Technicals Are Ugly, But It's Too Soon to Declare the End of the Bull Market
On Thursday, the S&P 500 suffered a bearish engulfing pattern at the highs on significant volume. The other indexes had negative technical action as well.
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The poor action was a function of two issues. The first was that very strong earnings from Nvidia NVDA triggered a sell-the-news reaction in the broad market. Nvidia itself performed quite well and closed with a significant gain, but the market was looking for an excuse to take some profits, and this turned out to be the trigger.
Many market players were concerned that Nvidia would be unable to rally much further, but guidance was extremely strong, and the 10 for 1 split was a big surprise. Market players decided to stick with Nvidia but sell everything else.
The second issue that hit on Thursday was another pushback in interest rate cuts. The market is now only certain that there will be a single quarter-point cut in 2024. Bonds sold off, and various Fed members stated that they would raise rates if the data stayed too hot.
It was an ugly one-two punch that created a technical warning sign, but how negative should we be at this juncture?
According to Sentimentrader.com, a bearish engulfing pattern in the S&P 500 at a new high does not have a strong history of creating a significant market top. In five similar situations dating back to January 2000, the market never lowered three months later. In the shorter term, the results were mixed, but this pattern alone was not enough to guarantee bearish action.
That is not a very large dataset, so there are some questions about statistical significance. We need to watch for further confirmation of a shift in market character. A cluster of distribution days, failed rallies, and lower lows would help establish a clear shift in trend.
There is a little bounce early on Friday morning, but we are heading into a three-day weekend, and there is often a positive bias in front of a holiday. We will have to wait until next week to see how the price action develops.
My game plan here is to tighten up some stops but watch for dip-buying opportunities in favorite names. I will be watching small-cap action very closely to see if the recent rally in that group can continue even if bigger cap names come under pressure.
At the time of publication, James "Rev Shark" DePorre had no position in the securities mentioned.
