The market is at a fork in the road, and it is going to have to choose which path it will take in the near future.
So, should we have our guard up right now? Should we start buying in anticipation of a market rise? Or should we start selling before the market nosedives?
Only the market knows where it is headed, but this is how we can tell what the market is thinking…
This update will focus on the very short-term action in the market (the intermediate and long term remain strong). Right now, most of the major averages are largely trading between their respective 50-day moving averages, or DMAs, & their 200 DMA lines. This area (between the 50 and 200 DMAs) is an area that I call “Chop City.”
Keep in mind that the latest pullback has been shallow in both size and scope, which is a healthy event. Furthermore, all the popular indices are trading only a few percentage points below their respective record/multi-year highs (another healthy event).
The Next Move Wins
Going forward, the next move wins, either the major averages break above their respective 50 DMA lines and hit new highs, or they take out August’s low and continue pulling back. After a big move off of last week’s low, the market is pulling in a little here to digest that move. It would be healthy to see this be a short-lived and light pullback. We are not out of the woods just yet, and a defensive stance is still warranted.
A Good Tell For The Market: Small Caps
So far, the small-cap Russell 2000 ($RUT) has experienced the deepest pullback, falling -8.74% from its record high. We are watching the $RUT closely as a good tell for this market. Interestingly, small-caps led the way down and then led the way back up. The $RUT began pulling back on July 1 (weeks before the S&P 500 recent high of July 24, or the Dow Jones Industrial Average’s high on July 17).
The $RUT placed a near-term low and started bouncing on Friday, August 1– almost a week before the other major averages. Going forward, it would be very healthy for this market if the RUT breaks above its 50 dma line and hit new highs. I’m also watching the Nasdaq Comp/Nasdaq 100 very closely as a good tell for risk appetite.
If you would like to know when to buy and sell stocks in relation to the market, check out our Stock Code Breaker course.
Trade Wisely,
Adam Woods
