Market Analysis

Weekend Charts: Resistance

Markets are in technical trouble and only sustained new highs across the board can avert a larger summer/fall correction. And time is running out as the traditional positive seasonal window will come to a close in the April/May time frame. At this precise moment in time we’ve seen a familiar refrain I raised in Market Paradox. $NDX made a new high while key other indices such as the $DJIA did not and that’s problematic.

Internals continue to be weak and, as I’ve pointed out on twitter, the most recent action is driven by magic overnight gap ups with $NYAD opening at high positives only to see participation deteriorate throughout the day:

Somebody is selling.

Last week I urged caution about the recent rally:

“From my perspective the rally of last week, while making perfect sense from a technical perspective, has not rung the all clear. Far from it. There are deep internal issue in markets that suggest that further gains, while certainly possible, may find themselves seriously tested by the pull of history.”

This last week then we saw indices hit key resistance across the board and we witnessed price struggle even during a seasonal positive March OPEX week.

$NYSE failed at the 50MA and retreated:

$TRAN, tagged the 50MA multiple times and retreated:

$DJIA poked above the 50MA and then retreated:

This happened as $NDX made a new high, but then failed to follow through.

Indeed the $NDX high came on a pronounced negative divergence:

Clearly $NDX remains the stronger index and no major technical damage can be observed, but markets remain very much dependent on tech not rolling over.

Notably $NDX rejected price again at a key trend line:

All of these trend lines have proven to be extremely relevant to $NDX and, without sustained new highs, $NDX is at high risk of entering a larger corrective move with the .382 fib from the February 2016 lows being a potential eventual target.

Rejection at a key trend line has also proved to be an issue for $SPX:

$SPX has defended its 50MA so far and, without a sustained break lower, potential for a 2850 gap fill remains:

$SPX has trend line and 21MA support below. Should price break this supporting trend line then immediate risk is back to the 100/200MA price range.

Potential good short term news for bulls here: It’s time for another Fed meeting this coming week and Fed meetings have been a primary driver of upside price discovery for years. But folks should take note that all this index price wobbling is taking place in context of buybacks being the primary source of equity buying here. Buybacks in 2018 are seeing a renewed surge due to the recent tax cuts. It is hence artificial stimulus driven demand and not organically driven demand.

And while earnings comparisons will be positive this year (due to tax cuts) there is precious little evidence to suggest that organically driven growth is driving equity prices here. Retail sales have missed 3 months in a row, debt levels continue to soar and the cost of carry heavy debt continues to rise.

All the while we see GDP estimates plummet across the board again.

Is this the sign on an economy expanding due to organically driven demand?

I respectfully suggest it is not.

And for all the new highs on the $NDX we can observe that the $TNX/$SPX ratio I’ve been tracking remains in questionable territory:

Europe continues to receive artificial stimulus while sitting on record low rates driven by an ECB unwilling to remove crisis level stimulus.

Yet while $DAX has bounced off of lows on a positive divergence it has yet to follow through on any price advance, and even if it does, it risks building a right shoulder ahead of negative seasonality emerging into the summer risking a 25% correction off the highs should the pattern trigger:

Eurostocks looked to break out of a larger cup and handle pattern, but the breakout has failed so far:

Globally speaking markets remain historically extended and any new highs would come on major negative divergences:

A bright light here have been small caps, however so far they also failed to make new highs:

The descending trend line on $RUT’s volatility indicator has proved to be resistance to any rally in small caps for the moment.

And while volatility has receded from recent highs the pattern that is emerging suggests more volatility to come this summer:

The pattern opens the possibility of seeing lower gaps filled by sometime in April. Indeed the pattern itself may suggest an extended period of chop inside the larger current price range AND it leaves room for the possibility of sizable rallies in the weeks ahead, but in principle this pattern is bullish for the $VIX.

As is the larger pattern on the $VIX and for now we can observe that the larger pattern on the $VIX has held:

Bottomline: We have a positive day trading environment, but also an environment that permits the capture of larger moves in both directions. But markets at large continue to show larger internal issues that do not speak of a confident environment. All we saw last week is price hitting resistance and retreating.

Bulls need to recapture the 50MAs on the larger indices. According to standard historic script a renewed cautious and dovish Fed combined with another round of magic overnight gap ups could certainly do the trick. Unless of course the newly minted Fed chair decides to show bold confidence and implement Shock and Awe a mere 9 years after the financial crisis (that’s sarcasm btw). A confident bold Fed? Show me.

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