Schwab Live: Midweek Market Trend for August 16, 2017

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While Monday’s rally after the big decline on Thursday was welcome, the bounce was not without some issues.  Looking first at the NASDAQ, the volume on the rally was less than the volume on the previous down days, and also less than the 50-day moving average of volume (Figure 1). 

Source: StreetSmart Edge®

Second, the equal weighted S&P 500 (SPW) has not been keeping pace with the regular market cap weighted S&P 500 (SPX).  Notice how its relative strength line has a downward slope over the last few days (Figure 2)(A), a sign of narrowing breadth.

Source: StreetSmart Edge®

Third, over the last five trading days, the more defensive sectors such as utilities, consumer staples and healthcare have been leading (Figure 3).

Source: StreetSmart Edge®

Speaking of consumer staples, the beverage stocks look interesting.  They appear to have broken out of a shallow cup and handle formation (Figure 4). 

Source: StreetSmart Edge®

 A cup and handle forms after a strong up move and is considered a bullish continuation pattern.  The left side of the cup forms as the stock or index initially sells off. The next part of the pattern, the right side of the cup, forms as the stock starts to rally back towards its previous high. The final part of the pattern is the handle, which is a downward movement starting at the right side of the cup.  There are two main buy signals with the pattern.  Some traders will draw a downtrend line along the upper border of the handle, and initiate a trade when the stock or index trades above the trendline. Another method is to wait until the stock or index trades above the pivot point.  The pivot point is the high of the right side of the cup.  A potential first trading target can be set by adding the height of the cup to the breakout price.  Keep in mind, though, that the “target” is based on historical performance, and should therefore not be considered a certainty.

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