The market had one of it’s worst weeks in recent years and the charts are pretty ugly, in general, out there right now. After months of the market doing nothing but going sideways in a very small range, the price consolidation was finally broken. The larger the base, the lower/higher in space. Just like if you were to compress a spring a little, it would expand a little. The same physics applies to the market, the tighter (more compressed) the market is (price), the greater the move will be after it breaks.
Personally, based on the size of this base and the breaking of a few key MAs, I imagine that the correction is going to go deeper. The charts are simply too broken to be considered buyable here for more than a quick bounce trade (which will happen in the next day or so). The market is likely to come in a little more before I would consider purchasing anything. After a historical run the past few years, then a long consolidation (this year), then a break lower from this consolidation, I personally don’t feel comfortable saying the market is a buy right now. Let’s take a look at some charts.
Above is the weekly IWM chart. As you can see, the price closed greatly below the 50 MA – something that hasn’t happened often in recent years. Combine this with the huge head and shoulders pattern (a bearish pattern), that was just broken (see drawn neckline), I don’t like this chart for a purchase right now. I think the market could finally see a pullback to the 110.00 area, for starters.
The next chart here is the QQQ weekly chart. This chart is the best testament to the historical trend of the past few years. Truly, it’s been a bull market for the textbooks. However, I am not so sure it’s going to continue – or at least not how it was – as you can see in the chart, the price closed below the 50 MA for the first time in a couple years, usually a sign of a trend change. Often trend changes don’t happen all at once. I expect the market to bounce around some, then continue lower, it’s not as easy as just a straight shot down (usually).
Above is a SPY daily chart. I added this daily chart to show you how big this base really is, it’s huge. Approaching a year old, and based on the size of this base, it makes sense that the move out of it will be large. I think it makes sense for SPY to make a trip down to 190.00 in the next couple weeks, again, not straight down, but down nevertheless.
Finally, here is a weekly chart of SPY. Again, as you can see the base is enormous and the break is clear and clean, especially when it comes to the 50 MA. The 50 MA hasn’t been broken in a long time in this chart either.
Overall, I think the dynamics of the market are changing and I think it’s likely there is going to a larger trend change in the next couple weeks. I am not calling for another bear market, by no means, but I am saying that I don’t think I would be comfortable buying this dip quite yet. I would give it time, be patient and wait for the set-ups to come back before just buying in the hole. And of course, if I am wrong, I will know it quickly and the set-ups will come back sooner than I expected.
I wish you all the best. Let me know if you have any questions or comments.