The S&P dipped to support at 2,040 on Friday and hung there for over an hour as traders battled for direction. When it became apparent the sellers were unable to press their advantage and break through that critical support level, the shorts gave up on the battle and began to cover ahead of the weekend event risk. A new short squeeze was born and the major indexes all closed positive. Unfortunately, they all closed under recent support/resistance.
The S&P closed at short-term resistance at 2,057 and just below stronger resistance at 2,063 and 2,080. Note that the oscillators are in full decline and the MACD separation is increasing. The odds of a break below that support at 2,040 are very good as we move closer to the end of May.
I used this chart previously to show the lack of movement at the top of a long advance. The moving averages have crossed for the fifth time since 1996 suggesting the long-term direction is down. However, the two year consolidation spread is 324 points and technically we should either see a 324 point breakout or a 324 point breakdown from this consolidation.
The recent volatility since August suggests a clear topping pattern that will resolve itself to the downside. Bear in mind this is a very long-term chart and it could take a long time for this to play out. I will continue to repost this chart as time passes.
The Dow nearly touched critical support at 17,500 on Friday before rebounding to close just under prior resistance/support at 17,750. The Dow is also clearly in decline and the 17,500 level is very important. A break below that level could produce some cascade selling since there is very little in terms of recent support.
The Nasdaq punched through support at 4,750, which is now resistance and touched a two month low. The Nasdaq Composite is targeting a return to support at 4,600 and with tech stocks declining due to earnings disappointments it should not take too long to get there.
Techs are seemingly over valued given the recent earnings cycle. Estimates are coming down and stocks are compressing. Only the top performers like Amazon are maintaining their gains.
The Russell 2000 failed to reach the top Fibonacci retracement at 1,162 and has declined sharply since that failure. The pause on Friday at support at 1,110 should only be temporary. There are multiple support levels at 1,190, 1,078 and 1,065 that should slow any decline into the summer doldrums.
The Biotech Index failed at resistance at roughly 3250 and just below the 150-day average, which has been resistance since last summer. The failure at resistance and the sharp decline has returned it to the short-term uptrend support at 2,925 but I doubt that will hold. I am targeting a return to the stronger support at 2,800. The MACD is in full decline and the RSI is approaching but not yet reached oversold. The 2,800 level would be a good rebound point.
The biotechs have been dragging the Nasdaq and the Russell 2000 lower for the last two weeks. If the biotechs were to firm the market would have a chance to rally.
The Russell 3000, the 3,000 largest stocks in the market, failed to reach resistance at 1,250 and is now threatening to break below support at 1,200. A support break here could produce cascade selling due to a lack of further near term support.
The broadest index is the Wilshire 5000 and note that it has come to a dead stop at 21,250 for the last quarter. This is a long-term chart and the MACD has right on the verge of turning negative. For long-term investors this is a market warning sign that should not be ignored. If the index closes below 20,000 it would be a strong sell signal.
The percentage of S&P stocks under the 200-day average has declined from 78% to 66%. The bloom is off the rose but it has not yet wilted. The average is moving higher as a result of the gains in March and April so this percentage will continue to decline unless the market rallies.
The percentage of stocks under the shorter 50-day average has fallen from a whopping 95% in late march to 63% today. Because this is a shorter average, it reacts faster and now that the March rebound has faded the stocks are starting to fall back below the average. This is a short-term warning that the momentum is fading.
On a positive note the rush into high-yield bonds has supported the equity market. The HYG normally leads equities and the last three quarters it has been negative. The rebound helped lift equities in March and April. We learned last week that $17 billion left equity funds and $2 billion flowed out of high-yield funds. If the HYG is about to roll over in an uncertain economy then is should drag equities lower.
The Baltic Dry Index has halted its rebound from a record low. The falling dollar lifted the price of commodities and that produced a spike in shipping rates. That was a temporary situation and now it will require additional demand from Asia to continue lifting rates. However, an onslaught of new freighters, ordered several years ago, are currently being delivered and with steel prices so weak it does not pay to scrap the older vessels. That means there too much capacity competing for what few cargoes there are to deliver. Without a resurgence in China the Baltic should continue to decline.
The commodity index rebounded because of the falling dollar. The dollar chart suggests a continued decline so commodities should at least stabilize until demand returns.
The Dollar Index appears poised to retrace its gains from two-years ago. This would be very positive for commodities and equities as well as earnings from international companies. The trend over the last four months is down and support has been broken. A move to a lower low in the coming days would be bullish for the markets.
The S&P Energy ETF (XLE) stalled just below resistance at $70. That is a major recovery but the price of oil has stagnated in the $44 range despite numerous production outages around the world including the 1.0 million barrels from Canada. It appears investors have begun to fade in their jubilation over the energy rebound. A falling dollar would do wonders here because it would push oil prices higher even if demand remains stagnant.
The longer-term market view is negative. The short term depends on headlines, the dollar, oil prices and the few remaining earnings reports. Typically, the end of May is negative and we have seen stocks sell off in anticipation of that decline. Numerous "high profile" analysts and hedge fund managers have warned of a coming crash. Whether that actually happens depends on a lot of factors including the Fed and the election cycle.
Enter passively and exit aggressively!
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