Since the market bottomed on December 24, the S&P 500 has only been down two days in a row once prior to yesterday. The losses were quite mild but this morning there is a strong indication that a three day losing streak may be likely.
The recent uptrend has been remarkably strong with the indices closing higher than they opened on about 24 of the last 30 days and only one close near the lows of the day. Overbought conditions and key technical levels have been ignored.
The action started to change on Wednesday with a choppy session and the shift in character accelerated on Thursday with steady selling for most of the day before a brief closing rally. This morning the sellers are active again.
Technically some weakness seems almost too logical. The S&P 500 was stopped almost exactly at its 200-day simple moving average at 2742. Many stocks and the indices have become overbought and the overhead resistance is significant as most of the losses suffered in December have been recovered.
As is typically the case, the technical problems the market is encountering are occurring at the same time a bearish narrative is becoming more obvious. The narrative right now is that economic growth around the world is slowing. A cut in GDP growth in Europe was the important headline yesterday.
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In addition, there is now growing recognition that a deal with China on trade may not be that easy. That has always been the case but the market has ignored the pessimism while it rallied. Once the indices started to roll over it was easy to explain the action by blaming the China trade negotiations. Nothing really changed except for the price action of the market. As I've often noted, it isn't the news that drives the market. The price action of the market drives the spin of the news.
The big question for us to consider now is whether this reversal action is going to lead to another big trend. We have had two very strong trends in the last few months with the bear dominating in the fourth quarter and the bulls taking control since December 24.
The bears may have given up on their hopes for a retest of the December 24 bottom but many are now looking for another substantial downtrend to develop. The bulls have regained their confidence and with the Fed now completely converted to a dovish view they are convinced there is more upside to come.
I believe it is likely that we are going to enter into a trading range for a while with hope for a China deal and other positives providing support, but worries about economic growth and political issues are keeping things contained.
There will be a premium on fast reactions and opportunistic trading as the bulls and bears battle forth. It will be very important to keep an open mind and stay flexible. Dogmatic bulls and bears are going to struggle when there is trading range action.
Early indications are soft but I'm looking for some dip buyers to emerge for a trade.
Have a great weekend! I hope you had a profitable week.