The Week Ahead in Stocks – Mar 12

As Friday’s session took shape, it became increasingly clear how stocks would end the week and start this week. What they do today should give a clear indication how the rest of the week will evolve.

The Nasdaq (QQQ) not only gapped to new highs on Friday’s open, but closed at the highs of the session and week. What happens next is something I write about often, especially during bull markets.

We need to see higher prices above Friday’s close to know if there is any rejection. It is extremely rare to see a market top / reverse after a weekly close at the high. Therefore we look for more upside on Monday / Tuesday. If prices are then rejected from these new highs, we can be much more certain it is a sustainable reversal.

Just look at the weekly closes on QQQ during the last run. How many times did we see a new high after a close at the highs of the week? And how often did this set up fail? Actually it failed twice, but nothing is perfect and we can only play probabilities.

This relates to how markets top. As Tom Demark writes in ‘New Market Timing Techniques’, “my studies suggest that market tops are not made because omniscient top pickers or informed trading syndicates with massive financial resources co-ordinate their selling campaigns; rather a diminution in buying occurs at that particular point in time and price declines of its own weight.” This he called “buyer exhaustion.” So if the week closes at the highs, it’s very unlikely buyers were exhausted… the clock simply stopped.

As the market opens today, many stocks are already due to open at new highs and how they act will be crucial for the rest of the week. Could we see a “Turnaround Tuesday”? We will be focused on catching any turn, as well as adding to the growing library of “Hot Stocks,” not all of which are “Hot” right now, but as we build and track a growing number, there will be more and more opportunities.

Good luck and good trading this week.
Andrew McElroy
Chief Stocks Analyst

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