China released its white paper on the trade talks with the US and the outcome is clear. In their eyes there is no rush and they want to work out an agreement that is equal on both sides. Unfortunately, the two sides started out very unequal so moving to the center is going to be difficult. They say they are willing to work it out, but talks could take decades. China always thinks long term and, in their eyes, they stand a better chance of maintaining the current status quo if they wait to negotiate with the next president, whenever that happens to be. Until then they are hardening their negotiations stance, and nothing is likely to be accomplished.

This would probably mean there will be more tariffs on China and more blustery headlines to irritate investors and the market.

Futures do not open for another four hours so we have no clue how the market will react on Monday. There is still plenty of time for a tweet storm before morning.

The markets broke critical support last week. On strictly a technical basis the charts are bearish and pointing to significantly lower support levels. We all know this is not a technically or fundamentally driven market. This market is headline driven.

I am anticipating some positive headlines from the meeting with Mexican officials later in the week. The risks are too high for Mexico and the fix is too easy to put in place. If they don't let migrants in their southern border, then it will be easier to police the northern border. I understand that is easier said than done but I would expect Mexico to at least attempt to pacify President Trump with some new measures. This would postpone the new tariffs on Mexico while the country implements its new programs. This means we could see a dialing down of the Mexican tariff rhetoric later this week.

That leaves China and I don't see any potential progress from that area. We will likely see an increase in bluster from both sides. Fortunately, the market has had a month to digest the collapse of the negotiations so the negative headlines should have less impact.

Market breadth has turned decidedly negative and running 2:1 decliners over advancers all week. Friday was more than 3:1 on the S&P. Unfortunately, that is not washout numbers of 4:1 to 7:1. This is just a normal sell cycle and we have not reached capitulation levels yet. That does not mean we cannot rally. We are oversold and a positive headline could easily cause a monster short squeeze.

The A/D line on the S&P is in full retreat at a two-month low. If we had gone bearish when the MACD went bearish back at the beginning of May we would be big winners today.

Next stop at 2,722 after a dramatic break below 2,800 and the 200-day at 2,775.

The Nasdaq A/D line is even more pronounced at a 4-month low. Tech stocks were 3:1 decliners over advancers on Friday and volume was heavy. The combination of multiple factors were tanking the sector. China was hitting the chip sector. Mexico was hitting the tech equipment sector with $75 billion in computer equipment imported from Mexico annually. The privacy/antitrust probes surrounding Facebook and Google soured sentiment. When Apple's stock declines on downgrades and expectations, all the feeder companies that supply components also decline. It was a bad week for tech stocks.

The small cap A/D line was 5:1 decliners over advancers as the Russell crashed back to 4-month lows and very close to an even larger breakdown. The A/D line is accelerating lower and showing no signs of buyer interest.

The small caps are dragging the market lower as evidenced by the correlation between the Dow and the Russell. No buyers in sight.

The VIX is also not showing any signs of declining. The VIX closed at the high for the week but down only slightly from the intraday high. The recent pattern of early morning spikes and afternoon declines is fading. This suggests the dip buyers are thinning out leaving us with a steady stream of sellers. Friday's indexes opened lower, posted only a minor rebound before 11:AM and then sold off the rest of the day to close at the lows.

The Nasdaq fell sharply below the 200-day on Friday and there is no support until 7,332 and that is only minor. The next major support is around 7,000. This chart is in free fall and a break below 7,332 targets 7,000.

Apple and Google are dragging the big cap tech lower and there are no signs of a pending rebound. Facebook and Netflix are slowly eroding and could join the plunge at any time.

Apple's dive and the China trade tariffs are dragging the chips lower and the Nasdaq is in lock step.

The Dow is in free fall territory after blowing through the last minor support at 25,200 and round number support at 25,000. The next likely target is 24,000.

On a purely technical basis, the market should move lower. If we were to have another couple down days like Friday, we could see a flush or a capitulation event. That could take the Dow to 24,000 and could set up a decent rebound, headlines permitting. I would not recommend buying this dip until we see other less cautious buyers appear in volume. All the headlines are currently negative and that has produced oversold conditions that can always become more oversold. That means the eventual short squeeze could be violent. Be prepared for a reversal day but be hesitant to enter unless volume is strong.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email