Head and Shoulders

We are starting to see a deterioration in some of the technical indicators I follow. Relative strength indicators (RSI) for US markets are still holding just above 50% but the RSI for EU stocks has dipped below 50% again. MACD momentum readings are still negative for all markets. The S&P 500 has closed below the long-term MA (50WMA) again, joining the NYSE, S&P 100, NASDAQ and EU Stoxx600 Indices. Only in the tech sector are the majority of stocks still trading above their 200DMA. The NYSE A/D Line is still near the highs set in December but needs to see follow through or else we have a lower high in the A/D Line. The TTI remains 42 points above its long-term trend.

I have outlined two potential scenarios for US equities and see no reason to change this view. Both call for a near-term decline in stocks, which is starting to play out now. I think the odds favour Scenario 1 and I remain in that camp: the market forms a H&S top in Q1 2019 and later in 2019 makes a more significant correction lower. Scenario 2 could still occur: a retest of the December lows, positive divergence at the lows in the technical indicators and new highs later in 2019, but I think this outcome has lower odds. Defensive assets like gold and bonds have not really sold off at all during the recent ramp higher in stocks.

The S&P is coming to the end of its first daily cycle (DC1) so this decline in the stock market in the short-term is expected. DC2 will be revealing. Can US equities consolidate and make a higher low or not? We will find out over the next month or two.


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