2021-05-12: State of the Market

As our indicators were saying for the last couple of weeks, the market has dropped around 5% in two days with the Nasdaq leading the fall. What is important now is to be alert for the signs of recovery so we can enter the market at an advantageous point. Let’s review the indicators to start our analysis:

VTI, that correlates the whole market, has touched 50 SMA. We see that in the past this resistance level has held quite well.

SPY, that follows the S&P500, has also touched resistance. I do not want to say that has found resistance but more that has reached a resistance level. The resistance now needs to show strength before we can say that the market has found any resistance.

QQQ, that traces the Nasdaq, has dropped below resistance. This is the only instrument where we see a low read on the XBP Efficiency Ratio indicator. Yet the XBP indicator is a leading indicator and we shall wait for price action to confirm any reading from this indicator.

I like to see the IWM as a natural leading indicator in the market. IWM traces the Russell 2000 index which tracks 2000 medium and small US companies. This indicator shows more the “real” state of the economy and I consider it less influenced by “trading fashion trends” where dumb money can artificially drive up or down certain stocks. IWM has, like the QQQ, also fallen below resistance but the XBP Efficiency Ratio is far from low reads still.

Finally the Put-Call ratio indicator. As we have discussed before, we saw a bullish divergence in the past where the indicator was having lower highs while the overall market was having higher highs. Now both the market and the indicator are in sync. Our action here is to wait until we see a reversal to the green, followed by price action in the market. The Put-Call ratio indicator is already in the previous reversal levels (mid-March 2021) as well as price is seating right on top of the 50 SMA resistance level. We shall monitor the market closely.

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