The 'Window' Isn't Open This Time
Let's take a look at the continuing 'no follow-through' group rotation, whether we saw a false breakout, and what this market is vulnerable to. Plus, Rocket Lab, Lilly, Merck and more.
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The Market
Thursday and Friday were mostly big nothingburgers in terms of any changes in the market. The group rotation (into drugs!) continued. And did you notice that the software stocks got a boost late last week (see my comments on Snowflake SNOW from last Tuesday evening). That’s the group rotation.
Most of the group rotation we have seen has had very little follow-through, though. Most of it has lasted a few days, maybe a week, before it’s over. That’s probably why the McClellan Summation Index can’t turn up despite the small-caps enjoying a big rally last week.
Was it a false breakout? I am uncertain, but I do know that the oversold condition we entered last week with got slightly overbought by Friday so the window isn’t open as it was last week. You can see the Overbought/Oversold Oscillator couldn’t even reach up to the high it saw in July, let alone the May reading.
The Nasdaq McClellan Summation Index (where I use volume) couldn’t turn up last week either. This is despite 10 straight days of the Nasdaq having positive volume readings (more up volume than down volume). It only needs a net differential of +1 billion shares to halt the decline and a bit more to turn it back up, but, as you can see from the chart, it is unusual for this to turn south while the index keeps rising, although it did occur in the first half of 2024.
With the Daily Sentiment Index (DSI) for the VIX still at 17 I still think it leaves the market vulnerable to increased volatility.
New Ideas
Last week we looked at Paychex PAYX with a chance the stock might break down from this giant top it has developed. But of course it went down and snapped right back. I guess we’d call that a positive, that stocks can’t break down. Yet remember all those software stocks that just gapped down? But then they rally immediately. That is the group rotation. There is no trend, just endless trading.
Today’s Indicator
The new highs improved on Wednesday then dropped off as soon as they improved (group rotation)
Q&A/Reader’s Feedback
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It would be awesome if AST SpaceMobile ASTS would break that black line and fall all the way to the blue line. You see that base it broke out of in June measured to that $60 area it hit in July. If it came down to the blue line it would meet the measured target from breaking the black line and at the same time it would be retesting the breakout. Otherwise the stock looks mostly sideways to me.
Rocket Lab RKLB has been correcting for more than a month now. It’s got support in this $42-ish area from the flat line as well as that uptrend line. So this seems to be the area to buy some. I would not want to see it crack under $40 though.
Estee Lauder EL looks mostly trapped to me, between $85 and $95, maybe $100. The reason is that the stock could not break over $95 during last week’s small-cap rally, and that’s the same spot it stopped at a few weeks prior, in early August. For now I’d play the range unless/until something changes.
American Tower AMT held $200 after threatening to break. That means it is oversold enough to rally. I’m not sure it can fill that gap overhead at $225 but as long as it doesn’t break $200 it gets the benefit of the doubt.
You might recall I liked Eli Lilly LLY a few weeks ago, believing it would stay in that range and not break $700. I was clearly wrong. But now it finds itself right back at $700 where resistance lives. A dip back into that $650-675 area should hold (sorry the range is so wide but it is what it is) and I would look for it to fill that gap around $730 in the next month or so.
SharpLink Gaming SBET left a big island overhead (circle) when it broke in June. It climbed back to fill the gap and is now heading down again. It’s hard to say what it wants to do now but if it breaks that early August low ($17-ish) it seems destined to visit $12-ish support.
I have been a fan of Merck MRK for quite some time and all it has done is go sideways. This time the resistance at $85-86 is different in that the flat line coincides with the downtrend line. It’s hard for me to play for a jump over it owing to the fact that it has just rallied 10%, but I lean toward it doing so over time. The base is too small to make a huge fuss over but a few months from now this one-year chart will drop that action from $120 to $90 (boxed in blue) and the chart, if it doesn’t break $70, will "flatten out" making this a more elongated base. I remain positive on the chart but on a trading basis I have no strong view.
