making an even more powerful move to the upside several days or weeks later.
For now, it’s simply too early to tell whether there was any significant technical damage done by yesterday’s decline. If leading individual stocks and ETFs fail to hold support of their 20-day exponential moving averages for more than a day or two, that would obviously be concerning in the near-term. However, as long as the broad market continues to avoid bouts of institutional selling (distribution), stocks could still eventually recover and head back to new highs when traders are least expecting it.
The back-to-back reversal candlesticks (bullish followed by bearish) created a few false breakouts in ETFs we have been monitoring. The iShares NASDAQ Biotechnology Index (NASDAQ:IBB) broke out from a tight-ranged handle last Friday but failed to follow through yesterday:
In a strong uptrend, there should always be a steady rotation of breakouts. But when a market becomes extended, the ETFs that are last to break out are sometimes the worst trades to take, as they can fall apart quickly when the market corrects. Sometimes laggard ETFs breaking out to new highs is a sign that the market is getting a bit ahead of itself and needs a few days/weeks of rest. With $IBB, the best case scenario (other than to return above the two-day high) is for the price action to “undercut” the 20-day EMA and wipe out all the obvious stops around the $144.00 area. Still, any shakeout below the 20-day EMA should be followed by a quick reversal back above the 20-day exponential moving average if the selloff turns out to be just a shakeout.
Like $IBB, iShares MSCI Indonesia ($EIDO) was late to the party in finally breaking out last Friday (after months of consolidation). $EIDO is above the $31.00 breakout level now, so the trade could still work out because about half of all breakouts pull back at some point test the breakout level before following through:
While the timing was off in both breakouts above, we will continue to monitor the price action for the next low-risk trade setup. If the stock/ETF is still under accumulation, then a false breakout should run its course in three to six days before reversing. As always, we will continue reacting to price action in the market, rather than trying to predict it. Our disciplined, rule-based market timing system remains on a buy signal, so we still expect any pullback to be short-lived. But all bets are off on the long side if higher volume selling starts entering the market.