One day the market looks bearish and the next day it looks bullish. Back and forth we go...where well end up nobody knows. That old saying has more meaning now than it has in years. This is actually a day traders dream. The more confusion the better! Confusion creates volatility and I love volatility.
I have been either talking or writing about this divergence between the major markets for months now and I am still not convinced which way the market is headed.
Can the Nasdaq lead us higher when the rest of the market remains weak? I don't think they can.
Can the Transports continue to lead us lower with a strong Nasdaq? I don't think that they can.
The market loves a leader but if the leader does not actually lead the rest of the markets in their direction; the leader will then end up a follower. That is why I think that we are seeing such high volatility. When the technicals in the Nasdaq start to break down we see a collapse across the board. When the Transports start to firm up we have huge up days.
The tug of war is between the Transports and the Nasdaq.
Historically when we have a weak Transports and Dow the rest of the market also remains weak. The current Dow Theory confirmation is that the trend is bearish. That would suggest that the rest of the market would be weak (everybody is except the Nasdaq).
Historically if we have a strong Nasdaq the rest of the market also rallies. The Nasdaq is currently trading above most of their major moving averages and they are in an uptrend (but the rest of the market is not).
Although I am not a complete Dow Theorist I respect it because I have seen it work many times in the past. I have also seen the Nasdaq lead the market. With the split picture that we are seeing I am just identifying which one is working that day. If the Nasdaq is strong and the Transports look firm; then I am more aggressive when I am buying breaks. If the Transports are weak and the Nasdaq is failing to hold support then I am more aggressive when I am selling rallies. If one is weak while the other is strong you have to be a scalper.
Eventually we will see the market make up its mind but until then I think that the big swings are imminent.
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