The recent narrowing of the stock market rally was typical of a tired market. Last week I pointed out that there were a number of technical indicators that made me nervous about the Dow Industrials market leadership. This included the lagging action of the % of S&P 500 stocks above their 50 day EMA and the weak relative performance analysis of the PowerShares QQQ Trust (QQQ). I also pointed out that the market was just “one sharp down day away from moving into the corrective mode”. The advance/decline have now entered the corrective mode which coincides with the negative seasonal bias that takes over at the end of August. Two weeks ago in “The Week Ahead: ‘The Market Appears Bulletproof?’” I wondered whether any market was really bullet proof as one market strategist recently suggested. I also looked at some of the market declines in August that have occurred during this bull market. The August declines that occurred when the weekly A/D lines were in a strong uptrend and making new highs generally lasted only 4-6 weeks. These corrections turned out to be buying opportunities for the patient investor or trader. In my experience when the market has a prolonged rally that most are not expecting a correction often goes through several phases. Many have been waiting for a correction to buy and some may have bought Friday as the market stabilized. The very negative A/D readings on Thursday makes a very sharp 100 point Dow rally likely in the next week. For those that bought on Friday a sharp rally will be encouraging but unless the A/D numbers are extremely strong the initial rally is likely to fail. If the market resumes its decline after a rally the market averages will most likely drop well below last week’s low. The decline will go low enough to convince those that wanted to buy the dip that the trend has changed. A prolonged market decline will push the bullish sentiment readings much lower. The CNN Fear & Greed Index closed the week at 28 and in Fear territory. A week ago it was at 64 which was in Greed territory. There have been August declines where the index dropped below 10. The AAII bullish % was 33.7% and it will typically drop to the low 20’s at a market low. This weekend I will concentrate on the technical outlook for the key markets. First let’s look at the NYSE Composite which is one of the broadest measures of the stock market. It made a new high on Tuesday but finished down 1.8% for the week as only the mid and small cap indices were weaker. The weekly A/D ratio on the NYSE was 5-1 negative. The monthly pivot support at 11,722 and the daily starc- band were both tested last week as the NYSE formed a doji on Friday. The QPivot is at $11,641 with the weekly starc- band at 11,571. There is support from the April-May lows in the 11,500 area, line a. The NYSE A/D line dropped below support (line b) on Wednesday and finished the week just above the support from March, line c. The WMA of the A/D line is now declining. The weekly A/D line is still above its rising WMA. The McClellan oscillator closed the week at -204 which is the most oversold reading since March 9th when it closed at -268, line 1. The weekly chart of the Spyder Trust (SPY) shows that it closed Friday below the doji low at $245.68 from three weeks ago. This triggers a weekly doji sell signal. A weekly doji sell was also triggered the week of March 24th. Though the SPY made its low the next week the market rally did not resume for four weeks The 20 week EMA is at $240.60 and some are looking for a drop below $240 to signal a change in trend. The quarterly pivot is at $239.77. The weekly starc- band is at $238.96. The weekly S&P 500 A/D line did turn lower last week but is still above its rising WMA and support at line a. The daily is now well below its declining WMA and is oversold on a short-term basis. It is back to support from late June. The Powershares QQQ Trust (QQQ) was up 0.76% on Friday but still closed slightly below the weekly doji low of $142.30. There is next support in the $140.50 area with monthly pivot support at $137.36. This coincides with the QPivot at $137.31. The converging chart support is in the $135.50 area, line a. The 20-day EMA is at $142.92 with additional resistance at $143.50. A daily close above $145.47 would be a bullish sign.. The weekly Nasdaq 100 A/D line has turned down but is still clearly above its WMA with more important support at line b. The daily A/D line dropped below its WMA on Tuesday and plunged Thursday as the support from June was reached. This could be consistent with a pullback in an uptrend if the A/D line can rally sharply. The declining WMA and resistance from the recent highs needs to be overcome to signal that the correction is over. The SPDR Dow Jones Industrials (DIA) came close to the quarterly pivot resistance at $222.08 early in the week before turning lower. DIA has pulled back to its 20 day EMA and formed a doji on Friday. The monthly pivot is at $216.60 with further support in the $216 area, line a. The QPivot is at $210.65. Volume was the heaviest of the year last week. The daily Dow Industrials A/D line has dropped below its WMA but is still holding above the July lows. The A/D line now has more important support at line b. The weekly A/D line continues to hold well above support though it did turn lower last week. The stock market has been led lower by the small cap Russell 2000 which is tracked by the iShares Russell 2000 (IWM). It was down 2.7% last week. The upper boundary of the recent trading range, line a, was tested in late July before prices reversed. The Friday’s close was below the support at line b, as IWM closed at the daily starc- band. The Friday close was well below the QPivot at $139.16 which indicates a change in trend. The quarterly pivot support at $135.42 is just below last week’s low. The weekly starc- band is at $133.39 with the March low at $131.83. The support from the spring lows, line c, was broken over a week ago and the bearish formation was confirmed by Tuesday’s weak bounce. This was the reason that aggressive Viper ETF Traders bought the Direxion Small Cap Bear 3X (TZA) and the Direxion Semiconductor Bear 3X (SOXS) early last week. They closed up 11.8% and 8.5% respectively. My early August analysis of the semiconductor group (Are The Semiconductor Stocks Topping?) formed the rationale for going short the semiconductor stocks. Market leading semiconductor stock NVIDIA Corp (NVDA) released earning last week. It dropped over 5% on Friday and volume was 1.5 times the average. So what is the most likely stock market scenario? The odds of a sharp rebound this week are quite high. In order to signal that the correction is over the market internals need to be 3-1 positive or more on the rally. Several consecutive days of strong action are needed to move the A/D lines back above key resistance. Based on the examination of all the major averages this seems less likely but not impossible. A more likely scenario is a rebound into the middle of the week that will be followed with more selling and a lower close this week. A further correction at this stage is not likely to change the market’s major trend and is likely to be a buying opportunity. The inflation numbers last week were lower than expected which takes some of the pressure off the Federal Reserve to raise rates in the months ahead. The economic calendar is heavy this week with Retail Sales, Empire State Manufacturing Survey, Business Inventories and the Housing Market Index on Tuesday. Also out this week are the Housing Starts, FOMC Minutes, the Philadelphia Fed Survey, Industrial Production, Leading Indicators and Consumer Sentiment. What to do? The stock market’s reversal last Tuesday set the stage for Thursday’s plunge as the selling did hit panic levels. The technical readings after the May and early July corrections were stronger than they are now. They indicated those drops were a buying opportunity. The technical studies now suggest a more complex and longer lasting pause in the major trend. A lower close this week will support this view. The A/D lines will need to be monitored closely this week to see if they can reverse the deterioration. This is not impossible but in my view is unlikely. As I have been mentioning for a few weeks it is not the time to be aggressive on the long side of the market. Viper ETF traders were able to take double digit profits in the iShares FTSE China Index (FXI) and the Vanguard MSCI Emerging Markets (VWO) near Tuesday’s highs. For investors the correction it is not likely to change the major trend and I think the next good buying opportunity will be after a further decline. On a rally this week will be looking to close out more trading longs and taking a few positions in the inverse ETFs. The entry price and stops will be critical. Viper Hot Stock traders had established a few new short positions in the last week or so and will be looking for new candidates on the short side this week. If you are interested in following the analysis of the A/D lines I hope you will consider a subscription to either the Viper ETF Report or the Viper Hot Stocks Report. Each service includes two 4-5 page reports each week where I teach you about the markets as well as provide specific buy and sell advice. Both services also include market updates when the market warrants. In Friday’s comment I advised not to press the short side of the market as the market was oversold. 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