By Tom Aspray 

The selling Monday was quite relentless, with many of the major ETFs and stocks opening lower and declining further throughout the day. The market internals for the NYSE were solidly negative, with 721 stocks advancing and 2261 declining.

Many are explaining the market drop on the news about that Harley-Davidson Inc. (HOG) seeks to move some manufacturing overseas in reaction to the new tariffs. However, even before that news broke, the market showed warning signs last week that is was vulnerable.

As I pointed out in my weekend article, “Three Warning Signs Of A Bear Market,” “the weekly chart of the Spyder Trust (SPY) […] reveals that the Friday close was below the prior week’s doji low at $273.35, therefore generating a weekly doji sell signal.”

As I discussed over a year ago in my article on “Candle Magic”, a doji is formed when the open and closing price for a day, week or month is nearly the same. These are most effective on the weekly and monthly data, as they are interpreted as a sign that the market is indecisive, with the bullish and bearish forces in balance.

Tom Aspray -ViperReport.com

In my Sunday review of the major markets, I noted that the Invesco QQQ Trust (QQQ) had formed a doji the prior week, as it had opened last Monday at $175.49 and closed on Friday at $175.32. The QQQ has been leading the market higher: as of Friday’s close it was up 13% for the year, while the SPY was up only 3.8%.

The doji low was $173.71, so a Friday close below this level will generate a weekly sell signal. It is important to look at the advance/decline analysis when evaluating the doji formations.  The Nasdaq 100 Advance/Decline line made a new high last week (line b) as it moved well above the March high. The fact that the A/D line held above its WMA and major support (line c) pointed to the completion of a bottom on May 12.

It is also important to note that the A/D lines for the NYSE, Russell 2000, S&P 500 and S&P 1500 have also made new highs. This is a sign that while Monday’s decline will likely lead to further selling over the near-term, there are no signs of an intermediate-term top.

Tom Aspray -ViperReport.com

The fact that the Consumer Discretionary Select Sector (XLY) also formed a doji last week was a sign that another market leading sector might also be ready for a pullback. The doji low last week was $110.74, and it opened Monday at $110.86, but had a low for the day of $108.27. Therefore, the open was a good place for traders to take some partial profits.

The weekly relative performance (RS) of XLY, which measures the performance against the S&P 500, turned positive late last year signaling that XLY was now a market leader. It has continued to make new highs and is well above its rising WMA. The weekly on-balance-volume (OBV) moved back above its WMA in April, indicating that the worst of the decline was over. Both are still clearly positive, and even though a weekly doji sell signal is possible this week, there are no signs of an important top.

Tom Aspray -ViperReport.com

It was also a concern that the First Trust Dow Jones Internet (FDN) formed a doji last week. This ETF has 42 holdings, with the largest holdings in Amazon.com (AMZN), Facebook Inc. (FB), Netflix (NFLX)  and Alphabet (GOOGL), and has been a top performer in 2018. In Monday’s trading, FDN had a low of $136.42, which was well below last week’s doji low of $140.84. The weekly RS completed its bottom at the end of January, as it moved through resistance (line a). The RS still looks strong and there is major price support in the $130-$132 area.

How can this help you?

Investors should watch their positions weekly to see if there are any signs of a trend change. They should also watch for a weekly doji following a protracted rally, to decide whether to take some profits before a correction. For traders, these signals are even more important, and I alerted Viper traders to take at least partial profits on Monday, given the weak pre-open action. As for the market, QQQ, XLY, and FDN are still leading, but are more vulnerable to profit-taking during this correction. Market-wide, the corrections are likely to last this week, but I will then be watching the daily technical studies for new buy signals. In a future article, I will discuss doji buy signals, which I find very useful in my stock selection process.