The tariff tantrum tanked the market with a promise of more to come.
The only guarantee we have this weekend is that there will be more volatility. The president is ticked that the proposed deal fell apart and he is going to take out his revenge on China through tweets and the press. Every camera opportunity is going to be a tirade against China because they made him look bad in the press. His "good deal" turned into no deal and plenty of requirements before China will agree to talk again.
With the new deadline of one month, it is going to be a full court press starting next week to threaten them back into negotiations. This is not likely to be received well by the market.
Volatility spiked significantly because of the sudden disruption in the negotiations. The president's Sunday evening warning that full tariffs were coming, and talks had broken down, caused an immediate bout of selling that lasted all week.
For the last several weeks market breadth had been improving. That came to an end last week when decliners beat advancers badly every day but Friday. On Tuesday it was 4:1 decliners over advancers. The hiccup at the top of the chart is not dramatic but the MACD turned decidedly bearish.
The Nasdaq A/D is even more bearish with a six-week low after struggling for weeks to make a new high. The big cap tech stocks and the chip sector sold off hard on the tariff news and the guidance warning from Intel.
The chip sector sold off hard and narrowed the divergence from the Nasdaq. The chip stocks are supposed to lead the Nasdaq higher and lower but the sprint higher in late April had never been copied by the Nasdaq. This appears to be simply an equalization of pressure after a 30% rise in the chip sector in 2019.
The FANG stocks all rolled over and headed back to uptrend resistance, but Google continues to be a major anchor after disappointing on earnings. The stock is holding at a 5-week low and could easily break that support at 1,165.
The combination of weakness in chip stocks and FAANG stocks was a one-two punch for the Nasdaq. Apple lost $75 billion in market cap to lead the market lower.
The Dow had been struggling for weeks to break through resistance at 25,616 to no avail. I have shown this head and shoulders chart configuration for two months and warned it could be a challenge. Others call it a triple top while other analysts claim there is no such thing as a triple top because the third attempt normally succeeds i moving higher. Clearly this was not the case in 2019.
This is a hard pattern to reverse. Once confirmed it can lead to significantly lower levels. Some would say this is not a true H&S because there is no clear neckline and I would agree. However, we need to assign it some sort of name because it is clearly a predictable top in the market. If I had to pick a target it would be 24,000.
The small cap stocks posted a breakout move the prior week, but it was completely destroyed by the market volatility. The small caps are back where they started two weeks ago while the Dow is significantly lower thanks to 3M, CAT, BA and the tariff sensitive stocks.
The S&P crashed all the way back to 2,825 before rebounding to test 2,885 again on Friday. Had the S&P closed at the 2,825 level this would have been a major breakdown. As it is, we only suffered a 2.1% decline, which is normal in any bull market.
I know last week was painful, but it was a normal bull market decline if it stops here at 2-3%. Unfortunately, I will be very surprised if we do not see additional volatility as the trade war shifts into a new chapter. I would hesitate to buy any dips until we see where the market is headed. This could be just a normal profit taking dip OR it could be the first leg of a sell in May cycle that lasts for a month.
Enter passively and exit aggressively!
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