This week I’ve been focusing on buying strong stocks that have the potential to accelerate higher.
However, today is Friday, and the market has a potential reversal pattern developing.
Click here to see when you should anticipate a market selloff
If the SPY doesn’t breakout to new swing highs and clear $282.50, then it would be prudent to be on the lookout for a market pullback.
The reason for my concern is because there are 2 patterns that all sum up to a warning that the market may sell off.
1. After a 3-day rally in the SPY, QQQ, and DIA they all have an inside day pattern. This means the current day’s range is inside the prior day’s range.
This pattern can indicate the market’s desire to reverse if the market breaks the low of the pattern.
2. The QQQ broke above its recent swing high, but the IWM hasn’t been able to get back over its 10-day moving average. This divergence is negative if the QQQ begins to sell off.
These two conditions do not mean that the market will sell off, but they do warn that if the market begins to sell off it is likely to continue to decline.
The price level that will indicate that the market has begun to sell off is Wednesday’s daily low. If the QQQ and the SPY are trading below their respective Wednesday low, then it would be prudent to become cautious.
On the other hand, if the SPY breaks out over $282.50, then the inside day patterns represent a consolidation that could power a good breakout, rather than a market reversal.
As a result, the range of the last 2 days should serve are your guide for which way the market will move next.
Rick Nartarian, Chief Investment Officer
The American Investor Daily