The bull entered the china shop yesterday. The momentum divergence I have worried about for the past week resolved to the down side, breaking the cup-with-handle formation on the hourly chart. As a result, the short-term trends have turned flat on the trend check carpet, though longer periods remain unaffected, as they should. I have also pointed to the broader market being weaker than the indexes. The overall path of least resistance from the Russell 1000 universe remains lower in the 25-to-50 day interval, as it has for the past several days. The big picture shows a double-top and a sideways move, with support from 2320-2280. Lastly, Berkshire Hathaway, my proxy for the broad market and the financial sector, broke key support, pointing to more weakness ahead.
Chart 1: The sharp sell-off in the market broke the short-term cup-with-handle formation leading into the recent highs.
Chart 2: The momentum divergence I commented on last weekend was resolved to the down-side, pushing the market into a broad trading range.
Chart 3: The trend check carpet shows that the trends have turned flat on the short-term, but remain unaffected on longer time periods, as they should. A one-day sell-off typically will not budge the longer-term trend-following models due to greater smoothing. Here time periods range from 25-200 days, doubling at each step from to bottom. The market breadth increases from left to right, from 30 to over 2000 stocks. (See model details here.)
I use trend-following models to check the percentage of the Russell 1000 universe above the upper bands for each time step. I then show the plots as the path of least resistance to get a sense for how the trends are distributed below the surface of the index. I have noted that the path of least resistance is lower in my recent posts, and that trend continues as you can see below.
Chart 4: The roll-up of the Russell 1000 universe shows the path of least resistance for the broad market is down in the 25-50 day range, flat in the 100-day range, and up in the 200-day area.
The Bigger Picture
The broader market, and now the SPX are essentially moving sideways. This means there can be large one-day moves in either direction without moving the market out of its trading range.
Chart 5: The blue box shows the SPX is now in a broad consolidation. The Aroon indicator in the lower panel still shows an up-trend since it is only a few days since the most recent 20-day high.
Chart 6: The SPX weekly chart shows the market moving sideways away from the upper boundary of a rough up-trending channel since the 2016 February lows. The market seems to have made a small double top. Initial support starts at the March lows, extending down to the top of the December/January consolidation, say at 2300(+/- 20).
Berkshire Hathaway is another stock telling the story of the weakness in Financials. Yesterday it broke important support, and will remain in a down trend until it can decisively break the dashed down-trend line. The next support is down near 157 area.
Chart 7: Berkshire broke key support, and must now test the next support at 157.5 and overcome the down-trend line before the correction can end.
The fear factor from the selling will take some time to dissipate. The vulnerability to head-line risk I had worried about for the past few posts arrived with a bang, and will remain with us for the immediate future. The market seems to have retreated into its consolidation region. The trend-following models have turned flat in the short-term, but the longer term models remain unaffected, as they should. The more sensitive path of least resistance calculations have been on track, pointing to short-to-medium weakness before the latest breakdown. Bonds and gold have rallied in a risk-off mode, and also enter a seasonally friendly period. We just have to be patient as the market comes to grip with the daily drip of the leak-of-the-day.
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