markets, but then Wednesday the market rallied into the close after a rough morning to bring some hope to the situation. Of course, then on Thursday the hopes turned into sorrow in a market that has reached its second highest valuation in its entire history.
But what is next?
Is this the start of a correction or just some temporary gyrations?
I believe we are heading for a real correction, but the next few days will tell us for sure.
The selling is hitting the Nasdaq harder than it is the DOW or S&P 500, so if the market is going to break down that is where it is going to start. Take a look at the chart.
The Nasdaq now has support at 13000, a level below its 50-day moving average and that has acted as support since New Years. So far, since the end of September, the Nasdaq has not yet broken support. It has continued to make higher lows and each low has held up.
That’s the definition of an uptrend. However, if it closes below 13000 then that pattern will be broken and the Nasdaq will begin a new downtrend. We’ll then have to figure out where the next support level is.
I talked about the importance of such trend changes in part II of my video series titled Stock Trading 101. For more on how I analyze the markets grab my book Strategic Stock Trading by clicking here.
I talked with Jim Goddard of www.howestreet.com about my thoughts on the current market trends and what I expect for the next few years yesterday in an interview posted on Youtube. The sectors leading now are what did well in the 1970’s.
Leadership in the markets is shifting out of the big tech stocks that have been so popular to buy for years and into other things such as commodities. Energy stocks like Exxon are now performing better than Facebook and Amazon.
Look at Amazon.
AMZN has not made a new high since Labor Day and has been lagging the stock market ever since. Yesterday it closed below its January low and its 200-day moving average. Facebook also is acting weak.
Facebook has been unable to make a new high since Labor Day and closed below its 200-day moving average yesterday.
Many other of the past favorite big cap tech stocks are also acting saggy. These are the stocks that are poised to lead the market down if the market corrects. Watch the 13000 level on the Nasdaq the next few days.
There are plenty of reasons to think the stock market is going to correct. Yields are rising to hurt the value proposition in buying stocks paying low dividends and represent declines in the corporate bond market. Not only are valuations high, but there is now record margin debt inside the stock market, because of the rampant speculation. Margin debt extremes can lead to panic declines.
In my view, now is the time to be cautious on the markets. It is time to get off margin and reduce risks. If the market does correct you want to be in a position to be able to buy when it is over and not one of the many going into panic forced to sell or simply too beat up to do anything.
I started something new last week and that is I am opening up my daily morning posts at the bottom for comments. My goal is to make this a water cooler type spot where we can talk about the markets together and share ideas. Check it out. If you got any questions or comments just scroll on down to the bottom of this post. It’s fun. If you are reading this on a mobile phone it might just be a little box that says leave a comment that you need to click to read the comments (I’m trying a wordpress plugin today that loads the pages faster on mobile phones as more and more people are using phones and apps to do everything).