The Zombie Market

Hey Market Pilots,

When the SPY broke out from its range at the beginning of August, there was a lot of energy behind it and the internals supported the move. As price approached its double top, momentum slowed as that is a natural resistance area and few traders are willing to buy the new highs. The internals began to weaken, we got one quick move down on the 11th, and since then the SPY has been like the living dead.

I feel that the term Zombie Market is pretty accurate since on the surface, the SPY appears to be doing quite well, but inside, with the internals, it is actually quite dead. I wrote an article the other week about how the 3 indices were each trading very differently from each other. That has become even starker of a difference now and I think helps to demonstrate what I am talking about. The QQQ is doing amazingly well because of a few big cap names like TSLA, AAPL, GOOGL, MSFT, AMZN. The SPY is in the middle because it also has some big names. But the IWM has been trending down, representing that a vast swath of names are not doing well.

Above, you can see the advance/decline volume flow and the number of stocks advancing vs declining. The magenta arrows are on 8/11/20 which point out the first pullback in the market since the break out on 8/3/20. It is from that point with the arrows that the market has died on the inside and the IWM began its descent. What stands out to me is that the overall number of declining stocks have been out pacing advancers in a big way since the 11th. You can also see that the volume flow has been negative nearly the entire time. Yet the SPY continues to stay propped up; even running into the close on Friday.

This has made trading very difficult because all the growth and action has been in only a handful of names, meaning we need to pile into them as well if we are to make any account gains. How long can this last though? How long can such few names really keep the rest of the market up? When will these internals catch up to the indices? My line in the sand is when the SPY earnestly stays under the Hourly 50 SMA, especially now that the Moxie Indicator is under zero, but what if the market just chops back and forth through it? We may not get a multi day pullback that is easy to trade as it could be very quick one to two day moves that are jagged and difficult to trade. This is the challenge we face as traders with the unknown. We have an idea of what is coming, but we have no idea how it will actually unfold.

Over and Out,

Your Profit Pilot


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