August 22, 2017

The Week Ahead – Up, Down, Sideways? Hmmm.

Last week I spoke about the short-term oversold nature of the major indices and how a bounce was likely given the extreme oversold readings. In addition, the seasonal winds were blowing in the direction of the bulls as the Nasdaq’s 12-day mid-year rally began (in late June and ends on July 13th). According to the Stock Trader’s Almanac the average gain for the 12-day mid-year tech rally is 3.2% versus the 0.1% for July as a whole. Moreover, the Almanac states to watch for “huge market gyrations” after July 4th, “both up and down”.

The Almanac goes on to mention that  ”in the mid-80’s the market began to evolve into a tech driven market and control in summer shifted to the outlook for the second quarter earnings of technology companies”. As a result, the Nasdaq’s 12-day mid-year rally from the end of June through mid-July is the strongest.

As we know the bounce came to fruition and now the major indices have moved back into a short-term “very overbought” state while at a strong area of overhead resistance. Furthermore, with the exception of the Russell 2000 (IWM) all of the major indices have closed their gaps that were left unclosed since June 29th. The unclosed gap in IWM could pull the market higher over the short-term, but I think the more likely scenario is one that witnesses a short-term reprieve over the next 1-2 days and then another surge resumes, with the Russell leading the way. Once the gap closes then all bets are off. The market should be back in a short-term neutral state. However, I do think that the bears will ultimately reign supreme. Earnings season is upon us and my guess is that we will continue to see weakness both fundamentally and economically.

One thing is certain, we shall see soon enough. It truly doesn’t matter to me quite honestly. I trade what the market presents. As a high-probability mean-reversion trader I will continue to take advantage of the froth that the market offers.

I will be back with more tomorrow. It is late here on the East Coast and the bed is calling. Good night!