Yesterday’s higher open followed by a cascading decline to under Friday’s lows was either a warning sign of bad things to come, or an all clear for the bulls to start buying again.
Either way, yesterday’s price action has created more clarity on which way to trade this market next.
Continue reading to see the trigger points that will send this market higher or lower depending on which get hit first.
When the market takes out important support swing low levels like $156 in IWM, which I highlighted a few days ago it gives you a read on the market’s strength.
The fact that the IWM and SPY both traded below their recent swing lows and then recovered is bullish if the market continues higher. By bullish I mean, with that ‘flush’ in place, a break to new highs is more likely to continue than sell off as it did yesterday.
On the other hand, if the market revisits yesterday’s lows, it will not be as likely to bounce back again. In this case, yesterday was the warning sign and I’ll expect further declines.
Which Way Will It Go First?
Based on the fact that the QQQ rallied all the way back to unchanged on the day, and it didn’t even come close to breaking its recent swing low, I’d bet on the bulls until proven otherwise.
In summary, the last 5 days of consolidation in the market was just tested.
Yesterday, the bulls prevailed and if they push the market higher it will likely have another significant multi-week rally. Look for the QQQ stocks to lead that move.
On the other hand, if IWM and SPY break below yesterday’s low, then yesterday was the warning sign and you should look for them to lead the market lower. In this case it will be time to tighten up stops on stock you don’t plan on holding through a 5%-7% market decline.
Rick Nartarian, Chief Investment Officer
Darwin Wealth Creation