Thursday, March 15, 2018

SPX and INDU: Fractured Markets

SPX continues to whipsaw everyone, bulls and bears alike.  Early this week, SPX broke briefly above its February high, then reversed right where I'd placed the black "or B" label.  It's possible that black C is unfolding, but bears have not yet accomplished their key goal toward that count, which would be a sustained breakdown at the red trend line on the chart below. 

It's normal for breakouts to retest important trend lines, so nothing truly bearish has happened here yet -- however, if bears can break below that red trend line and turn it into resistance (not a brief whipsaw, in other words), then they'll be well on their way toward making the black count a reality.  If they can't whipsaw this breakout, then bulls still have the ball.

Apart from SPX, an issue for bulls may be the Dow Jones Industrial Average (INDU), which still hasn't come close to clearing its February highs, and which is actually faring rather poorly when compared with most other indices.  This is not encouraging to bulls for a couple reasons:

1.  INDU tends to lead SPX, not vice-versa.  It is currently leading lower, not higher.

2.  The broad market is badly fractured.  NASDUCK made new all-time highs; SPX broke its February high and whipsawed; INDU is nowhere near its February high.  Over the past 9 years, equities across indices have generally rallied together.  The fact that they are not able to do so now is indicative of the fact that there is not enough liquidity to go around (as I spoke about previously).  These fractures essentially confirm that there simply isn't enough cash to pump everything to new highs at once... and bull markets need cash.  (Bear markets, of course, need thin liquidity.)

Can bulls reverse this situation?  Of course, anything is possible.  We can only analyze what's present in the market at this exact moment in time -- and as of this moment, both of the above situations exist.  And they paint a picture that suggests trouble may be brewing beneath the surface.

On the INDU chart above, I won't say I've never seen a pattern such as this one that ends up resolving bullishly -- but it's far more frequent to see such a pattern resolve bearishly over the near term (below the blue A/1 low, in other words).

Finally, I'm about up to my ears in the headlines about "trade wars."  I can't recall the last time the media milked an issue so heavily for every single intraday move.  If the market ticks downward, they blame "trade war fears"; if it ticks higher, they say "investors shake off trade war fears."

Holy cow, guys, get a new shtick already!  The "trade war" is not driving the market -- and it's certainly not driving every single intraday move.

There's been a lot of talk about China in the "trade wars," but apparently only 2.9% of our steel is even imported from China.  Our leading source of imported steel is actually Canada (accounting for 16%), with Mexico also high on the list (at 9%).  These so-called trade wars appear to primarily be a bargaining chip that will be used for renegotiating NAFTA, so I think the media is overplaying this card.

In any case, as we've noted, there are a couple warning signals from the market that liquidity is still thin (nothing to do with "trade war fears"), and while we could be close to a short-term bottom, bigger picture, the onus remains on bulls to prove they still have the firepower to keep the broad-based bull market going.  Trade safe.

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