Markets did not break down in the second week of our lunar Red period, and even recorded new highs.
This is a sign of ongoing strength.
What does that mean going forward?
The market has closed right near the overhead resistance. That means it will not be easy to add to the recent gains, unless we see a proper breakout to the upside. The new lunar green period favors a move to the upside. The question will be: is there enough fuel left in the tank to move even higher, and more importantly: hold on to whatever gains we get?
My Earl indicator (blue line) is bottoming, indicating that there is now room for another push to the upside. But the Earl2 (orange and red line) remains bearish. This means any new push to the upside could be quickly reversed.
So, I am going to remain cautious. The trend is still up, but I would now keep my stop-loss at 3225 for the Nasdaq.
Any drop below that level would break the uptrend, and probably signal the start of a larger move to the downside.
What could trigger a downturn? Well, among many other things I would watch out for solar flares this week.
A few weeks ago, we had a post about Watching solar activity.
Watching for potential solar flares is equally important, because solar flares cause geomagnetic storms, which are known to have a negative effect on stock markets. That’s why we keep a solar flare monitor on our Solar Activity page. I watch it every day before the market opens. So what to look for?
Here is today’s picture:
First thing to know: the sun has a slow 27 day rotation period, and sunspot areas move from left to right in the picture. Most sunspots are harmless, but bigger sunspot groups can release solar flares, including the rare and dangerous X-class flares.
So, when a big sunspot group becomes visible at the left of the picture, then we know it will come near the middle of the picture after about 7 days and then it will be pointing right to us. If an X-flare happens when our planet Earth is right in the “crosshairs”, then a massive geomagnetic storm occurs. This can knock out satellites and cause blackouts.
Historic examples are the Solar storm of 1859, the May 1921 geomagnetic storm, the March 1989 geomagnetic storm (blackouts in Quebec), the Bastille Day event, the Halloween storms of 2003
The stock market usually doesn’t respond well to X-class flares (probably because of the risk for economic damage).
* March 6, 1989 storms: S&P 500 dropped 2% over the next two weeks.
* Juli 14, 2000 (Bastille Day Event): S&P 500 dropped 100 points (~6%) in the next two weeks.
* Oct 19, 2003 (start of Halloween Storms): S&P 500 lost 30 points (~3%) in one week.
The most recent X-class flare that came our way was on October 24, 2012 and the S&P 500 lost 60 points (~5%) over the next two weeks.
The market doesn’t always lose 100 points, but usually there is some effect in the market after an X-class flare.
The good news is we have tools to anticipate when X-flares might come our way.
As you can see in the current flare monitor picture (above), a big sunspot area (number 05) has appear on the left side. The table on the right shows you that this is a dangerous sunspot group. The risk for M-class flares is 18% and the risk for X-class flares is 6%. As this group will probably remain in view for another 10 days, we better keep an eye on it.