Caution Warranted. A lot More Downside in Store?
Yesterday’s stock market action was so ugly and sent a warning shot across the bow. The bearish setup and follow through that permeated so many US stock sectors did immense technical damage. Unfortunately, none of the market leaders were spared which is what you expect to see in a strong bull market and as such, it looks as if there is more pain ahead. I wrote about seeing this setup across many sectors (using the financial stock ETF as my example) over the weekend and the timing of the warning couldn’t have been better as they broke down yesterday. Looking at the best performer since the 2011 bottom, the top 100 technology companies, QQQ, broke down hard too. Much harder than I would have liked to see if I were expecting more short term upside. In fact, its decline wiped out the last 20 days of gains. This is a great illustration of how stocks move … stairs up and elevator down.
The negative momentum divergence that developed on the last push higher warned of a pullback and says there is still a lot more room to fall before it becomes oversold if the market wants to fall further. This combined with yesterday’s huge, confirming volume makes it look like this pullback might have some legs.
When the leaders that have driven the overall market higher (in this case the banks, technology and small caps) begin to take it on the chin, it immediately raises the yellow caution flag. As we know, one day does not make a trend but what happened yesterday got my attention. With any luck it was just a one day Trumper tantrum! If not, this may be the beginning of that long awaited pullback and volatility spike that has so eluded us.