Why Today's Price Action Matters

JC Parets
May 2, 2019

From the desk of Tom Bruni @BruniCharting

Over the last two months we've been pointing to many divergences in breadth and momentum, as well as intermarket relationships that add to the mixed near-term signals we continue to see around the globe.

Last week I compared the current environment in US Stocks to that of India's a month ago saying the stage was set, but that all these divergences needed price confirmation before they become actionable.

Yesterday I talked about rotation into Small-Caps being the potential catalyst to help the major averages break through all-time highs and allow momentum to get overbought.

Here was my quote regarding the signal I thought the move in Small and Micro-Caps relative to the S&P would provide about the broader market, regardless of its outcome.

"If Small and Micro-Caps are going to outperform, these are the conditions that are going to spark it. On the other hand, prices rolling over and this mean-reversion failing likely occurs in an environment where Large-Cap stocks fail at their all-time highs and correct further through time or price."

With today's action, the latter scenario seems more and more likely.

First let's start with an updated Russell 2000 chart quickly falling back below resistance, confirming a failed breakout and momentum divergence.

Click on chart to enlarge view.

If Small-Caps are failing, it only makes sense to see the Dow 30 also failing at its January 2018 highs and closing on its lows.

Additionally, the transports were rejected at their former highs as momentum diverges.

Here's the Nasdaq Composite failing at last year's highs.

Same story in the S&P 1500.

Meanwhile some key sectors like Consumer Discretionary are also close to confirming a failed breakout of their own.

Equally-Weighted Industrials also look vulnerable if below 126.

Basic Materials, which way will they resolve?

Even Consumer Staples, a more defensive sector, is extended here and failing at former highs with an ugly bearish engulfing candle.

If it wasn't clear before today that near-term risks are elevated, it's clear now. Post-FOMC price action can get a little tricky, but by the end of the week we generally have a more clear picture of how each of the major asset classes are trading.

While these mixed signals remain, cash isn't a bad position as we wait for a more attractive tactical pitch. Or if you have a mandate to be long and share our bullish intermediate/long-term outlook for stocks, you can find the individual names we like here.

For now, let's see what the Bears have got.

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Thanks for reading and let us know if you have any questions!

Allstarcharts Team

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