In my previous blog post, I said that indecision and choppy price action near the highs “is often a warning sign that a substantial pullback may be just around the corner (especially when combined with higher volume selling in the broad market).”
Fast forwarding two weeks later, stocks have indeed slid lower, weighed down by continued distribution (higher volume selling) in the broad market.
Of all the main stock market indexes, only the NASDAQ 100 remains above key intermediate-term support of its 50-day moving average.
As such, our market timing model now shifts into “neutral” mode, and could potentially flash a new “sell” signal within the next week or two if the NASDAQ Composite clearly breaks down below its 50-day MA and is unable to quickly recover.
Follow The Fibonacci
One reliable technical indicator I use to help determine significant support and resistance levels is called Fibonacci (click here for an overview of how it works).
With Fibonacci, a mere 38.2% retracement off the highs of a prior wave up is considered bullish and normally suggests further upside.
With the NASDAQ Composite, the best scenario would be for the index to consolidate (for a few weeks) above its 38.2% Fibonacci retracement level of the last wave up.
This means the 4,280 area is a key level of support to pay attention to in the coming weeks:
Although not shown on the weekly chart above, the daily chart of the NASDAQ shows the index in danger of breaking near-term support of its 3-day low.
If it does, bearish momentum could quickly spark a sell-off down to the 50% Fibonacci retracement level (just above 4,200), which roughly converges with support of the 40-week/200-day moving average.
Watch Leading Stocks For Clues
One of the key factors that determines the status of our market timing system is the performance of leading growth stocks, which usually lead the broad market in either direction.
During the most recent stock market rally, quality growth stocks such as Tesla Motors ($TSLA), Under Armour ($UA), and Facebook ($FB) underperformed while the major indices rallied higher.
However, those same stocks that previously showed relative weakness are now exhibiting relative strength because they have held up well over the past few days.
Cavium Networks ($CAVM), Palo Alto Networks ($PANW), Ambarella ($AMBA), and Restoration Hardware ($RH) are few other growth stocks to monitor because a mass breakdown in these stocks could pave the way for a deeper market correction.
Laying Low, But Prepared
With the stock market still under distribution and our timing model now in “neutral” mode, I see no reason to establish new long positions right now.
The only exception would be if select, low-risk pullback opportunities developed in top growth stocks over the next few days.
Unless you have a big profit cushion in a position and can hold through a 20% to 30% price correction without feeling too much pressure, it may be wise to raise the stop prices on any open positions you are holding (then wait for lower risk re-entry points to emerge).
As always, I will alert Wagner Daily subscribers with my exact entry, stop, and target prices of any new stock or ETF trade setups that meet my strict entry criteria in the coming days.
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