Last week I mentioned that I thought the small triangle consolidation would be broken to the upside before the market ultimately turns lower. We’ve had the break higher and the turn lower so the market is now at a very critical junction. The action over the next few weeks will likely point not only the short and intermediate term direction, but determine the long term trend as well. It is critical that the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) hold the August lows or the long term trend will almost certainly be down. If on the other hand, the indexes can hold up the odds increase that the worst is behind us.
My core market health indicators with the exception of risk all declined this week. This isn’t the type of action I like to see during a rally. It suggests that we’re seeing a dead cat bounce rather than a resumption of the uptrend. It appears that more time (and probably price weakness) will be necessary to repair the damage to market internals. What I’d like to see to indicate the market is getting healthy is a decline that holds the August lows and shows some divergences in internals. Until then I’ll be exercising caution.
One thing of note this week is that my market risk indicator is getting close to righting itself and clearing the warning. This is another indication that the market is at a critical juncture. Some positive price action with improving internals would likely clear the warning by next Friday. I’ll be watching market risk on any decline for confirmation of a resumed down trend or some positive divergences in the four components as a signal that we’re putting in a durable low.
I know, this post sounds like I’m saying, “The market will go up or down…or maybe sideways.”. But, what I’m trying to express is that the market needs more time before it can point a clear direction. Be patient and cautions until it does.