Market Outlook
We are seeing the rumbling of a bottom up style breakdown. If you were not aware, there is often two methods of approaching the market, top down or bottom up. This newsletter is a top down newsletter, we look at the overall index's first, then the sectors, then move onto individual names last. Yet the market has been showing us a bottoms up break down for a few weeks now.
It has been no surprise on our end as we have been laser focused on the tech names as most of the other stocks in virtually every other major sector were breaking down. With a major of stocks breaking down, it pulls down the sector as a whole. Which is why we've seen stage 4 breakdown stages basically across the board for the last two months.
When this happens, the last bit of strength hangs on for dear life, where ever it can be found which we knew was tech. This sector and the mega cap names held the index's up but eventually even the strongest sector gets pulled down and joins the party.
On Wednesday, in the chat, Chad and I were go over this, where the index (S&P) was flagging so tightly under the all time high with about 1% risk. Even with that tight range, the odds were pointing more towards a sell off, then a push higher.
And even with how the market appeared to look strong, looking at it from the bottom up showed a different story. So when the sell off started later in the week, we were sitting in cash avoiding the pain. While tech and semi names took a real beating on Friday. Even with Elon showing us he could make his cars do kick flips, it still couldn't bring real buyers into the market.
On Monday, we should expect to see a break of 760 which isn't really saying much but the 750 and 725 areas will be the two to keep a closer end on as VIX starts to wake up from its recent slumber.
Over the last few months we have gotten use to the tiny intraday moves due to the low volatility but now we are seeing that change where 1%+ daily swings should start to become the new normal again.
Now with this exhausted index for the most part that is starting to show its hand, its not all doom and gloom. The sooner we get a pull back or correction, the sooner the market can shake traders out who will chase the market to new highs.
While most sectors were in stage 4 breakdowns for the last few months, we are starting to see early stage 1 bases starting to form in most of them. Once we see the tech, semi, telecom, health care and bio's shakeout there moves lower, then we will start to see the market start to climb higher.
While the names already basing will be the real clue to when that will occur as those will be the first to breakout. The sectors to keep a closer eye on are consumer discretionary, financials, materials and industrials. Once these sectors start to test the resistance areas of their bases to the upside will be when the swing back to a trending higher market is in the cards.
For now, continue to take advantage of the sector weakness via the Big Picture Model and practice your sitting out with the active account.
From Bennett
Founder Big Picture Trading
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Cyclical - sectors that are more sensitive overall market conditions.
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Defensive - sectors that tend to outperforming during sub par market conditions.
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Sitting In Cash
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