The Stock Market Update was prepared for a pause, but the raging bull market didn't want to rest.
We think Monday's powerful gap-up caught the bears off-guard. Instead of the bull taking a break, this week felt like the bears were hibernating.
The Nasdaq composite is trading at all-time highs and the S&P 500 is poised to break out. This week we reintroduce a possible precedent for future gains.
We start with a day-by-day analysis of the Nasdaq composite in search of hidden clues of accumulation or distribution in the daily price action.
Then we step back and put the puzzle pieces together. Our mission is to give you an edge in the market.
If this is your first time with us, or you are new to candlesticks, please read the Stock Market Update: Your User Guide.
Monday, July 6: Positive Expectation Breaker
Facts: Up 2.2%, 73% closing range on higher volume.
Great: The end of the prior week left us with an expectation of going lower. Instead we started with a powerful 1.6% gap-up.
The midday 0.9% giveback held above the morning lows. That showed true power.
Because we set up to move lower this week, this action was a positive expectation breaker.
Bad: The rally into the close could have shown more power.
Candle: Excellent. Large positive body with small top wick. If you start it from last week's close, it was a massive positive body.
Expectation: Higher.
Tuesday, July 7: Downside Reversal
Facts: Down 0.9%, 3% closing range on lower volume
Good: The mild 0.3% gap-down is a healthy way to start a day. After five days up, a downside reversal helps keep things from getting too euphoric.
Bad: At 8:30 a.m. PT (Nashville add two, Woodstock people add one more), we ran out of gas around 10,500.
At first, the selling was constructive stair steps down. By 10:10 a.m. PT, the steps turned into an elevator ride down to the close.
The higher high, closing at the lows, is a classic downside reversal.
Candle: Bad. Medium negative body. The long top wick stands out as a sign of weakness.
Expectation: Lower.
Wednesday, July 8: An Inside Day Never Looked So Good
Facts: Up 1.4%, 99% closing range on lower volume.
Great: Tuesday's downside reversal implied further weakness. The 0.6% gap-up wasn't too surprising because many bad days start with gap-ups, just like good days start with gap-downs.
After a roller coaster of a day, which included a 1.2% and 0.5% pullback, we turned and closed at the highs of the day.
The inside day helped break the expectation left from the downside reversal.
Bad: Nothing.
Candle: Excellent. Medium-size positive body. No top wick with a small bottom wick.
Expectation: Even though the action was great, and the candle was perfect, the downside reversal from Tuesday was still in play.
The only way to negate a downside reversal is to close higher than its high. Inside days don't give you a sense for a change in direction.
Therefore, the expectations were for sideways or lower.
Thursday, July 9: Another New Record
Facts: Up 0.5%, 84% closing range on lower volume.
Great: The close above the high from Tuesday's downside reversal was very significant.
IBD's Market School refers to this action as a downside reversal buyback signal. It changes the implied direction from down to up.
After gapping up 0.7%, the market fell sharply down 1.9%.
The tell was the sharp turn all the way back to new highs for the day.
Bad: Closing slightly below the open.
Candle: Great. Very small negative body sitting above the highs from the prior two days. The very long bottom wick showed the power of the intraday comeback.
Expectation: Higher.
Friday, July 10: Record Breaking
Facts: Up 0.7%, 97% closing range on lower volume.
Great: The high, low and close were all at all-time highs. You can't ask for much more going into a weekend.
Mixed: Some may say the declining volume as we hit new highs shows a lack of power.
While that is true, it's also a return to normal.
The coronavirus stock market crash elevated volatility and volume to record levels. Having both volume and volatility return to normal levels is positive.
Candle: Perfect. Medium-size positive body that engulfed Thursday's tiny body. The long bottom wick, with a higher low than the prior bar, adds to the power of the day.
Expectation: Higher.
SMU's 50% Retracement (Slight Return)
Trend Line: Trend lines can be drawn on all chart time frames. From short to long.
The longer the trend line, the more meaningful it is. But short-term trend lines are also of value.
Many times, you won't take any action when one breaks. Simply observing how it acts at the lines will give you a sense of the market's health.
A break of this very short-term trend line (yellow) should find support near the lows of July 7 (green line).
A quick break of both could be your first warning sign to take some mild defensive action. Many times, that's simply not pressing harder on the accelerator.
50% Retracement: Two weeks ago the Stock Market Update introduced the 50% retracement rule.
This simple rule of thumb states that a stock, or index, can give up half its gains and still be healthy. You can use it on multiple time frames.
Following the successful test of the 21-day exponential moving average on June 29, we ran up a quick 10%: from the June 29 low of 9663 (red line) to Friday's high of 10,622 (blue line).
Using the 50% retracement rule, we know that any pullback to the midpoint of 10,142 (white line) would be normal and healthy.
Any lower and it's a sign of weakness. You would ease your foot off the accelerator.
If we pull back to the expected level and start bouncing, you start pushing a little harder.
Your changes adjust according to the length of the time frame.
Intraday movements require smaller actions than daily and weekly movements.
Stock Market Update: Take A Step Back
Taking a step back to the weekly chart is critical for context.
Facts: Up 4.0%, 98% closing range on higher volume.
Weekly candle: Beautiful. A gap-up above the top of last week's wick. Large positive body with no wicks. It doesn't get any better.
Expectation: Higher.
Stock Market Update: Moving Averages
Take another step back and focus on the moving averages.
Power Trend: Excellent: The power trend remains on and in a very healthy position. It will turn off when the 21-day moves below the 50-day.
21-day moving average: Great. Friday was the ninth consecutive close above the 21-day, closing 5% above. The low has been above for eight days.
June 26 was the first close below the 21-day line in 57 straight days. On June 29, we retook the 21-day with a classic and powerful upside reversal.
The 21-day has remained above the 50-day line for 53 days and above the 200-day line for 48 days.
50-day moving average: Great. We closed 11% above a steadily rising 50-day.
The 50-day has been above the 200-day for 28 days.
200-day moving average: Great. The 200-day continues to rise, and we closed a whopping 21% above the 200-day line.
Stock Market Update: Webby's RSI
There's a very popular Relative Strength Index (RSI). This has nothing to do with that indicator; it's just a fun play on words.
On May 30, Stock Market Update introduced Webby's Really Simple Indicator (Webby's RSI). There we explained the details and showed how it behaved during the 2017 bull market.
In the June 6 Stock Market Update we went over Webby's RSI during the 2003 bull market. You should review both to understand how to use this indicator.
It's simply the percentage of the low vs. the 21-day moving average. That's it!
As a bull market starts you want to see very high levels on Webby's RSI. That shows the lows are well above the 21-day. A sign of power.
Eventually, bull markets level out to a more sustainable pace.
In prior bulls, the ideal spot has been 0.5% to 2% (the green lines). For reference, yellow is at 4% and red at 6%.
All bulls have their own character and volatility. This may end up with a higher or lower ideal range; the Stock Market Update will adjust the levels further into the bull market.
Current Webby's RSI: We are two weeks into the bounce off the 21-day and the behavior has been classic, healthy and very powerful.
An initial thrust well over 4% and then trending lower and sideways. Friday's value was a powerful 3.22%.
It would be nice to see this continue to stabilize, even if it's higher than the traditional 0.5% to 2%.
This has been one of the most powerful bull markets in history. It appears that 2% to 4% is the sweet spot for now.
The blue line is a 10-day moving average. Friday's value was a healthy 2.23%. It's been relatively steady for the past three weeks with a slight upward bias.
Stock Market Updates: Lower Channel Line
This week we are introducing a new upper channel line, but let's first review our current lower channel line.
Steep channel lines work until they don't. It's that simple.
Respect them if the market respects them. Some are so obvious everyone sees them. Others are very tricky.
Original Channel: In the May 16 Stock Market Update, we introduced a very steep channel line (red line). It connected the low of March 18 with the low of April 3.
We noted it was way too steep to last forever. It broke on June 11.
When a channel line is broken, it's typically considered invalid or simply dead and gone.
Second Channel: In the June 20 Stock Market Update, we introduced a new channel line (white line). This one connected the March 23 low to the June 15 low.
That one died on June 26.
Current Channel: In last week's Stock Market Update, the market gave us a new, less steep channel line (blue line). This one was a little trickier.
To draw this, take the low of April 13 and connect it to the June 29 low.
Meet The New Line; Same As The Old Line
This raging bull market hasn't played by the rules.
Its raw power has kept it from creating solid resistance at an upper channel line. But since mid-April, it has been in a relatively tight trading range. The trading range has just been at a sharp angle.
Using the current lower channel line (blue) the market doesn't go too far above it before it pulls back in.
That's where we get the new upper channel line (red). We are simply taking the lower channel line and making a parallel line that contains the bulk of the uptrend.
You can see when it poked its head above this line from June 5 to June 10 and got hit with a big gap-down on June 11.
Again, it tried on June 23, only to move back into the channel.
Midpoint: The midpoint channel line (white) is just there as a reference point. The market has been so strong that the bulk of the time has been spent in the upper half, above the white line and below the red line.
On Monday we poked back above the line. Tuesday's downside reversal made it feel like we were returning to the white line. Obviously, that didn't happen.
What now? Assuming we don't go into an intermediate correction, the outcome feels binary.
First outcome, like June 11 and June 24, we move back into the channel.
Another outcome, July 6, was an inflection point for a steeper new channel. This could be like 1980 (see below), where the upper channel line became a floor.
The OG Raging Bull Market: 1980
Raging Bull 2020, The Sequel
The closest precedent for the current raging bull happened in 1980. Ironically, that's the same year Scorsese released his masterpiece movie "Raging Bull," starring Robert De Niro.
Similarities:
Peak on Feb. 11, 1980.
Peak on Feb. 19, 2020.
Bottom on March 27, 1980, down 25.3%.
Bottom on March 23, 2000, down 32.6%.
It took until July 14, 1980 (blue line) to recover to new highs.
While we poked above new highs on June 5 (blue line), we didn't successfully stay above it until June 30.
On Friday we closed 8% above those old highs (green line).
Why study this? History repeats itself all the time. While this is not a perfect precedent, it's pretty good.
A true raging bull can go a lot further and longer than anyone can imagine.
Differences: The green line in 1980 shows where it had recovered 8% above the old highs.
In 1980 the depth of the bear was less, but volatility was also dramatically less.
So, a true comparison would put the green line much earlier. Closer to 5% or 6% above the 1980 highs.
Homework: Pull up the Nasdaq Composite in Market Smith.
Do a change date at similar points. Go to the bottom day of the current market, then the bottom day in 1980. Then, go to the follow-through day in each.
After that, advance the 1980 example a week at a time. Analyze the market.
How would you feel?
Where are your lines in the sand?
If you want to really get in the mindset of 1980, maybe put on the bestselling album of 1980 while you do your homework. Hint: Hello? Hello? Hello? Is there anybody in there?
The James Bond Index May Be The Key
The S&P 500, commonly referred to as "the spy" or SPY, may be the key to a leg higher.
On Monday, the SPY gapped up through the prior resistance within the handle of the cup-with-handle base it formed.
On the weekly chart, the tiny spread closing near the highs is what the Stock Market Update calls a setup week. It leaves you with the expectation of moving a lot higher the following week.
The SPY has clearly been the laggard vs. the Nasdaq, so a mean-reversion trade would be very logical.
Stock Market Update: Better Not Look Down
Sun Tzu said: "Whoever is first in the field and awaits the coming of the enemy, will be fresh for the fight; whoever is second in the field and has to hasten to battle will arrive exhausted."
Bill O'Neil said: "There are the quick and the dead."
Stock Market Update said: "Know your levels."
Tests of support levels are normal and healthy. Abnormal breaks warrant quick and defensive action.
First Level: Below the upper channel line (red trend line). Moving back below this and staying above the middle-channel line (white) would be ideal.
This would keep us in the current character of the market. It would also put us near the 10,221 highs from June 23 (green horizontal line). This is also near the 50% retracement level of 10,142 (not shown).
Second Level: The 21-day moving average 10,105 (blue moving average). This is very close to the 10,086 highs from June 10 (yellow horizontal line).
This is a key level because it has been defended successfully in the past. A break below this without a quick recovery would change the character of the market.
Defensive action would be warranted.
Third Level: The February high of 9838 (orange horizontal line) and the lower channel line (blue trend line).
Fourth Level: June 29, low of 9663 (red dashed horizontal line). This was the last successful test of the 21-day line. This is close to the 50-day moving average (red moving average at 9605).
A pullback to this area would be a normal intermediate correction of 9% to 10%.
The Line In The Sand: Breaking 8807, the current 200-day (red thick horizontal line) would be a massive negative character change.
Stock Market Update: The Key To The Highway
This week, once again this raging bull market showed exceptional strength.
Gapping up and being at all-time new highs doesn't allow for any logical upside targets.
The next task is making Friday's high of 10,622 the floor. The next magnet is 11,000.
While we focus on the Nasdaq, the key this week will really be if the S&P 500 can join the party. All the other major indexes are still below their 200-day lines. The SPY is the only true contender.
This is what to look for on the upside for the S&P 500:
First Level: High of handle at 3233 made on June 8.
Second Level: The low at 3328 from Feb 21.
Final Level: The high at 3393 from Feb 19.
Remember the old saying: The trend is your friend, until the end when it bends.
As always, be kind to one another, keep an open mind and stay flexible.
You can do it!
Mike Webster is IBD's Head Market Strategist. Follow Mike on Twitter under @mwebster1971. This weekly column was formerly named What Would Webby Do (#WWWD) available on Mike's Twitter Feed.
