“Dead cat bounce” failure might lead to brief test of lows before rally Array ( [cookie] => 04419c-eb4507-4fe0b1-e64bda-8779d5 [current_usage] => 1 [max_usage] => 2 [current_usage_crypto] => 0 [max_usage_crypto] => 2 [lock] => [message] => [error] => [active_member] => 0 [subscriber] => 0 [role] => [visitor_id] => 0 [user_id] => 0 [reason] => Usage under limits [method] => ) 1 and can accesss 1

Markets arguably are nearing a low, and while that likely is not in place just yet, it should bottom out in the month of April, potentially in the next 3-5 trading days on a test/minor break of early week lows. The resulting bounce into June-August will say much about whether a larger correction/bear market and/or recession can be avoided.   At present, trends, momentum, and breadth remain quite negative, but SPX has officially reached the 50% retracement of the entire bull run from 2022-2025.   Furthermore, some extreme signals are now being recorded with regard to volume, breadth, and sentiment, which normally occur at/or near market lows. While markets remain extraordinarily volatile given a VIX that remains over 50, the risk/reward should be excellent with those who have at least a 2-3 month timeframe. Unfortunately, Tuesday’s continuation of Monday’s rally from the lows lacked staying power, given how strongly negative momentum has gotten in the last few weeks. This remains a bottoming process, not a bottom, but a break of early week lows would satisfy the wave structure to bring about a possible low to this decline.

Additional reasons why a test/break of April lows would likely bring about a bottom for US Stocks

 I listed some important reasons in Monday night’s report regarding why a low should be near for US Equities.  While this didn’t truly materialize yet to my liking, there was a very sharp rally from Monday’s lows which almost reached 9% in SPX before Tuesday’s mid-day reversal.  

Some of these are being repeated below for emphasis, along with a few additional reasons that highlight volume, breadth, and liquidity measures. My specific reasons for today’s bounce have to do with the following:

1. Capitulatory volume over the last 2 days, back-to-back records, and panic volume to the downside last Friday.
2. This was followed by a sharp comeback on advancing volume yesterday that caused the TRIN to dip to 0.50.
3. Volume hit a new record high, but Goldman Sachs said S&P Emini’s “top of book depth” dropped to just $2mm, the lowest on record and the widest gap between volume and liquidity in the GS data set.  
4. Numerous measures of breadth reached extreme levels -Percentage of SPX stocks above 20-day moving average (m.a.) dipped to 2.58%, under levels seen during 2022.  Both daily and weekly MACD are now oversold.
5. Massive high-volume reversal off the lows and closed well off lows, which shows exhaustion.
6. Tuesday’s bounce extended largely on “bad news” China trade war escalation
7. SPX held its 50% retracement line of the entire rally from 2022 lows into February 2025
8. Elliott-wave theory normally shows that Multiple open gaps are part of Wave 3’s (of 5), so Monday’s lows likely don’t signify an important low. However, given that Tuesday’s bounce failed, this might now bring about a test and minor break of Monday’s lows to complete “wave 5”. This could bring about capitulation.
9. My cycle composites show a bottom is imminent in the short run. (How long it lasts is questionable.) I expect we will rally into June after proper signs that we’ve bottomed. 
10. Tuesday’s session finally brought about a TRIN reading back over 2.0 on this decline with very heavy downside volume compared to the overall Advance/Decline, which showed volume finishing roughly 7/1 down, while Advance/Decline was -3.5/1 down.

S&P 500 Index

The real importance has less to do with whether lows are in place by this week or next. The key technical necessity to avoid a bear market at this point involves a strong, sharp, high-breadth rally off the lows that exceed SPX-5500. Moreover, broad-based participation in such a move is imperative. The lack of a strong move from April into July-August would be problematic and likely result in another selloff into the Fall, which could undercut recent lows. 

SPX members above 20-day m.a. dropped to 2.5%, while members above 50-day m.a. are now in single digits

The degree of breadth erosion has been extraordinary in recent weeks and has taken SPX down to oversold levels based on popular gauges like RSI.

However, the percentage of stocks above their 20-day m.a. closed down at 2.58% heading into Tuesday’s session.

As shown below, the situation now has mirrored times when the market has bottomed in recent years. While there’s no guarantee that lows need to happen in an imminent fashion, when looking at sentiment, breadth, momentum, DeMark, seasonality, and cycles, not to mention traditional market structure, it seems to be right around the corner for April.

S&P 500 Breadth – Percent Above 20 Day Moving Average

Technology is reaching support, while many investors might be considering diversifying out of Tech at the wrong time

Below is an important chart.  This highlights the ratio of Equal-weighted Technology vs. Equal-weighted S&P 500.

The mid-February breakdown was seen on the weekly charts and directly coincided with a downside acceleration in Technology.

Fast forward to this week, and Tech vs. SPX (RYT vs. RSP 1.48% ) has pulled back to test an area of trendline support vs. the broader market which has held for over a dozen years.

Furthermore, this ratio is now within one week of reflecting an exhaustion signal known as a TD Buy Setup, a DeMark-based exhaustion signal that can often coincide with changes in trend.

Overall, while the carnage in Technology has proven extreme over the last seven weeks, there are suddenly a few technical reasons present to argue for at least a trading bottom in Technology, which should come about over the next 3-5 trading days into next week at the latest.

CBOE VIX gives all the clues we need about volatility and movement in the absence of news

There’s a lot of head-scratching going on as to “why” the market rallied on Tuesday, and also “why” the market gave up gains so quickly. The VIX being over 50 tells you all you need to know.  We’ve now seen four straight sessions of 5% trading range for SPX which has only happened three times over the last 50 years:  1987, 2008 and 2020. 

While many are scanning news sources to understand if tariffs are behind this, the simple truth is that markets don’t need an excuse to be volatile when implied volatility (“Vol”) has gotten so high.

While the spread between Spot VIX and 3-month futures looks unsustainable and could bring about a collapse in VIX between mid-April and June, it’s still a bit early to “jump the gun” at this point in trying to sell “Vol.” 

Goldman Sachs reported that its order book has the widest spread between volume and liquidity ever. Thus, to reiterate, there doesn’t need to be a news event to drive price action, and when momentum is so strongly negative, it makes dip-buying incredibly difficult in Equities.

While I expect a possible test and minor move to new highs in VIX, this will result in negative momentum divergence given the decline that happened in RSI from the peaks earlier this week.

It’s always difficult to analyze VIX technically, but my feeling is that we’ve entered the endgame for this spike in “vol” for now. Any move back towards earlier week lows in SPX should likely result in VIX trying to test and exceed prior peaks by a small margin, particularly if this occurs on expected and/or shockingly negative news, which is unexpected.

However, “vol” is getting “rich” for those with a three-month timeframe. Gains in VIX into mid-April should likely represent a selling opportunity, and we’ll see implied volatility lessen between April and June.

Volatility S&P 500 Index