Trend Check with Tushar Chande

Market's Reluctance to Rally Raises Risks (Plus: 28 Top Financials)

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Higher open, lower close: the market's inability to rally convincingly on the back of strong earnings raises down-side risks.  Caterpillar led the way, with a massive sell-off as it failed to please analysts on their conference call.  Other mega-caps followed suit after Caterpillar's manic Tuesday.  The 10-year US Treasury yield has hit a bit of resistance just above 3%.   Since rising rates are good for Financials, a table of the strongest 29 financial stocks is shown below.

 

Chart 1: Caterpillar set the pattern for many key reports this week: higher open but lower close after earnings.


 

Chart 2: Other tech giants reported a similar pattern, though MSFT and AMZN closed higher

 

The bounce off the double-bottom has been anemic, and prices are mired in a triangular consolidation.  As a result, the intermediate-term trends have turned bearish across key ETF groups, a bearish sign, that must be reversed soon, or the market is vulnerable to a sell-off.  In addition, the 50-day simple moving average could run into the rising 200-day moving average pretty soon if this bearish mood persists, leading to more negative commentary.

 

Chart 3: The market is trapped within a large triangular consolidation on the weekly chart, even as it tries to emerge out of a similar pattern on the daily chart.

 

Chart 4: The trading environment has turned bearish on the intermediate-term time frame across major indexes and key ETF groups.  This bearish development also occurred in 2015. The market is now vulnerable to a a sharp-selloff, perhaps in response to head-line risk.

 

Chart 5:  In keeping with the drifting US indexes, the major global equity indexes are also generally trending flat-to-down (See long-term view in the right-hand column. Data are from ETFmeter.com).

 

Chart 6: The US 10-year Treasury yield rose into resistance just above 3%. Of course, the longer-term trend is towards rising rates, hence any  meaningful break in the resistance will lead to cash outflows from equities.  The Federal Reserve meeting this week will also influence trading.

 

Chart 6: The strongest stocks in the Financials sector within the SC database as of 04/27/18.

 

Looking Ahead

The election season means market performance in August-October is likely to be a flat-to-down.  So, bulls are running out of time to mount a rally back to the old highs before the pre-election slow-down.  A lot is happening next week including more than 100 earnings reports and a Federal reserve meeting, so their comments could drive trading mid-week. Perhaps Apple's earnings announcement will help change the mood.  

 I hope you liked this brief overview of the current trading environment, and will subscribe to the blog using the quick link below.

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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