MARKET TEST CONTINUES -- THE DOW AND S&P 500 DIPPED BELOW THEIR 200-DAY AVERAGES -- THAT PUTS THE MARKET IN DANGER OF RESTESTING ITS 2018 LOWS -- INDUSTRIAL AND FINANCIAL SPDRS LED MARKET LOWER
DOW AND S&P 500 DIP BELOW 200-DAY LINES... Stocks started the day under pressure. Chart 1 shows the Dow Jones Industrial Average trading below its 200-day moving average this morning (before recovering later in the day). A close below the red line would signal that a test of its February/March lows is probably in store. Chart 2 shows the S&P 500 also dipping below its 200-day line earlier today (before recovering). A close below the red line would put it in position to test the trendline drawn under its February/March lows (more on that shortly). Neither stock index has closed below its 200-day average since mid-2016. Where the market closes today relative to its 200-day line today will be an important test. [Addendum: This message was originally posted at noon today. I've updated all of the charts to reflect today's closing prices and some of the text (in parentheses) to reflect this afternoon's rebound. The Dow ended with a modest gain with both indexes closing above their 200-day lines. The main message, however, remains the same which is that the stock market continues to test important underlying support levels.
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Chart 1
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Chart 2
FINANCIALS AND INDUSTRIALS LED MARKET LOWER... Two of the biggest morning losers are shown below. Chart 3 shows the Financial Sector SPDR (XLF) trading below its 200-day line this morning. It's also testing its March intra-day low. [Despite an afternoon rebound, financials were the day's weakest sector]. Selling of financial stocks is especially disappointing in the face of rising interest rates. Chart 4 shows the Industrial Sector SPDR (XLI) trading at the lowest level this year (before closing modestly higher). That's still not a good sign for such an economically-sensitive stock group. Caterpillar (CAT) was the Dow's biggest early loser (before ending the day with a modest loss). Goldman Sachs (GS) also led the Dow lower (before closing with a small gain). [Charts 3 and 4 are updated to reflect today's closing prices].
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Chart 3
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Chart 4
LOWER END OF TRIANGLE IS BEING TESTED... A lot of conversation is taking place about "triangular" formations in the major market indexes. But different stock indexes present different versions of that price formation. The Dow Industrials in Chart 1 look like a "descending" triangle which is normally a bearish pattern. That's because its lower trendline is flat. The triangular formation in the S&P 500 looks more "symmetrical" in shape which is less bearish (with its lower trendline showing a slightly higher slope). Small caps, however, have held up better than large caps. Chart 5 shows the Russell 2000 Small Cap Index still in the middle of a "symmetrical" triangle which is more neutral. The best way to resolve those different triangular shapes is to use an index that includes both large and smaller stocks. Chart 6 shows the Vanguard Total Stock Market ETF (VTI) which includes the entire stock market. The two converging trendlines in Chart 6 resemble a "symmetrical" triangle. But it also shows the VTI moving closer to its lower trendline (and its 200-day average). Regardless of their shape, the key to all triangles is the same. Market direction is ultimately determined by which of the two converging trendlines is broken first. [Technical Footnote: Triangular formations in an uptrend usually have five waves, which include three pullbacks. This is the third pullback since the late January peak. That makes any test of the lower trendline (and 200-day average) all the more important. Charts 5 and 6 are updated to reflect today's closing prices].
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Chart 5
