After the markets tumbled on Monday we noted that alot of key indicators we follow were pulling back to prior areas of resistance, and we were curious to see if these levels would now act as support. Specifically we stated:
As long as they hold above those previous breakout levels or close to them, then this is just a routine dip after a strong rally. A few of those indicators are the Dow Transports, who’s key support range will become 4,700-4,900. The Dax Composite, between 5,800-6,000; Copper, between 3.20-3.40; the Euro, between 134-136; Russell 2000, between 690-720; Midcap 400, between 820-850; JPM, between 33-35.
Well routine dip it was as the markets have now rallied some 3%+ in two days.
Even better, we now have our key levels to watch for support moving forward: this weeks lows. So lets recap those levels. On the Dow Trasnports: 4,724; Dax Composite: 5,762; Copper: $3.46; Euro: 136.06; Russell 2000: 712; Midcap 400: 853; JPM: $31.84. You’ll notice that with the exception of JPM, none of our key indicators closed below the highlighted support ranges on a daily basis (DAX closed above 5,800 the day it put in the 5,762 low). This is really a good sign and supportive of the underlying strength that has been in the market the last few weeks.
The only red flags we see are that the VIX is still above 30, which means the door is open for a sharp drop. But remember, the VIX seems to signal a top in the S&P500 when it trades in a tight range coming off a decline and we didn’t have a tight range on the VIX today with it trading between 30-35. In addition, the financial sector, as represented via XLF is still lagging. Below $13.50 the ETF has not yet managed to solidify itself above its September highs.
One thing is for sure, the last four days have gotten shorts and longs both on edge. However, that still doesn’t change the point that if you’ve simply bought dips since the 1,074 low on 10/4 you have continued to fare quite well. Unless we see a move below the lows of the last four days, we feel you can continue implementing such a strategy, albeit with less aggression than you were when we were still below 1,200. The reasoning is obvious, there is much more resistance in the 1,250-1,300 range than there was in the 1,150-1,200 range and the VIX is lower so the moves higher won’t be as drastic.
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