In a hurricane the leading edge can be very damaging but the first bit of calm does not mean the storm is over. A hurricane has a calm spot in the center of the storm called the eye. The leading edges of the storm can pound an area for hours before the eye moves over the area. Many times residents come out of hiding to survey the damage and pick up some pieces before going back indoors as the eye moves away from them. The backside of the storm arrives and they are hit all over again.

A market decline can be similar to a storm. The first decline is a surprise and can be dramatic. As the market becomes severely oversold, buyers appear and the selling pressure eases. The eye of the market storm can last 2-5 days before the trailing edge arrives and pushed the market to new lows.

We could be in the eye of the current market storm. The initial week of declines was brutal but was followed by a nice rebound of nearly 50% before losing traction. This is a very common type of oversold rebound before the market rolls over under the weight of the second wave of selling.

Volume was very anemic at 6.5 billion shares on average over the last three days. This compares to 8.3 billion shares on Monday's steep decline. Decliners were 6:2 over advancers on Monday. On Friday decliners were nearly 3:1 over advancers.

The A/D chart on the S&P posted a major decline we one would expect. The Wednesday/Thursday rebound helped to recover some lost sentiment, but the chart is still bearish.

The Nasdaq A/D is starting to breakdown after plateauing for a month. The A/D is very close to the low made on Monday. The A/D on Friday was nearly 3:1 decliners over advancers with 90 new 52-week lows.

The three days of relative calm mid-week helped to lower the VIX back closer to neutral territory. The two-week spike would appear to be over but a second leg down in equities could push the VIX right back over 20 again.

I know you get tired of hearing this but the chip sector does control the direction of the Nasdaq. Weak earnings and guidance for the rest of 2019 is depressing the sector and that has put the Nasdaq on a slippery slope. The correlation is returning and the $SOX is moving back to a more normal relationship with the Nasdaq.

The big cap FANG stocks moved down in unison with the exception of Google. That stock is well out of the group and has been a major drag on the Nasdaq. Apple, not shown, is an even bigger drag with a $30 decline over the last three weeks.

The Nasdaq came within 27 points of touching critical support at 7,600. The Nasdaq had declined more than 500 points at that low. The rebound has been just enough to satisfy the technical traders and we could be looking for another leg down next week.

The triple top formation on the Dow is intact and the target on a continued decline would be 24,000.

I am bearish on the market short term, but I do realize that the market exists solely to confuse and humiliate analysts. While I do not expect a continued rebound it is always possible. I continue to recommend that you buy the dip only for trading positions. There are too many unsent tweets for us to believe the battle is over. Sell in May is alive and well in 2019.

Enter passively and exit aggressively!

Jim Brown

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