Daily Gains Letter

These Two Charts Suggesting Trouble Ahead?

By for Daily Gains Letter |

Two Charts Suggesting Trouble AheadToday, I’m going to talk about the technical picture and what to expect going forward.

At the start of the year, I would have been somewhat surprised if you told me the small-cap sector would be in negative ground at the end of the third quarter.

Small-cap stocks and technology fared the worst in September. Small-caps continue to be vulnerable, with the Russell 2000 retrenching 6.19% in the month and down 9.22% from its high. The small-cap index is again nearing the official 10% correction and reversal point, based on my technical analysis, which it ran into earlier in the year but managed to recoup.

The Russell 2000 is showing a bearish death cross with its 50-day moving average (MA) crossing below its 200-day MA, based on my technical analysis. And unless we see a reversal in the fourth quarter, my technical analysis suggests small-caps are heading for a down year.

Russell-2000-Small-Cap-Index-ChartChart courtesy of www.StockCharts.com

It has been an uneasy year for stocks, unlike what we have been seeing over the past four years of the bull market. I thought the S&P 500 could gain 10% and 15% in the best-case scenario. At the end of Tuesday, the index was up 6.73%, so I may be close.

In the final trading session of the third quarter, the S&P 500 and NASDAQ pushed back below their respective 50-day MAs.

The technology group has been the top performer in this mixed year with the NASDAQ up 7.59%. The leadership has helped to lift the broader market, but with the NASDAQ at its highest point in more than 14 years, it’s not a surprise to see some topping action, as my technical analysis suggests.

Where we are heading is still unclear at this juncture, based on my technical analysis. At this point, the safest bets would be with the blue chips and S&P 500 stocks, but even they are no guarantee.

A look at the charts shows nervousness with the near-term and intermediate trends, but the long-term trend remains firmly bullish above the 200-day MA, as my technical analysis suggests. Only the Russell 2000 is below.

I sense higher-beta stocks will continue to be at risk as we move into the always interesting and volatile month of October, based on my technical analysis.

The fact is that investors are not that confident at this time. As my technical analysis indicates, the investor sentiment readings are fragile, with the NYSE showing seven straight bearish sessions as of Tuesday. In a rising stock market, sentiment readings are generally bullish in direct correlation with the overall direction of stocks.

NYSE-Advance-Decline-Line-ChartChart courtesy of www.StockCharts.com

We are definitely witnessing some hesitation and stalling on the charts. The failure of a big and sustained upward push could see the stock market flounder for the remainder of the year, based on my technical analysis.

What I suggest investors do is write some covered call options on stocks you are holding in case the stock market languishes. In this way, you can generate some premium income. You can always write calls on sectors that reflect your portfolio holdings as well.

Finally, you can write some put options and look to buy on a potential decline in the stock market. Buying on weakness via put options could pan out given the current climate.

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