Here's What The Market Needs To Hold Off A Summer Correction

John Kosar's picture

Monday, May 12, 2014 - 1:30pm

by John Kosar

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).

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.

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.

This article originally appeared on ProfitableTrading.com:
Here's What the Market Needs to Hold Off a Summer Correction

John Kosar does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.