Here's What the Market Needs to Hold Off a Summer Correction

Although the U.S. stock market was generally stable last week, the tone remained cautious as the defensive Dow Jones Industrial Average was the only major index to post a gain, and that of just 0.4%. 

As has been the case for much of the past two months, the tech-laden Nasdaq 100 and small-cap Russell 2000 were the weakest indices, losing 0.9% and 1.9%, respectively. These two market leading indices must begin to get some traction, and soon, if the broader market is to avert -- or at least postpone -- a summer correction.

Nasdaq Composite Likely to Lead the Next Trend

The sideways movement in the U.S. stock market this year doesn't make for splashy headlines, but it does indicate investor indecision, which is where new price trends begin. The key to investing in this type of environment is being able to identify when the market makes that shift from indecision back to conviction, and right now one of the best indices to watch is the Nasdaq Composite.

The Nasdaq Composite is situated right between major support at 3,990 to 3,980, which represents the 200-day moving average (major trend proxy) and Dec. 18 and Feb. 5 benchmark lows, and 4,186, which represents the 50-day moving average (minor trend proxy).

Nasdaq Composite Market Outlook Chart

As this index tends to lead, a sustained move through either of these levels is likely to be a key indicator of whether the broader market will resume its larger 2013 advance or begin a "sell in May and go away" type corrective decline.

Diamonds: An Investor's Best Friend?

In last week's Market Outlook, I said, "The Dow industrials finally confirmed the transports' March 7 new closing high on April 30, by posting a new 2014 high of its own, although just barely." This equates to a near-term bullish signal according to Dow Theory, one that I have been watching for and discussing in this space since the March 10 report

The Dow took yet another positive, albeit cautious, step in that direction last week, by setting a new all-time closing high of 16,583 on Friday.  

Meanwhile, the SPDR Dow Jones Industrial Average (NYSE: DIA), commonly known as the "Diamonds," also set an all-time closing high of $165.72 on Friday, which places the ETF slightly above its Dec. 31 intraday high of $165.51.

DIA Market Outlook Chart

The strong Friday close is important because a sustained rise above $165.51 would confirm a breakout from four months of sideways indecision in DIA that would target a 7% advance to $177. I would view such a rise in DIA this week, accompanied by a sustained rise above 4,186 in the Nasdaq Composite, as corroborating evidence that the recent period of investor indecision is over and the larger advance is resuming.

Editor's note: Dow Theory buy and sell signals are some of the most-watched and accurate indicators in the market. Yet some of the best indicators are those that few people know about, because it's been proven that once a market-beating strategy gets too widely known, it can lose its effectiveness. That's why we're limiting the number of investors we're sharing our Alpha Score research with -- we don't want to give away our edge. A few weeks ago, we opened up 500 spots for investors interested in benefiting from our success with this indicator. As of this writing, less than 200 of those open positions remain. 

If you act now, you may still be able to access the Alpha Score by following this link. In our report, we'll give you more details about the Alpha Score and tell you which stock it's signaling to buy now. Click here to get started.

[Market Outlook] Why I Can't Stop Talking About The 200-Day Moving Average
Premium Content  | Amber Hestla | February 12, 2019

Many investors hold strong opinions about the 200-day MA... but is it actually important?