Stocks fell sharply yesterday, ending the streak of seven consecutive positive Tuesdays. The Dow lost 130-points, but more importantly we saw resistance hold and many indices resumed their recent downtrends. Bond yields were down again as bonds prices were up.
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With stocks foundering and bonds yield falling, I don't know what is happening with the economy, but perhaps Federal Reserve chief Janet Yellen can shed some light as she heads to Capitol Hill to answer politicians' questions about the health of economy today. I guess that could be a market mover - but which way?
The SPY (S&P 500 / C-fund) has failed again at the 188 level, and fell below the 20-day EMA. This is starting to look more and more toppy, and the fact that it is doing it during the "sell in May and go away" month, has me thinking these warnings probably shouldn't be ignored. We have already had the failed breakout, and with yesterday's action the 2nd failed retest could be the red flag we have been waiting for on the S&P (we know the Nasdaq and small caps already flew these flags.)
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
I marked the spread between the 50 and 200-day EMA on the chart above and you can see there is a lot of room between the two. I bring this up because I want to compare the 2007 peak with the current action.
In 2007 we saw a similar failed new high, although it took a lot more time to develop back then. Because it took longer to develop and because the pullback after the S&P peaked in July 2007 was severe, the 50 and 200-day EMAs came close together by the time we had the failed breakout.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
Tops take time to develop. The market rarely drops like a rock off new highs without a few rebounds like we have been seeing. But you can see what happened in late 2007 after the 50-day EMA finally fell below the 200-day EMA. We may not be that bad yet, and it would take some time should we get that crossover, but you can see that the downtrend was already in progress by the time they crossed.
The Wilshire 4500 (S-fund) backed off from the 50-day EMA resistance, and this is classic downtrend action. The only hope here is the higher low that may now act as support. Not looking great here without a higher high being made (above 1010).
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The Nasdaq 100 (QQQ) failed at the 50-day EMA and the descending trendline, and if it rolls over here and forms a right shoulder, we have a bearish head and shoulders pattern to deal with. It may be too early to say this, but if this head and shoulders breaks down, the downside target would be 75 to 77 or about 14% from current levels - and this would be the high point before it happens.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
Bonds bounced off of the recent resistance line and the strength in bonds, and drop in yields, is not comforting and another reason to stay on your toes. There is something brewing that the stock market leading indices (small caps and Nasdaq) and low bond yields don't like and are trying to tell us.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
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Thanks for reading! We'll see you back here tomorrow.
Tom Crowley
Posted daily at TSP Talk Market Commentary
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