In our last blog, we projected that the bank stocks would fall in the direction of cycle regardless of their earnings report. They did fall after earnings report. BAC is the weakest and MS is the strongest in the group of BAC, C, JPM, GS and MS. The banks are making money, but the market didn’t care.
The NASDAQ had a worse week than the S&P 500 and DOW last week. The weekly NASDAQ chart presents a very clear breakout position and the possibility of a breakout failure is building up.
The reasons of a possible breakout failure:
- The market breadth is narrowing with the mega techs back to leadership after the rolling corrections in different parts of the market which we talked about in our last blog.
- Time wise, August is the 17th month from the March 2020 low. 17-month is approx. 2×8.6, 8.6 being the basic time cycle frequency. August has the tendency to produce a seasonal high; September and October have the tendency to produce a seasonal low. So it’s not unreasonable to expect a somewhat shake down in August-October dark period. Some fundamental events (delta variant + geopolitical scares + fiscal cliff, etc..) will occur in the direction of cycle. Watch out.
- Price wise, the NASDAQ is currently 62.2% over its 200-week moving average, the highest overage since the DOTCOM bubble.
- Cycle wise, it has been 16 weeks since the current weekly cycle low on 03/26/2021. The weekly cycle is currently in top timing band.
- Technically, if the July top is confirmed later, you will see the on balance volume has been telling the story. The highest on balance volume was achieved in Feb 2021, the currently high was accompanied with a lower on balance volume. That’s a classic bearish divergence.
In order to confirm the July top and the subsequent greater than 15% selloff, the NASDAQ and S&P 500 charts have to confirm a breakout failure. The DOW has not confirmed its breakout yet.
In the weekly NASDAQ chart, you can see clearly that the NASDAQ is currently in breakout position. If it turns around and takes out the Feb and Apr top around 14,200 with momentum, you know the current breakout has failed and the correction is underway. The NASDAQ is at 14427 now; it’s only about 200 point below to confirm the top. It’s a relatively small risk when you try to short the top.
What to do after confirmation?
- Long term investors need to do nothing, as the bull market is no way near its end. Perhaps add new money to work in the fall correction.
- Traders can buy puts and sell covered calls.
We would like to remind our subscribers that the bull market started in March 2020 has ways to go. The secular digitization trend is just getting started. This pending correction should be viewed as opportunity. Corrections are healthy and normal market behavior, but when it finally hits your portfolio, it would not feel so healthy and normal. Our cycle analysis is striving to provide a longer cycle view so you will would have less stress and be calmer during the market sellloffs.