If the market seemed a little bit jumpy to you, it was. Since Wednesday, the market appeared to be moving very quickly; it felt like no gain was safe, and a decline could reverse higher at a moment’s notice.
I started to notice this during the Fed press conference on Wednesday, and it continued right through Friday. What happened was rather interesting because liquidity appeared to have thinned out.
The chart below is from the CME, and it shows that the depth of the book for the bid and ask has thinned out, especially since the market started selling off in January. Meaning the number of contracts on the bid and offer has fallen. What is even more interesting is that when looking at September’s sell-off, the depth of the book did not thin out.
It is the same for the NASDAQ 100 futures, with the depth of the book narrowing since this sell-off began. With fewer bids and offers on the top of the book, it means the market will remain very volatile with significant swings up and down.
The thinner book has resulted in the spread between the bid and the ask to widen. Again, just another indication that volatility is likely to remain significantly elevated in the days ahead. It would also suggest that the declines we have seen in the market are not over. Because a market where the top of the order book is thin and spreads are widening is not a healthy market.
Friday’s rally was bizarre, following the PCE data. Its violent nature was more akin to traders who were closing out short positions heading into the weekend. I spent more time reviewing why it looked much more like a short-covering rally in this weekend’s technical take for members of Reading The Markets.
1. S&P 500
I’m sure plenty of people are looking at the weekly chart and thinking the index has bottomed. The steep sell-off, followed by a sharp rebound and higher close, created a long wicked green candle. But it may not mean that at all. Something similar happened in August of 2015, with the S&P 500 falling 5.65% the week of Aug. 17, followed by an increase of 0.95% the week of Aug. 24. Only to drop the week of Aug. 31 by 3.4%.
This time, the S&P 500 fell 5.68% the week of Jan. 18 and rose by 0.77% last week. So does that mean we fall sharply this week? It could; all I am trying to point out here is that there is a good chance we revisit or even take out the lows, especially if the liquidity situation doesn’t start to improve.
Additionally, the S&P 500 is no longer oversold, with the RSI solidly above 30 and back within its lower Bollinger® Band but unable to clear its 200-day moving average.
2. NASDAQ Invesco QQQ Trust
Even with the rally on Friday, my wave count for the Q)s remained unchanged, with the completion of wave 4, and now we were waiting for the start of wave five down.
The Qs already retraced 38.2% of wave three down on Jan. 26, and I expect that we now see a move lower. If not, I will go back and recount because there is always another way to count. However, to this point, it has worked, and there is no reason to think it won’t.
3. Aussie Dollar/Japanese Yen
On top of that, there was no reversal in the risk indicators like the AUD/JPY. On Friday, the currency pair finished down by 75 bps and was channeling lower.
4. Amazon
It will be a big week for Amazon.com (NASDAQ:AMZN), a do-or-die moment, with the company reporting results. The stock has struggled mightily since the last time they reported, and that was because they missed estimates and gave weak guidance.
The shares have been stuck below resistance at $2,900, an essential resistance level. If the stock can get back over that price, it probably has some room to run higher to around $3,200. But I think the chart looks weak, and the stock cannot afford to fall below $2,650.
5. Alphabet
Alphabet (NASDAQ:GOOGL) reports results on Tuesday afternoon, and it may tell us a lot about what happens next in the broader market.
The charts between the S&P 500 and Alphabet look incredibly similar. But there is one noticeable difference that makes the chart on Alphabet a bit clearer: the bear flag. Which would imply the stock breaks support at $2,570 and goes lower, which would probably tell us that if Alphabet drops, the S&P 500 follows.
6. Micron
Well, Micron Technology (NASDAQ:MU) pulled back after hitting $95, and now it filled the gap at $77.20. I think there is a good chance this one starts to go higher now. An uptrend is forming, and the RSI is also starting to trend higher, suggesting the stock may have pushed up towards $81.
7. Walmart
Walmart (NYSE:WMT) has fallen to support at $135 on many occasions and has held. Additionally, the RSI is steadily trending higher, suggesting that momentum has shifted to bullish. It gives Walmart the potential to rise to around $142.
This week’s YouTube Video: