Toppy Action After a Big Move, But It's Too Early to Proclaim the Tide Has Turned
Here's what we need to see to determine if the the market trend has shifted — and the one thing you must resist doing right now.
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After another big week for the indexes, the market was hit with some toppy action on Friday. It started with euphoric buying of speculative small-caps at the open, but fizzled out by midday and broke below the morning lows about 90 minutes later. There was a half-hearted attempt at a rebound, but a weak finish created a bearish pattern on the candlestick charts.
It is too early to conclude whether this reversal and weak close are significant. What matters most is whether there is downside follow-through next week. One poor day of technical action is not enough to conclude that a shift in trend is occurring. A series of weak closes and failed bounces is needed before it can be concluded that market sentiment has shifted.
Despite the reversal in the indexes, there was still plenty of green on the screens with about 60% of stocks finishing in positive territory and over 280 names at 12-month highs. The Russell 2000 (IWM) finished well below its intraday high but still managed a gain of 0.7%. While there is still a very high level of speculative interest, with nearly 100 individual stocks gaining more than 10%, the Magnificent Seven (MAGS) dragged with a loss of 0.6%
When markets have run as hot as this one recently, it is tough not to look for signs that things might start to turn. Everyone wants to sell at the exact high, and you can only do that if you sell into strength rather than wait for some weakness to occur. Typically, you are more likely to maximize gains by using tight stops rather than selling new highs, but most traders can’t resist the game of timing the exact turning point.
The big question next week will be whether the government shutdown will start to have an impact. It was shrugged off this week mainly due to some very strong news in the AI sector, but in the past, the market has grown impatient when the shutdowns have dragged out longer than a week or so.
My best advice is to stick with stock-picking rather than trying to time the indexes. There is still plenty of good action in individual stocks to trade.
Have a great weekend. I’ll see you on Monday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
