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Is the Pullback Finally Here?


A weak open will go a long way toward confirming that it is. A higher open, on the other hand, should keep the bears on their toes.

After yesterday's pullback, this morning's open, in my opinion, is even more important. When I wrote about the S&P 500 (INDEXSP:.INX) in the context of DeMark indicators, I stressed that when powerful trends are in place, acting on exhaustion counts alone can be dangerous; it's far more prudent to wait for some level of confirmation that the trend has not only exhausted itself, but it has likely changed.

Two of DeMark's confirmatory tells are the "Price Flip," i.e. a close below the close four bars prior, and the TD Reference Close price. As DeMark explains it, "The Reference Close indicator is designed to anticipate the potential for trend continuation by comparing current price activity to the close of several bars earlier." In practice, when a TD RefClose Level is penetrated shortly after the completion of an exhaustion count, it reinforces the message of the Price Flip. In addition, and this has served me well in the past, I find it best to wait for one of DeMark's "opening conditions" to be met before trusting a close through the RefClose price. The condition I follow is that, following a close through the RefClose price, the following bar's open must be lower than the prior bar close ("Lower Open"), and the price must then print at least a tick lower ("Lower Low").

Let's look at some charts. The first, and perhaps the worst, is the SPDR S&P Homebuilders (NYSEARCA:XHB). Below are the daily and weekly charts.

The XHB looks "exhausted" on multiple time frames, with a Combo Sell 12 on the daily chart, Combo Sell 11 on the weekly chart, and a just-printed Combo Sell 13 signal on the monthly chart. With leeway for possible marginal new highs, the XHB looks primed to roll over. With yesterday's nasty drop of 4.4%, the stock knifed through the daily TD RefClose Down at $28.38, as well as the weekly TD RefClose Down at $28.21. To matter, the latter needs to be breached on a closing basis on Friday, but... it's a start. Also, on the weekly chart you can see that a momentum indicator known as TD Propulsion has triggered; the price has dropped through TD Prop Momentum Down (Yellow Line) and it now projects to the TD Prop Exhaustion target of $26.02 (Red Line). Still, for all of the bears' efforts, a higher open this morning would certainly stunt the message of the RefClose Down price. If the stock does meet the "opening condition" there is a strong argument that a much more meaningful drop is unfolding.

An almost identical pattern shows up in the daily chart of the SPDR Oil & Gas Exp. & Prod. ETF (NYSEARCA:XOP).

The caveat for the XOP is that the weekly and monthly charts are not nearly as extended as the XHB.

Also ripe for at least a pullback are the Nasdaq-100 Index (INDEXNASDAQ:NDX), and the iShares Dow Jones Transportation Index (NYSEARCA:IYT), although again, their respective weekly and monthly charts suggest that prices have more upside before exhaustion. Alternatively, or much more technical damage is needed before we can suggest that a downtrend is in place despite a lack of upside exhaustion.

If you are wondering why I am highlighting only ETFs, the reason is simple. Absent a marked change in the tone of the corporate bond market, it is far more likely than not that sell-offs in individual names will be met by buybacks and more M&A, and the last thing a bear can stand at this point is to have a sharp correction blow up in his or her face courtesy of a takeout bid. So for now, with the exception of small positions in Chipotle Mexican Grill (NYSE:CMG), Lululemon (NASDAQ:LULU) and Dun & Bradstreet (NYSE:DNB), all of my short exposure is through broad breadth instruments.

To sum it up, a weak open will go a long way toward confirming that the universally awaited pullback is finally here. A higher open on the other hand should keep the bears on their toes.
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Positions in CMG LULU DNB IYT XOP XHB and NDX futures.
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