Failed Breakouts Everywhere

April 19, 2024

From the Desk of Alfonso Depablos @AlfCharts

2024 is far from being like 2023.

While we’ve experienced some healthy sector rotation, the first quarter was characterized by waning momentum.

With these long-standing momentum divergences in place, so far, the second quarter has been characterized by selling pressure.

Since last week, we’ve seen an increasing number of these divergences confirmed by price.

Making matters worse is where this downside is taking place. We're also seeing a growing list of indexes and sectors lose key former highs.

Until the bulls can reclaim these polarity zones, markets will remain messy.

Let’s talk about some of them.

First, we have the Equal Weight S&P 500 $RSP putting in a failed breakout:

As you can see, RSP attempted to break out but was unable to hold its prior cycle highs from 2021. For now, the pattern has failed with RSP back in its old range.

Notice how momentum was showing a bearish divergence since December and is now threatening to reach oversold levels.

We see a similar picture with the Equal Weight Nasdaq 100 $QQEW:

This one needs more time to consolidate and build up steam before this base resolves higher. QQEW is also dangerously close to what could be its first oversold reading since 2022.

What about Mid-caps $MDY?

This one is pretty nasty too.

Here’s Small-caps $IWM falling back into the box:

Momentum has been unable to reach overbought conditions all year in this lagging index.

Unlike the leadership indexes, which have already achieved new all-time highs and are in primary uptrends, the Russell 2000 falling back into its old range means the primary trend is still sideways.

We need IWM back above 200 to complete this potential bearish-to-bullish reversal pattern.

Here you have the “median” stock as represented by the Value Line Geometric Index:

Another ugly failed breakout leaving price back in its old range.

The Value Line is an example illustration of what most stocks look like: Rangebound, sideways, trendless. Until this changes, it’s still a mess out there for most names.

One of the most important sectors in the world, Financials $XLF, could not hold above its former highs and is back below a big resistance level:

Look at momentum getting crushed.

While it’s not quite a failed breakout because we never made a new all-time high, the broker-dealers index $IAI also remains trapped beneath its prior cycle highs:

The bias is sideways for longer if the price remains stuck in the current range.

Here’s another failure in the Healthcare SPDR $XLV:

Another failed breakout and potential false start.

Notice momentum getting oversold as price presses to its lowest level of the year.

Materials $XLB is not far behind:

It broke out last month but failed this week with everything else.

Look at the Natural Resources ETF $IGE failing to hold its former highs:

With about 80% energy and 15% materials, this one is also back in the box.

This action is not just occurring in the US, we’re also seeing various MSCI country indexes print failed breakouts.

Here we have a dual pane chart of MSCI France $EWQ and MSCI Spain $EWP:

That’s pretty much the camp we are in.

Failed breakouts are everywhere.

Now, this doesn't mean the bull market is over. Counter trend moves are always going to take place. These failed moves are likely just false starts.

However, the tactical damage and undoing of so many breakouts recently, does speak to the potential severity of the current counter trend.

As long as all these indexes are stuck below their old highs, downside risks are elevated. The odds of not just further, but deeper corrective action are heightened.

Patience pays until these levels are reclaimed.

The damage can be repaired tomorrow in some of these indexes. But it could also be next month, or next quarter until bulls are back in control.

We’ll know when we see it, and it will be time to press the gas again.

Until then, it’s still time to sit on our hands.

Alfonso