The stock market has absorbed some economic reports in March that cast doubt on the bullish case ahead of this week’s FOMC meeting. The outlook on rates has changed quite a bit since the start of the year as now a cut is not expected this month. In the past week, the yield on the 10-year T-Note has risen from 4.038% to 4.340%. With yields back to the top of the recent three-month range, what is next for stocks?
The key reversal in the Invesco QQQ
QQQ
SMH
So far in March, the Spyder Trust (SPY
PY
SPY
So is the start of an overall market correction or is this just a period of sector rotation that is often seen during even the strongest bull markets?
The Spyder Trust (SPY) has stayed technically strong since the October low of $406.30 as it closed strongly above the 20-week EMA in the first week of November. It has been trading above the yearly R1 at $509.60 for the past four weeks and formed a doij each of the past two weeks. Now a weekly close below $503.35 is needed to trigger a weekly doji sell signal. The rising 20-week EMA is at $484.23 which is 6.1% below Tuesday’s close.
As of the close on March 15th, all of the weekly advance/decline lines except the Russell 2000 A/D line were positive. Three of the daily A/D lines were negative but also three were positive. It typically takes all six A/D lines to be negative and have formed new downtrends before the overall market is in the corrective mode.
The S&P 500 Advance/Decline is on the verge of making another new high this week. It is rising sharply and well above its WMA which also shows a bullish trend. The A/D line moved to new all-time highs in June 2023, point 1, which forecasted that the S&P 500 would also make a new high which it already has.
The NYSE All A/D line also looks strong as neither the weekly or the daily A/D lines show any signs that a top is being formed. The NYSE numbers before the close on Tuesday were over 2 to 1 positive. There is important support for the A/D line at line c, and the rising EMA.
The daily chart of the QQQ shows that the reversal (see arrow) occurred after the monthly R1 at $446.53 was exceeded. The pivot at $431.90 was almost reached on Friday as the low was $432.17 and a daily DTS sell signal was generated. The 20-day EMA has flattened out but it is not yet declining. The S1 is at $423.78
The relative performance (RS) signaled that the QQQ was going to be a market leader last October as it formed a positive or bullish divergence in late October, line b. At the start of March, the RS did not form a new high with QQQ as a month-long negative or bearish divergence, line a, was formed. The break of the support at line b confirmed the divergence.
The Nasdaq 100 A/D line broke its downtrend, line c, in early November which was a positive sign. The A/D line has just crossed back above its EMA which is a short-term positive. The A/D line now has support to watch at line d, as a drop below it could signal a deeper correction.
There are some other technical measures that I monitor for warnings of a deeper correction, including the analysis of the VIX and VXN. So far the evidence suggests that this is just sector rotation but that can often change in a week or two.
I am also watching the New High and New Low analysis on both the NYSE Composite as well as the Nasdaq Composite. This warned in late 2021 of the top in the maga seven stocks as well as ETFs like XLK
XLK
There have been a few days recently when the number of New Lows exceeded the New Highs. As I have discussed previously I am now watching to see if the New Lows exceed the January high at 224 as it would warn of a deeper correction.
It has been a great run to the upside since November but taking profits, especially on strength as well as reducing market exposure is never a bad idea even if we do see another 2-4% rally.
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