Wednesday’s announcement brought about a rapid about-face in Futures, which have undercut last week’s lows in S&P and NASDAQ Futures following the close on Wednesday. Meanwhile, Equal-weighted S&P is showing positive divergence in trading above January’s lows, and Treasuries and Gold are both extending higher as “safety trades.” Overall, some positive divergence will be present on Equity indices on any break of recent lows on Thursday into Friday of this week, which is often favorable for “buying dips” when sentiment has grown fearful. Thus, while most view a breakdown as being a huge negative for equity structure, my view is that this will bring about capitulation that only partially occurred in mid-March. Overall, the risk/reward is quite favorable for US Equities in US sectors like Financials, Industrials, Discretionary and Technology. I am skeptical that this recent pullback means that a bear market is imminent, or that a recession is right around the corner. Any break of SPX 5500 should bring about a maximum move to near 5375-5425 before a bottom is in place.
Despite what seems like an awful outcome, as might be discerned by watching overnight activity in US Equity futures, there are a few positives to mention that are important:
- Positive divergence is clear on S&P and NASDAQ on daily charts, despite what appears (as of 7:30 pm EST) to be a break of last week’s lows. (Price is set to close under prior lows, while momentum will be quite a bit higher, which is normally considered a positive.)
- Elliott-wave structure shows the potential for an undercut of recent lows to bring about a “final” leg of this decline which likely proves short-lived before reversing higher.
- Sentiment likely will show evidence of capitulation on a gap-down under prior lows, which is exactly what the market bulls have been waiting for. Specifically, it’s important to watch downside volume and/or evidence of high Equity Put/call ratios for the balance of this week.
- Stocks like NVDA and AAPL, despite showing likely weakness on Thursday, have shown some improvement in recent days, which has strengthened the short-term momentum in these stocks (thus, a break to new weekly lows could also create positive divergence).
- DeMark’s weekly TD Buy Setup could be complete as early as next week, showing an “8 count” as part of a “9 count”. This TD Buy setup is nearly complete in S&P 500 and QQQ.
- Equal-weighted S&P 500 is also still quite a bit higher than January lows after having recouped this prior low on its bounce. Even on a decline on Thursday, there’s no guarantee that January lows will be broken.
- Strong Ichimoku Cloud support is apparent on weekly charts on S&P 500, QQQ and is also apparent on stocks like AAPL. This adds to the likelihood of support to this decline in the coming week, despite it seeming like a breakdown.
Overall, make no mistake…trends are bearish, momentum and breadth remain quite negative, and it’s going to be important for any undercut of prior lows to prove short-lived, being followed by a rapid rebound to have the confidence of a possible bottom. However, a few technical positive reasons have come together despite the tariff decision being looked upon as a disaster by risk assets. (Given the rapid about-face after hours.)
Keeping a close eye on participation Thursday, market breadth, and/or looking for evidence of capitulation will prove important. Any break of 5500 in SPX has support from 5375-5425 that has important Fibonacci-based properties based on the entire rally higher from 2022 lows. I am expecting a low to happen to this decline this month.
As seen below, despite S&P Futures having undercut prior lows in the overnight session, momentum, as per RSI, remains well above prior lows and will show negative divergence. This positive divergence, combined with signs of fear escalating on a break of lows, normally presents an attractive risk/reward for investors with intermediate-term timeframes.
S&P 500 Emini Futures
Equal-weighted S&P 500 remains in better technical shape after having recovered prior January lows
As shown below, Equal-weighted S&P, which closed at $174.86 on 4/2, is trading at $170 at 7:45 pm Wednesday evening (EST).
Note that even on weakness Thursday, there is a likelihood that January lows might still hold and not be undercut again. This positive divergence joins the momentum-based divergence on daily charts of S&P and QQQ and is something to pay attention to.
Invesco S&P 500 Equal Weight ETF
Insurance stocks remain technically attractive and have avoided much of the recent weakness
As seen below, the SPDR Insurance ETF (KIE) has been showing excellent technical strength and remains a defensive area which has shown outperformance during a time of weakness in the broader indices.
Despite my thinking that US Equities should be close to bottoming out, I find KIE attractive and should be overweighted as a sub-sector within the Financials sector.
Crude Oil looks to be quite close to beginning a decline to test and break intermediate-term support
Following its bounce over the last 3.5 weeks, WTI Crude should be close to turning back down to challenge and break intermediate-term support.
My cycle composites indicate a likely peak in April which should start to take WTI Crude lower, and the tariff announcement was viewed as a negative for Crude oil on Wednesday.
Factors like OPEC + restarting supply along with US raising oil production look to be important factors that should keep supply noticeably high. China’s 34% tariff announcement might add some concern in what’s already proven to be a fragile recovery effort. Thus, the demand side of the equation could also prove quite weak.
Overall, until some further clarification on tariffs is known, which might take weeks and/or months, I expect that WTI Crude should fall to break $64 in the month ahead (front month futures), which should be a negative for Energy.
As discussed, WTI technical targets lie near $50 at a minimum, but Crude might fall to the mid-$40’s before finding much support. Overall, the area in the low $60’s for Crude (near $64) looks very important technically. Energy remains a technical underweight.
Light Crude Oil Futures
