Optimism over a possible Covid-19 vaccine pushed us to the highest levels of this raging bull. It left us right between the Stock Market Update’s upper and lower channel lines.
If this is your first time with us, or you are new to candlesticks, please read Stock Market Update: Your User Guide.
We start with a day-by-day analysis of the Nasdaq composite in search of hidden clues of accumulation or distribution in the daily price action.
Then we step back and put the puzzle pieces together. Our mission is to give you an edge in the market.
Monday, May 18: Beautiful Day
Facts: Up 2.4%, 71% closing range on increased volume.
Great: Gapped up 1.7% with a steady rise throughout the day eventually taking out the high from the May 12 downside reversal. While it didn’t close above that high, taking it out midday was solid action following last week’s bounce off the 21-day.
Candle: Great. The actual body was small. But with a gap up, imagine the body starts from the close of the prior day. Through that lens, it was a large positive body with a small top wick.
Tuesday, May 19: Vertigo
Facts: Down 0.5%, 1% closing range on lower volume.
Good: It was another beautiful day, until it wasn’t. The buying was steady and constructive. It managed to take out Monday’s high.
Bad: At noon PT, a negative news article about a coronavirus vaccine trial came out. We fell straight down 1.4%. The final 15 minutes looked like panic selling and heavy short selling.
Candle: Bad. Long top wick with a small negative body. Closing higher than Monday’s open was the only saving grace.
Wednesday, May 20: Desire
Facts: Up 2.1%, 81% closing range on increased volume.
Great: It took out Tuesday’s highs within minutes of its 1.5% gap. It rallied, pulled back and then rallied into the close. This is textbook bull market action.
Candle: Great. Like Monday, picture the positive body starting from the prior day’s close rather than the open. This made for another large positive body with a tiny top wick.
Thursday, May 21: Downside Reversal, Outside Day?
Facts: Down 1%, 20% closing range on less volume.
Good: While some consider this an outside day, the Stock Market Update doesn’t. True, it has a higher high and lower low. But since Wednesday gapped higher, we consider the low to be Tuesday’s close.
Bad: Classic downside reversal. A higher high and then closing near the lows.
Candle: Bad. Large negative body with small wicks on both sides. Closing below Wednesday’s open added to the negative look.
Expectation: Lower or sideways.
Friday, May 22: Mild Upside Reversal
Facts: Up 0.4%, 96% closing range on less volume.
Great: Classic, but low-key, upside reversal. A smaller version of the May 4 and May 14 upside reversals.
Bad: While higher volume is ideal for upside reversals, volume typically declines before long weekends.
Candle: Nice. Small positive body with small bottom wick. Very constructive feel.
Expectation: Sideways or higher.
Take A Step Back: Weekly Candlesticks
To understand where you are, it’s critical to take a step back and look at weekly and monthly charts.
Weekly Candle: Great. This week’s positive body was only 1.6%. Two weeks ago, it was a massive 6.2%. But if you factor in Monday’s gap up, the positive bar goes to 3.3%.
The raw power of the four large weeks from the bottom was needed to get us near highs. This week’s lower volatility is a healthy sign that we are on our way back to a normal bull market.
Expectation: Sideways to higher.
Stock Market Update: Moving Averages
Focusing on just the moving averages is another way of taking a step back.
21-day moving average: Excellent. The close is 4% above a strong uptrending 21-day line. The low stayed above the line for six days and the close for 34 consecutive days. The 21-day remained above the 50-day line for 20 days and above the 200-day line for 15 days.
50-day moving average: Better. While it’s still below the 200-day, the uptrend is getting steeper. If we continue at this pace the so-called golden cross could happen in just over a week. We remain a scary 13% above the 50-day. Ideally, we’d like 3% to 6% above the line.
200-day moving average: Good. The mild uptrend continues. We are currently a healthy 10% above the 200-day.
Your Memorial Day Weekend Present: Homework?
This Memorial Day Weekend spend some time studying history, it will pay off.
The current power trend started on May 8.
It will remain on until the 21-day crosses below the 50-day on a down day. In some rare cases, a circuit breaker rule will end it earlier.
In last week’s Stock Market Update, we went over the 1982 power trend. This week, your homework is to study the 1958, 2003 and 2009 power trends.
Stock Market Update: 1958 Power Trend
Eisenhower was president, the U.S. Army gained Elvis in the draft and Buddy Holly’s “Peggy Sue” was on the radio. We were right in the middle of a major bull market that went from 1949 to 1966.
If you read Nicolas Darvas’s great book, “How I Made 2,000,000 in the Stock Market,” this was the market where he made his fortune trading.
Your homework assignment: using the change date feature in MarketSmith go to May 9, 1958. Always start with the monthly chart for context. We were just coming out of a 20.6% bear market from April 1956 to October 1957.
Now look at the daily and weekly charts. Pretend you are Marty McFly and you were left there to trade the market.
The key, you must be intellectually honest with how you would trade it. Fast forward a couple weeks and do the same thing. Repeat this until the power trend ends.
Stock Market Update: 2003 Power Trend
After the dot-com bubble burst, we plunged 78.4% from the March 2000 top to the October 2002 lows. Then came the war on terror. Some of us will never forget that time.
It was natural to be scared to death of investing at the time, but I was using history. Just like you are doing now, I did my homework and realized the market was tracing out exactly like 1929 to 1932. The precedent was a thing of beauty and became priceless.
The point? History is there so use it.
Your homework assignment: Start on March 12, 2003.
Stock Market Update: 2009 Power Trend
From October 2007 to March 2009 the financial crisis brought us down 55.8%.
We were truly on the brink of ruin. If the Federal Reserve and Washington D.C. hadn’t pulled out all the stops, it could have taken several decades to recover. Sounding familiar?
Your homework assignment: Start at the lows, March 9, 2009.
The Bottom Line: Life In The Middle Lane
This week’s action was perfect. A strong gap up, some healthy fear mid-week, then ending with a low-volatility upside reversal.
More importantly, we were able to stay right in the middle of the channel while still moving up a very respectable 3.4%.
Next week, the red lower channel line will be around 9050. The upper will be near the Feb. 19 high of 9838.
We’ve rallied over 40% from our March 23 low. The largest pullback since the April 6 Tom Petty, Won’t Back Down FTD was 5.9%.
Given those facts staying in the middle or lower part of this very steep channel is great. Remember, it’s way too steep to be sustainable for an extended period, so enjoy it while it lasts.
Stock Market Update: Better Not Look Down
On the battlefield, you need a strong defense.
Here are the levels the bulls need to defend:
First level: 9154 the low of the May 18 and 9050 the lower channel line. A test of these levels would be normal and expected. The key is how we test those levels. Study May 4 and May 14 for the ideal way.
Second Level: The key psychological level of 9000, and just under it, the 21-day moving average at 8956. A quick break to these levels would warrant reducing positions and raising some cash.
Third Level: The low of May 14 at 8705. A quick breach of this level would be a very big deal.
The line in the sand: A quick break of the 200-day, currently 8496, would be a massive negative character change.
Stock Market Update: The Key To The Highway
At this stage, playing offense simply means keeping your foot on the gas. Tune out the negative news. Remember, it was bad at the bottom in 2003 and 2009. Listen to the market not the news or social media.
Levels on the upside:
First: A push is a win. Going sideways between Monday’s low of 9145 and Thursday’s high of 9405 would be perfect. This would allow the 21- and 50-day lines to catch up.
Second: The low of Feb. 21 at 9542.
Finally: The ultimate is obviously to retake the Feb. 19 high of 9838. While it’s only another 5%, it would be healthier if that took some time.
Remember the old saying: The trend is your friend, until the end when it bends.
This Memorial Day Weekend remember those that sacrificed for us. Take the time to thank any veterans you know. Thanks dad!
As always, be kind to one another, keep an open mind and stay flexible.
Mike Webster is IBD’s Head Market Strategist. You can read previous versions of the Weekend Stock Market Update on Twitter. Follow Mike on Twitter under @mwebster1971. This weekly column was formerly named What Would Webby Do (#WWWD).
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