Is your head spinning yet? Because the last few trading days have sure been a whirlwind of price action. And if you’re not careful, it’s all too easy to get disoriented.

So in today’s edition of the Daily Trend Letter, I hope to give you some perspective to make sense of these fast-changing prices. And the best way to do that is by taking a step back.

Big Picture Stock Market Analysis – Week in Review:

As I was saying, the volatility this week (and indeed, this month overall) have really picked up from what we saw in the summer. And in my experience, it pays to pay attention to changing market environments. Because…

While it’s relatively easy to ride trends in slow-moving bull markets, it’s another story entirely when index prices are gyrating wildly higher and lower every other day. So in addition to protecting your trading capital, being aware of shifting market regimes can also help you keep your emotional capital intact.

After all, you’re much more likely to make a critical trading mistake if you’re feeling unhinged or out of sorts. So first things first, try and be aware of how you’re feeling and consider dialling down your exposure if you find yourself unable to focus on anything but the latest stock quote.

So yeah, I know this might all sound a little bit silly. But managing your mental state is another big part of trading success. And it’s often hardest at turning points like we’re seeing now.

Speaking of turning points…

Tech Leads A Market Rebound, But Can It Hold?

I expected we’d get a bounce yesterday after Wednesday’s afternoon washout. But I didn’t expect it to be so strong! Yet despite their best efforts, bulls weren’t able to reverse all the damage. And heading into today’s opening bell, we’re still down for the week with futures looking dire.

More specifically, I want to whip through some index charts to show you both (1) the intensity of yesterday’s bounce, and (2) how despite that rally we’re still below key levels.

For exhibit A, here’s the SPY daily chart:

So you can see we recovered some of Wednesday’s losses. But we faded towards the end of yesterday’s trading session, and were unable to clear the 200-day MA.

Over in the Nasdaq 100, leading tech stocks fared a little better, although they too faded at the close:

My concern here though is whether these gains can last (and based on futures prices, that seems unlikely). Because after the closing bell, GOOGL and AMZN both missed revenue expectations for the quarter (though they did both beat on the bottom line). And initially, the after hours reaction has been a move lower that wiped out almost all of Thursday’s impressive gains.

Now for me, this is really the crux of the market, and may very well set the tone for the trading day. The reason is, these mega cap growth names led the bull trend higher over the last 5 years or so. That means…

If they start to roll over (and to be honest the weekly charts already look somewhat precarious), I would expect them to pull the majority of the market down with them. To paraphrase Jesse Livermore: if the momentum generals can’t lead the charge, the rest of the army doesn’t stand a chance!

So even though yesterday’s big rally was impressive, it might not have been enough. Because in addition to the broad market and large cap tech, small cap stocks are also still down for the week too:

And given the way small caps have led us to the downside so far this month, it’s not exactly encouraging to see them unable to get up and running again. This becomes even more apparent when you zoom out a little bit…

Weekly Chart Perspective Suggests Major Topping Patterns:

When the daily price action ratchets up like we’ve seen the last few weeks, I really like to step back and look at weekly or monthly charts. I find it helps improve the signal-to-noise ratio and better highlight the major market trend (or lack thereof).

Now first, here’s the SPY weekly view so you can see US stocks are in something of a no-mans land…

Now to be fair, you can see bulls did make some progress yesterday to bid prices up off the lows. And it’s also evident that the long-term secular bull trend hasn’t been shattered, though it is bending quite a bit.

And just to complete the picture, here’s the QQQ weekly so you can see tech names look slightly better:

Of course, based on the AMZN and GOOGL earnings reactions, it’s also quite possible this view worsens into today’s close. But in any case, these two charts are about as good as it gets for stock bulls.

More concerning to me is how global stocks are still looking like they’ve confirmed a top, per ACWI:

And as you probably know, European and emerging market indexes are pretty much all in serious downtrends with price hovering just above 52-week lows. So don’t expect much overseas support for domestic equities. The all-country world index looks worse than it has all year.

Now pivoting back to US markets…

The order concerning thing for me is the technical damage that’s starting add up in some of the individual sectors. Because while tech and consumer discretionary stocks are sill hanging onto their long term uptrends (for now!), the same cannot be said for other pockets of the market

For instance, consider the chart of US financials, via the XLF ETF:

And now let me ask you: does that look closer to the top, or closer to the bottom? And again I don’t expect much support globally for this group as European and Asian financial stocks are feeling the selling pressure too.

Another bearish development has been the selling in material stocks, as shown by XLB:

Not very pretty, is it? So while this kind of price action might be great for hyperactive day traders looking to scalp quick moves, it’s not what stock market bulls want to see. And just as we rode price trends on the way up, I have to defer to the trends in the way down, which is why I think there could be more downside ahead.

That means I’m not very optimistic price will turn around on a dime here. Instead, I expect sharp rallies that make it tough to short, but which ultimately end of getting faded (to be followed by lower lows).

Speaking of new lows…

As an interesting factoid you might not expect: yesterday’s strong performance notwithstanding, there were still over 10x as many new 52-week lows as highs. Not something you’d expect on a bullish day, right? It goes to show the bigger backdrop is still increasingly bearish.

All that to say, volatility tends to cluster. And based on the wild swings the last two days, I don’t think we’re in the clear yet. So as we wait for our current (and dynamic!) weekly chart to close today, there are a couple key charts I’ve got my eye on as potential tells while I wait for actionable trade signals.

Let me show you what I mean:

Friday’s Charts Of The Week:

First I want to start with a weekly look at the US Dollar Index. Not many people are talking about this but, it’s one of the most constructive looking charts out there. And further strength may present headwinds to equity prices around the world. Beware.

AMZN and GOOGL are both extremely top of mind today, and I’ll be incredibly curious to see where these stocks end the trading week. They both put in strong performances yesterday but based on the after hours action it seems those gains might not hold. Can dip buyers come to the rescue?

I mention these two together as I expect they’ll move in a convoy. Just look at the hammer candles that are currently taking shape. First, AMZN:

And now GOOGL:

Now as for positive earnings reactions, take a look at EHTH as a possible breakout candidate if the market can keep rallying again today. It put up an earnings beat last night and considering the top-down market weakness, this chart looks reasonably good.

COLM is another interesting earnings chart, especially after the company announced a beat on the top and bottom line. It’s not the fastest mover, but the chart is holding up well and any ongoing market strength could lift this one higher. The retail sector overall is also looking pretty good (and received some positive coverage from Moody’s yesterday), so it’s possible this could get moving.

On the flip side of the coin…

INTC beat earnings, but I think the chart looks pretty weak. And if the stock starts to roll over on a “sell the news” reaction, I’d be interested in looking at a short position.

HLI also beat earnings last night. But I think the chart is in a downtrend and on a poor reaction, I’d be comfortable shorting the lows because it looks like any potential support is quite a distance from the current price. So look out below!

Alright, I hope this helped show you why I’m comfortable sitting on my hands today. And while we wait for the crazy price action of this week to settle, here are some carefully curated articles to help you make the most of your Friday morning…

Further Reading:

“Is there ever a reason to sell? Certainly, but it should be unemotional, in response to a clearly defined strategy or a change in goals/risk tolerance/holding period. If you sell today, when do you buy back in and what is the catalyst for doing so?” Why Are Stocks Going Down?

“As infamous boxer Mike Tyson once said, “everyone has a plan, until they get punched in the face.” And with the recent indiscriminate marketwide sell-off, many traders are feeling like they’ve just been punched in the face.” Will You Adjust Your Strategy, Or Go Down With The Ship?

“Most of the time the stock market has a run-of-the-mill correction that doesn’t turn into a bear market but a bear market is always a possibility. And every time stocks begin to fall there’s a little voice in the back of our heads that tell us, “Maybe this is the big one…”” When Stocks Fell 10%

“Particularly during turbulent times, having a set of deeply rooted principles is paramount to long-term success. Now is as good a time as any to ask yourself – or your advisor – what pillars define your beliefs and guide your actions.” A Matter of Principles

“The year-over-year increase in the CAB has softened recently, suggesting further gains in industrial production in 2018 and early 2019, but at a slower pace.” Chemical Activity Barometer Begins to Cool in October

Further Watching: Stocks Are Still Cheap

Alright, that’s it for now! Let’s see how things shake out at the close and I’ll be back at the same time Monday with another update for you.

For more commentary and ideas throughout the day, you can find me on StockTwits and Twitter sharing ideas. Any questions or ideas of your own? You can shoot me an email or comment below. Happy trading!

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