The market has jerked investors around pretty good for the last couple weeks as interest rate, China slowdown and Iraq fears all weigh on investors minds. For months, many have said all we need for another leg to the bull market is a pick up in jobs and continued positive economic numbers. Well, positive reports continued pouring in on the jobs front, the corporate earnings front and the economy. However, they were a bit too good, fueling speculation that interest rates would rise sooner rather than later.
It all leads to an extremely erratic and as some would argue, irrational market. One in which it is difficult to make money in as sustained trends remain nonexistent. One of the most important aspects of the CANSLIM method of investing is to invest long only in a confirmed bull market. 75% percent of stocks move with the market. If you insist on investing long under the current market conditions, your chances of losing increase dramatically. How do you gauge the health of the market? By checking price/volume action of the three major indices and the action of leading stocks. The market is contstantly undergoing “tests” at major support and resistance levels. If you are unfamiliar with support and resistance levels it is critical that you at least have a basic understanding of these important areas on a stock chart because they are “test” areas that reveal to you clues about the health of the market. By looking at the chart of the Nasdaq it is clear that investing right now is not a wise decision. In the coming days, the Nasdaq faces a big test at a major support level (see the chart below).
Notice the first blue arrow points to the 200 day moving average, which is a major level of support. In fact, in March the Nasdaq was able to bounce off this line of support and rallied for several days. Well, here we are once again at this level of support. Will we get a bounce again? Today was a good start, but notice the lack of buying conviction evidenced by the lack of volume today on the nice move up. If a drop below the 200 day moving average should take place, the last line of support is around 1900 (blue line) where previous support and resistance has been found over the last sever months. A drop below signals major trouble ahead and probably an end to any sustained bull market from that point on.
I said above another way to gauge the strength of the market is to watch the action of leading stocks. Are they breaking out successfully from a sound base? Lately, that has not been the case. Many stocks have failed in their breakout attempts. Examples of failed breakouts can be seen in CRDN, LCAV and in my post below regarding ACH.