Time to get excited right? Inflation fears are overblown because China is going to crackdown on commodities was the theme to start the week. Wall Street responded with a big up Monday. We hate to be Donnie downers but… last week we discussed how downtrends can be a three-step process before they end.
Step 1 – first leg down
Step 2 – partial recovery
Step 3 – second leg lower but doesn’t go as low as step 1 before pivoting higher
Monday’s major uptick could put the process near the end of step 2, which could mean the market’s next move is down. Maybe, the NASDAQ finds its way to 13,800ish before step 2 ends and step 3 begins. In our opinion, investors should be on the lookout for the start of Step 3.
Of course, there are no absolutes with the financial markets, just wisdom guided by experience. It is possible that prices continue to move higher. One of the methods we use to gauge the market on a day-to-day basis is by marking the high and low levels for the opening hour of trading.
If Wall Street takes the index above the opening high-water mark, chances are prices will head higher. On the other hand, if prices move below the opening hour low, then odds are prices could go lower. Tracking this basic rule can help you with trading and identify if/when step 3 begins.
For now, we are still working with 3 steps in mind and expect the next down leg to start, most likely in the near-term, maybe before the end of the week.
On the earnings front, the first quarter reporting season is nearly complete for the S&P 500 with 475 of the 505 companies reporting. It will be the best quarter in decades if the remaining companies continue at the same 84.60% bullish surprise rate. Additionally, 368 of the 475 companies already in books exceeded sales estimates.
Despite overwhelming numbers, stocks have not been able to move past February highs. This is a touch concerning because it has echoes of the end of the dot.com bubble, incredible earnings, and a lackluster response.
First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) was tops on our sector watchlist. A bunch of technology exchange-traded funds made up most of the remaining top 10 performers from last week. Because of our 1-2-3 view of the current state of the market, we’d consider waiting for the next leg before committing money on an intermediate to longer term basis. We see the current environment more suited to short-term trading.
Sector/industry types might consider using the first hour trading strategy outlined above for QCLN and tech ETFs. Buy if they exceed their opening hour high and short if they move below the first hour low. Of course, always have an exit plan to minimize losses when day trading.
Since we are waiting for leg 3, we don’t want to commit to anything that could be lower in price in the next few days.