How to identify the leader of the market.

Like I was saying going into this week; the bullish trend of this market has not yet been broken down.  With all of the bad news that we have gotten in the past couple weeks where did we go?  We went moderately lower scaring out a couple of longs. No big deal.

In the S&P we traded around the 50 day moving average for several days trying to get some of the bulls to sell their longs and to get the bears thinking that they are right.  In the meantime the Nasdaq and Dow were not acting weak but acting strong.  They were not breaking as much as the S&P and they were sustaining trade above their 50 day m.a.'s.  This told me that this recent sell could be mostly based on news (Italy, Spain, Moody's and S&P possible downgrades of U.S. debt) and did not change the trend of this market.

When you have divergence between the major markets the leader is always the one that is the strongest in the current trend.  

Let me make that clearer........if all three of the major markets are trading above their major moving averages (20,50,200) then the market is strong.  Right.  (or whatever tool you use to determine the primary trend)  If one or two of the the three fails to hold any one of their major moving averages that is non confirmation of a change in the primary trend.  It takes all three of the major markets to break down below their moving averages to change the primary trend of the market.  With the Nasdaq and Dow Industrials remaining strong I have been advising my subscribers that they will lead the S&P higher.  That is what you saw today.  The tug of war between the S&P and Nasdaq/Dow was won by the leader(s), the Dow and Nasdaq.

To confirm what I am saying......when you see either one or two of the major markets break out one way or the other look to see what the other market(s) are doing.  The market loves to follow a leader.  The leader is the one that doesn't break its trend as easily as the other correlating markets and stays on whatever the current trend of the market is.  The Nasdaq is the current leader (with the Dow as a close second) because they never broke down below their 50 day moving average and they led the rest of the market higher.

I do a Q&A every Wednesday live at 1:00 et.  Tag your tweets with #eminix or email me your questions.  For my day to day comments check out my morning brief.  

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