Stock markets have gone mostly sideways as we indicated last week. The Dow Jones Industrials managed to set new highs, but the Nasdaq failed to do so.
On Thursday there was a sudden drop in the market, followed by a remarkable comeback on Friday. This could be the first of a series of air pockets as we remain in lunar red period and the drop has left some technical damage on the charts.
Here is the current situation for the Nasdaq (click for larger image):
The recent breakout above a resistance line (thick pink in the chart) that was in place since last May, was reversed by last week’s drop. So this is starting to look like a failed breakout, and that would imply more downside action to come. Friday’s spectacular rebound has taken the Nasdaq back up to this support/resistance line ~3930, but unless it can break convincingly above it again, this is not a reason for celebration just yet.
My Earl2 indicator has turned down, while the Earl and MoM indicators were pointing down already. This is a weak technical picture and I would postpone any buying until we see at least the shorter term Earl form a clear bottom.
If the Nasdaq falls below last Thursday’s lows, then a quick sell-off could ensue and 3800 followed by 3650 are the first areas where trendline support is present.
The situation is rather delicate right now. Buying the dips has been a very good strategy for most of the year so far, and that probably explains Friday’s market reaction. But sometimes an air pocket is quickly followed by another one.