Trend Check with Tushar Chande

SPX Breaks Cup-With-Handle Formation

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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).

 

Financials Falter


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.

 

Summary

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.

Thank you for your time, and please subscribe below for automatic reminders of future posts.

Enjoy!

Tushar

 

 

 

 

 

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Tushar Chande
About the author: , PhD, MBA, is the inventor behind an impressive collection of technical indicators, including the Aroon and Stochastic RSI. He has written several books, holds both a PhD in Engineering and an MBA in Finance, and has over two decades of experience trading the financial markets. Follow Tushar in this blog as he highlights his new "Trend Meter" indicator and shares his analysis of current market conditions. Learn More
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