As we approached yesterday’s action, even those that have been bullish on the market were prepared for some type of digestion or pull-back. At this point, we want to measure the type of digestion to see if the composure and speed of this rally continues.
Some bears are pointing to a double top on the Nasdaq. The pattern is worth noting and it will be important to see what support levels we hold. The 8/21 day moving average in the QQQ stand around $68.11-68.41. In order for the intermediate uptrend to change character, the QQQ will have to close below $67.50. So if you want to protect gains and have high level stops, that is your line in the sand. The 50-day moving average is all the way down at $65.94.
The S&P 500 is also very extended from the 8/21day moving avearges, but didn’t get hit hard yesterday as the tech heavy Nasdaq. A healthy retest of the prior breakout stands around 1422-1426, while the 8/21 day moving averages stand at 1412-1415. If they hold, it will also be a very constructive sign for the market. We will continue to check the temperature of the market nightly in our Off the Charts newsletter.
High beta names have had major runs, and the way Apple (AAPL) acts in the next few days may also gives us clues for the broader market. Yesterday AAPL failed to find momentum above $682.48 and gave active traders sell signals in the first hour. Some lightened up (like me), and some got short.
In order for AAPL to maintain commitment to these upper levels, it needs to hold the 21-day moving average around $657-659. A break and close below that level could bring out more sellers and then put the prior highs on the table to watch at $644. I love AAPL and think we have higher prices in the future, but I also respect price action and my p&l more. Thus, I will look for bullish signs but I won’t be wearing AAPL bull goggles like I had on yesterday.
Yesterday we highlighted a few laggard type plays that are worth keeping an eye on. SodaStream (SODA) was up nearly 5%, as the highly-shorted stock triggered out of a lower base and looks like it could eventually challenge recent pivot highs around $44.50. Chipotle (CMG) continued it recent torrid run, recovering from its post-earnings malaise with a 15% move higher over the last three days. Another former momentum darling, Lululemon (LULU) exploded back to near its highs last week following strong earnings, and yesterday held in very well. Watch to see whether LULU pulls back or simply digests those higher prices.
Metals remain strong as those looking for a pullback aren’t getting much of one. I sold my Gold (GLD) on Friday, and will have a hard time getting back in. Remember, just because something is extended, doesn’t mean it’s a short. Trying to be cute, can become ugly fast, especially in the metals which are particularly volatile.
Overall, there is no reason for bulls to hit the panic button after yesterday's modest pull-back, you should have a clear trading plan in place and not get out of your positions unless trends are violated on the time frame that you are trading. Over the last year, there have been five major patterns that marked complexion changes in the market, and we will be on the lookout for the next one. But until that comes, the trend is your friend.
*DISCLOSURES: Scott Redler is long AAPL, SODA. Short SPY, GS.
