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It was a wild week in the stock market last week, as daily stock market swings kept investors confused and on their toes. The muted reaction to Friday’s weak jobs report helped maintain the weekly gains. It was likely the vote to postpone the debt ceiling deadline that helped reduce the selling, as the 1.3% drop in the S&P 500 on Monday got the markets as well as some politician’s attention.

When you consider that the S&P 500 was down almost 100 points before lunch on Monday, the weekly gain of 0.8% was better than most had hoped for early in the week. The Dow Jones Transportation Average led the way, gaining 2.7% followed by a 1.2% gain in the Dow Jones Industrial Average.

It is still a split market, as the Nasdaq 100 NDAQ was only up 0.2%, while the iShares Russell 2000 was down 0.3% for the week. Those in the energy stocks or ETFs were the biggest winners, as the Energy Sector Select (XLE) XLE was up over 5%, while the Real Estate Sector (XLRE) XLRE was down 0.70% for the week.

Since August the nervousness of global money managers has supported my expectations of a market correction. There had been signs since July that most stocks were moving lower, not higher.

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The NYSE Composite formed higher highs in early September, but the NYSE All Advance/Decline Line did not make a new high, diverging from prices (line c). This A/D line includes not only stocks but bond funds, ADRs, etc. It was more revealing that the NYSE Stocks Only A/D line had diverged more sharply from prices (line d). This was even a stronger indication that most stocks were moving down, not up.

Both A/D lines closed slightly above their exponential moving averages (EMA) and are trading well above the September 20 lows. These slight positive divergences could be a sign that the market is now closer to bottoming. In order to confirm that a bottom is in place, the A/D lines need to move above their recent highs and key resistance levels. Last week there were 1735 issues on the NYSE advancing and 1754 declining. 

The Invesco QQQ Trust (QQQ) QQQ  had been leading the overall market higher all summer until it peaked on September 7 at $382.78. At Monday’s low of $350.32, which tested the uptrend (line a), it had dropped 8.5% from the high. The rebound last week took the QQQ back to its declining EMA and the monthly pivot at $365.95. This is typical of a rebound within a downtrend and suggests that the correction is not over yet. 

The Nasdaq 100 Advance/Decline line had violated support (line c) in September, which was a sign that a correction was underway. The A/D line rallied last week back towards the key resistance (line b). A strong move above this downtrend will be a strong sign that that the worst of the selling is over. The On Balance Volume (OBV) is also still negative, as it shows a pattern of lower highs (line d). It closed back below its weighted moving average (WMA) on Friday, so the volume should be watched closely on a further decline.

The stock market was supported last week by the energy stocks. One that turned up on my weekend scan was Phillips 66 PSX (PSW), which was up over 13% for the week. It closed at $82.13, which was above the 61.8% Fibonacci resistance level from the June high. This chart from last Friday, October 1 shows that the daily relative performance (RS) had completed its bottom formation on September 27, as the resistance (line a) was overcome. The OBV shows a similar positive formation as it had overcome its downtrend (line b) a few days earlier. PSX closed the week above its starc+ band.

The bullishness for crude oil and energy stocks is starting to get too high, which increases the odds of a sharp correction in the coming weeks. From the low of $61.50 on August 20, crude has had quite a rally. The October R1 pivot resistance at $78.83 was reached last week with the daily starc+ band at $82.47. The Friday close was 4.3% above the 20-day EMA at $75.05, with further support at $73.73 (line a). The monthly pivot is at $72.87.

The open interest peaked eight days ago (point b) and has declined 100,000 contracts, suggesting that some of the recent strength is likely due to short covering. There has not yet been any dramatic increase in the open interest for the December contract. 

The Herrick Payoff Index uses volume, open interest and price to determine positive money flow and has been above the zero line since September 2 (point c). It still shows a positive trend, as does the OBV (line d).

In late August I encouraged investors and traders to learn more above market corrections and commented that “professional managers and individual investors are likely to turn more negative before the correction is completed”. This process is now occurring. From the American Association of Individual Investors, the Bullish % has dropped from 43.4% on 9/1 to 25.5% last week. 

The expectations of strong corporate earnings have encouraged investors all year, but the start of earnings season this week may further reduce the bullish sentiment of investors. In a Friday report, Factset warned that a high percentage of S&P 500 companies have commented on the negative impact of supply chain factors on their earnings.

In my view, we are getting closer to the good buying opportunity that I have been expecting. When the correction is over I would expect only some stocks and ETFs to lead the market higher, so be sure to look at the technical studies to determine which stocks and ETFs are leading before establishing new long positions.

Source: Forbes

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