Market update July 19, 2011

As I mentioned yesterday, a lower volume hammer was not that strong a signal of start of a sustainable rally but today we got a gap up and the market closed near the highs of the day. Volume on SPY was a bit lower than yesterday, again not supportive of a rally but it was higher on QQQ. S&P futures including the overnight session also printed a bullish engulfing candle and that too on lower volume. So, there is a bit of divergence between the volumes of these 2 indices but one such day doesn't mean anything. Even if we see this situation on a number of days I don't know what to conclude from it. So, for now the path of least resistance is up until there is evidence otherwise.

Previously my opinion was that due to summer time, we might not see a breakout of the overall market from the current trading range before start of September. But considering that a number of leading stocks are forming bases and few have just broken out, it is quite possible that we see a breakout much sooner than start of September.

Disclaimer: No position in SPY, QQQ or ES.

QQQQ signals

Today QQQQ is showing 3 signals of near term top:

• RSI curve trying to move below the overbought region
• A doji on the daily candlestick chart
• MACD crossing the signal line from above

These 3 signals together suggest that the market might be ready for another correction. Whether this area becomes 'THE' top for a longer term remains to be seen.

Disclosure: No position in mentioned security.

QQQQ trendline possibly broken

QQQQ may have broken below its trendline. The reason I use "may have" is that trendlines are not unique, meaning we can draw them in a variety of ways. They are primarily used as guidelines. Also, MACD is showing slight negative divergence, after a series of progressively weak up moves.

SPY is still within its trend channel. Whether it will also break below the channel remains to be seen. There is possibly short term support around 87. MACD is also showing slight weakening of the trend. Corey Rosenbloom pointed out a bearish pattern in SPY, which is a doji, followed by a hanging man, followed by a bearish engulfing candle.

On a positive note XLV broke above its trading range. This indicates investor rotation out of recently strong sectors like financials, basic materials and technology into more defensive sectors like healthcare.

Disclaimer: No current position in QQQQ, SPY or XLV.