Market Report 1/16/18

As trading resumed this morning – coming off the three-day holiday weekend – the markets were gapping-up significantly with the Dow crossing above 26k for the first time ever and the SPX surmounting another round number hurdle at 2800. This lasted for the first 30-minutes of the day and then the slide began.

Going into this week the major indexes were about as extended as they’ve ever been with the RSI’s on the Dow, Nasdaq and SPX pushing the 70’s and 80’s on both the daily and weekly timeframes. It’s no mystery that the market has been extremely extended, with the best start to a new year since 2003. The bullish sentiment has been some of the highest ever recently and coupled with those extremely overbought RSI’s, it was just a matter of time before we were going to see a reversal.

That big gap-up this morning after the move we’ve seen was just begging to get filled. Take a look at the Dow today.

As I discuss a lot on the shows – generally when looking at charts of individual stocks – big run-ups frequently exhaust themselves with a final gap-up, then the price reverses and you get a pullback of some sort. The way the market has acted since the election, it’s too early to tell if today’s reversal will mean anything until we see a couple more days of price action.

I’ve been quite reluctant to chase the rally since the start of the year, which could be seen as a good or bad thing – depending on what happens from here. The “overboughtness” of the market coupled with the enthusiastic sentiment has been making me nervous. Now last week I pointed out how technically there was no reason to expect any real weakness until we see some of the technical levels get broken and that hasn’t happened of course.

Today’s reversal seemed mostly about the market just being way overbought in the near-term. On the SPX chart below we can see how the price had been running up the upper Bollinger Band and today’s gap-up was outside that band. Going into today the daily RSI(14) stood at 83 – that’s stretched to say the least.

Keep in mind that one day does not make a trend as they say but it would seem reasonable that the market needs to work off some of these overbought conditions – and today might just be the start of a pullback towards that steep rising trendline. It’s all about today’s high of 2807 the rest of the week. If I had to guess I’d say that high might be in place for the near-term.

When the market gets too extended it’s normal for it to pull back or at least consolidate for a bit. Anyone that’s been in the market for any decent length of time knows that the recent “melt-up” price action isn’t typical. Of course you don’t want to “fight the tape” as they say, but sometimes you have to just stand back and let things settle down.

Now I have no idea if the SPX is going to pull all the way back to that thick black trendline I drew on the chart above, but it wouldn’t seem unreasonable. Notice that trendline coincides with the 20-day moving average which is the middle of the Bollinger Bands. Keep in mind the SPX just broke through 2700 on January 3rd and that 20-day moving average and the trendline are already over 2700. Today was only the 9th trading day of the year.

What was interesting about today is how the sentiment seemed to deflate so quickly as the market reversed. It seems like everyone knew things were getting out of hand and “frothy” but it’s hard to argue with a strong market that just keeps going up. When we get a potential reversal day like today everyone stands up and takes notice.

A lot of individual stocks got crushed – and tons had bearish engulfing candles. This is more reason to be cautious the next few days and see how things settle out. I see a lot of stocks that lost a week or two worth of gains on no news, just the reversal action in the overall market – which raises a red flag.

The silver lining in all this is that if we do get some backing and filling in the overall market, I expect some decent down-cycles to play out in individual stocks. That will just set everything up for a decent buying opportunity for swing trades. The trick is being patient and letting things come in a bit, then taking advantage of the next bounce.

Join me tomorrow for the live show and we’ll look through a bunch of charts and find some new ideas that might set up in a few days.