This year’s stock market uptrend is officially shattered.
China trade concerns may be the trigger, but as I always say: Technicals paint a picture of things to come, and when things line up, markets will find a trigger to confirm the technical picture.
The break of these trends may have significant consequences. I’m saying this with eyes wide open to the binary situation markets will be confronted with in regard to Chinese tariffs set for Friday: Will China blink, will President Trump blink or will everybody dig in their heels? The outcome to those questions can result in either a massive relief rally or more downside.
Let’s evaluate the charts and understand the context.
I’ve been publicly warning about rising wedge patterns, stating that they don’t matter until they do. But when they break, they can result in the release of a lot of energy.
Take these two prominent examples:
The point was the pattern was narrowing, unsustainable and was practically begging for a break. We got the break last week and confirmation Tuesday:
In the same article I pointed to the VIX
wedge compression — oh so similar to the previous compression phases we’ve seen in recent years:
And, boy, did the VIX release a lot of energy coming out of the pattern:
And, of course, there were warning signs that something was about to happen.
Take the trend line in the DJIA
— it broke on April 25:
A chart that was highlighted in Trend Breaks:
That sent a signal that something was technically amiss. Of course, we saw further bounce action in it, but the signal produced sizable results by filling two of the lower gaps:
The DJIA is at an interesting spot everyone should be aware of. Unlike SPX
and NDX, it never made a new high and all of a sudden the rejection here raises larger concerns:
A potential major topping pattern.
And now that SPX has rejected its marginal new highs, the onus is on bulls to prove their case.
As I mentioned at the outset, a turnaround on the China trade deal could produce a major relief rally at any moment. But clearly markets are rattled, and success is not guaranteed either.
Hence, further downside risk must be considered as well, especially since the patterns above have a lot of room to go lower should markets turn in earnest. While the VIX is getting short-term overbought, ES
suggests risk of a repeat of February 2018 and October 2018:
Given the massive 2019 run, such a corrective move, if it unfolds, should not surprise anyone. Markets are now short-term oversold, and bounces and rallies are to be expected, but this week’s binary market event will likely decide the next big move into next week.
Be aware that, however the trade talks turn out, investors are on notice: The 2019 trend is officially shattered, and the charts told you ahead of time that it was coming. Bulls have a lot of technical damage to repair and require new highs or are at risk of being confronted with major potential topping patterns.
Sven Henrich is founder and the lead market strategist of NorthmanTrader.com. He’s well-known for his technical, directional and macro analysis of global equity markets. Follow him on Twitter at @NorthmanTrader.
Source : MTV