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A warning signal on US stocks

May 2, 2021

Last week: I noted in my last weekly update how US stocks were flashing a signal of hesitation. This evolved in the last week to a signal of mild warning with all four of the US stock index majors, S&P500, DJIA, NASDAQ and Russell-2000 printing bearish weekly candles, in spite of better than expected Earnings from many US companies. This is a new shift, though, as all four stock indices printed bullish monthly candles but some caution would be prudent in light of this price action recent weeks. The US$ bounced back last week but the the risk-sensitive Emerging Market ETF, EEM, closed lower for the week and month. The one main point of divergence has been with Copper; it closed higher for the week and month, despite the stronger US$, and is now up testing an all-time High region.

 

Technical Analysis: It is important to keep in mind that this analysis is Technical and chart-based but that any major Fundamental news items, as recently seen with Covid-19, have the potential to quickly undermine identified chart patterns. This is why it is critical that traders appropriately manage their trade exposure and risk per trade during these volatile market conditions.

 

Trend line breakouts:  The descending wedge breakout on the USD/JPY was the standout move last week. Updates posted throughout last week can be found through the links here, here, here and here:

 

  • USD/JPY: a wedge TL b/o for 120 pips:

 

  • GBP/JPY: a b/o above 150 for 230 pips.
  • AUD/USD: a recent TL b/o that gave up to 150 pips before reversing.
  • Gold: a recent TL b/o that is now up around now over $70.
  • EUR/USD: a recent TL b/o that gave up to 350 pips before reversing.
  • NZD/USD: a recent TL b/o that gave up to 230 pips before reversing.

 

This Week: (click on images to enlarge):

 

    • DXY: US$ Index: The US$ index closed with a bullish-coloured Inside-style weekly candle reflecting indecision but keep watch for any new momentum-based trend line breakout.

DXY weekly: watch for any new momentum-based trend line breakout:

 

DXY daily: I had warned mid-week to watch for any support from this TL and it evolved!

 

 

    • Central Bank Update: There are two Central Bank updates this week: RBA (AUD) and BoE (GBP).

 

    • 10-yr T-Note Interest rate: The chart of the 10-yr Treasury Interest rate shows the recent bullish breakout from the triangle congestion pattern remains paused under the weekly 200 EMA region. Watch to see if the previous Resistance region of 15 might act as any potential new Support.

 

  • 10-yr T-Note Interest rate:  more sideways consolidation:

 

 

    • % Stocks above their 200 Day Moving Average Index: The Percentage of stocks above their 200 Day Moving Average is below the 85% region. The first chart below gives a perspective of this current level and shows the previous peaks near 92.50% and how there often tends to be some mean-reversion once such lofty levels are reached. The second, expanded, chart shows the continued struggle under the 92.50% level.

 

% of US Stocks above the 200 Day Moving Average: watch for any further reaction at the 92.50% region:

 

% of US Stocks above the 200 Day Moving Average (expanded): holding below 92.50%:

 

 

    • S&P500: Keep the bigger picture in perspective with the recent moves as this chart suggests there is a lot more room to move with the overall bullish run. However, this does not discount the odd pullback along the way as trends do not travel in straight lines forever; they tend to zig and zag their way along either bullish or bearish paths. Note how the recent Covid dip does not even figure on this chart!

 

S&P500 yearly: keep this latest move in perspective:

 

 

    • Market Phases: It is important to recall the three main types of market phases: Accumulation, Participation (Up and Down) and Distribution. Traders should monitor the chart of the S&P500 chart for any Distribution type activity that might eventually lead to Participation Down; especially as the S&P500 trades up near an all-time High. The chart below shows how the S&P500 evolved in the years leading up to, and during, the Global Financial Crisis (GFC). Note how the Distribution phase evolved over a period of many months and there was a double test of the all-time High region. Keep this in mind with the current market action on the S&P500.

 

S&P500 market phases: Global Financial Crisis 2007-2009:

 

S&P500: keep watch for any Distribution type of activity:

 

 

    • Copper: Copper is often viewed as one metric of economic health and closed with another bullish weekly candle. The Bull Flag remains in progress and has closed above the potential Double Top level. The important feature to note this week is how price is almost up to the all-time High region of circa 4.65:

 

Copper weekly: watch for any push through to the all-time High,circa 4.65:

 

 

 

    • Emerging Markets: The Emerging market ETF, EEM, closed with a bearish weekly candle and remains below the 12-month support trend line. There still isn’t much momentum here and so I have revised the trend lines and note how there is still the look of a Bull Flag.

 

EEM weekly: watch for any new Bull Flag breakout:

 

 

    • DJIA: The DJIA closed with a bearish weekly candle following last week’s warning of a bearish-reversal Hanging Man weekly candle and is now back below 34,000 so watch for any pause here. The trend for now remains UP, given the print of higher Highs and higher Lows, but keep watch for any shift:

 

DJIA weekly: watch for any pause here:

 

 

    • NASDAQ composite: The NASDAQ Composite Index closed with a small bearish weekly candle as price continues to hold under the previous all-time High. The Bull Flag remains in play BUT watch for any continued Double Top hesitation.

 

NASDAQ weekly: watch for any continued Double Top activity:

 

 

    • DAX weekly: The DAX closed with a bearish weekly candle following last week’s warning of a bearish-reversal Hanging Man-style candle. The Index still remains above a 12-month support trend line but watch for any weakness. As with the DJIA, the trend remains UP for now given the print of higher Highs and higher Lows but keep watch for any shift:

 

DAX weekly: watch for any continued weakness:

 

    • Russell-2000: The Russell-2000 is often viewed as the ‘Canary in the Coal Mine’ for US stocks and the index closed with a bearish-coloured Spinning Top weekly candle. The Index continues to hold above the 61.8% Fibonacci extension of the Covid-induced Swing Low so watch for any push to the 100% level, circa 2,500.

 

RUT weekly:  keep watch for any new momentum-based triangle breakout:

 

 

    • Bonds / TLT: The Bond ETF, TLT, closed with a bearish weekly candle BUT my Elliott Wave indicator is still suggesting a potential uptrend.

 

TLT weekly: still holding above the 135 level and the 61.8% Fibonacci:

 

 

    • Commodities: this bullish descending wedge breakout remains in play the index printed a small bullish weekly candle:

 

DBC weekly: this bullish wedge b/o continues:

 

 

    • USD/CAD and USD/CNY: keep an eye on these two weekly chart Descending Wedge patterns for any bullish breakout and / or follow-through.

 

USD/CAD weekly: watch for any new breakout:

 

USD/CNY weekly: note how 6.5 has been broken so watch for any push to the recent Low:

 

 

    • VIX: the Fear index closed with a bullish weekly candle following the warning from last week’s bullish-reversal Inverted Hammer-style weekly candle. It is at its highest level in 4 weeks so watch the 20 region for any new make or break.

 

VIX weekly: watch the 20 S/R level for any new make or break:

 

 

Calendar: Courtesy of Forex Factory: note the holiday Monday in many areas:

 

 

Earnings: Courtesy of Earnings Whispers: It is another big week for Earnings:

 

 

Market Analysis:

 

S&P500: There has not been a lot of change here this last week. The S&P500 closed with a bearish-coloured Doji weekly candle, another indecision candle, and just under the 4,200 level making this whole-number resistance to monitor for any new make or break.

This continued choppiness above the 4,150 level is not at all surprising given that this region, as noted over recent weeks, marks the the 61.8% Fibonacci extension of the Covid-induced Swing Low so watch to see if this old Resistance turns into new Support. Keep in mind, though, that the monthly candle was bullish and this latest weakness could end up being temporary.

Trading volume was lower last week and is below the 200 MA and bear trend line so watch for any new breakout.

 

S&P500 ETF: SPY weekly: watch for any new volume trend line breakout.

:

 

The 4,200 level is the resistance to keep watch for any new make or break and there are revised 4hr chart trend lines to assess with any new momentum breakout.

NB: The second weekly chart shows how the 61.8% Fibonacci extension of the Covid-induced Swing Low is up near 4,150 so watch to see if this region forms any new support.

Bullish targets: any bullish 4hr chart triangle breakout would bring 4,200 back into focus.

Bearish targets: any bearish 4hr chart triangle trend line breakout would bring 4,100 and 4,000 back into focus as the latter is near the 4hr chart’s 61.8% Fibonacci and 12-month support trend line. After that, watch whole-numbers on the way down to the weekly chart’s 61.8% Fibonacci retracement level, now near 3,000.

  • Watch 4,200 and for any new 4hr chart triangle breakout:

 

 

 

ASX-200: XJO: The ASX-200 closed with a bearish weekly candle but still above the pre-GFC High of 6,851.50, pre-2020 High of 6,893.7 and the whole-number 7,000 level. Price closed just above 7,000 so that will be the support to monitor next week.

Despite the close above these significant S/R levels, the last three weekly candles have shaped up in a bearish-reversal Evening Star-style pattern so any break below 7,000 could prove significant. However, it is worth noting that the monthly candle was bullish and so, like with the US stock indices, this weakness is rather recent and could prove to be temporary.

Trading volume was little changed last week and still below the 200 MA and the bear trend line so watch for any new breakout.

 

XJO weekly: keep watch for any new b/o above the 200 MA and bear TL:

 

 

Keep in mind that the recent Golden Cross still remains valid. The Golden Cross is a bullish signal where the 50 SMA crosses above the 200 SMA. Such crosses are often, but not always, followed by a decent bullish run so these crosses are worth noting:

 

XJO daily: the recent Golden Cross remains valid for the time being:

 

There are revised 4hr chart trend lines to monitor for any new breakout.

Bullish targets: Any bullish bounce up from the 7,000 support region would bring 7,100 into focus followed by the 2020 High of 7,197.20.

Bearish targets: Any bearish 4hr chart triangle breakout, below 7,000, would bring the pre-2020 High of 6,893.70 and the pre-GFC High of 6,851.50 back into focus followed by 6,800 and 6,700.

  • Watch 7,000 and for any new 4hr chart trend line breakout:

 

 

 

Gold:  There was not a lot of change here during last week. Gold closed with a bearish-coloured Doji weekly candle, reflecting indecision, and just under $1,770 making this the resistance level to watch for any new make or break. The recent bullish wedge breakout has stalled for now but has given up to $70.

Gold closed the month with a bullish monthly candle though and this has given the last three monthly candles the look of a bullish-reversal Morning Star-style pattern so keep an open mind here, despite the stronger US$.

As mentioned over recent months: The hold below $1,900 acts as further evidence in support of the longer-term Inverse H&S thesis that I have been discussing as an option here for many months.

The weekly chart still has the look of a broad Inverse H&S pattern; or some may see this as a broad Cupping style pattern. Both are rather similar though as they are bullish patterns and suggest follow-through to the order of magnitude of the depth of the Cup / height of Head. In this case, that move is of around either $800. Keep watch of $1,900 now that price action is trading below this neckline region!

$1,900 remains the region in focus for any bullish Cup or Inverse H&S breakout:

  • Any hold above $1,900 would support the Cup pattern thesis.
  • Any move back below $1,900 would support the Inverse H&S pattern thesis.

Traders need to watch this $1,900 level over the coming sessions especially as the US$ index is still below the recently broken 10-year support trend line:

  • any US$ hold below the multi-year support trend line could help send Gold higher.
  • any US$ move back above this support trend line could keep Gold range-bound. This would help to further develop the Inverse H&S pattern.

The daily chart reveals the importance of the $1,670 level so this continues to be a ‘line in the sand’ support level to monitor. Any new weekly close below the $1,670 level would bring $1,500 into greater focus. The two weekly charts show that $1,500 is:

  • near the 61.8% Fibonacci of the Aug 2018 – Aug 2020 swing High move.
  • forms the lower boundary of the Inverse H&S pattern I have had on my charts for many months.

 

Bullish targets: any bullish 4hr chart break above $1,770 would bring a 4hr chart triangle trend line and $1,800 into focus followed by $1,850 and $1,900.

Bearish targets: any bearish 4hr chart hold below $1,770 and break of the 4hr chart triangle trend line would bring $1,750 and $1,700 into focus followed by the $1,670 support level.

  • Watch $1,770 for any new make or break:

 

 

 

EUR/USD: The EUR/USD closed with a bearish weekly candle and the recent 4hr chart wedge breakout tally peaked at 350 pips before a reversal set in. This weekly candle, as well as the bullish monthly candle, were essentially ‘Inside‘ candles though reflecting indecision so are worth noting.

Price action is back down near 1.20 so will be the one to watch for any new make or break.

NB: Note that the longer-term target for any continued bullish movement following the previous break of the 13-yr trend line is the monthly chart’s 61.8% Fibonacci, near 1.40. This trend line breakout was flagged back in a post on August 2nd 2020. Price at the breakout was around 1.17 and has reached up as far as 1.23, a move of around 600 pips, so this has been a breakout worth monitoring.

Bullish targets: Any bullish 4hr chart hold above 1.20 would bring 1.21, the monthly 200 EMA and 1.22 into focus. After that, watch whole-numbers on the way up to a previous weekly chart High, circa 1.26 and for any continued push up to 1.40.

Bearish targets: Any bearish 4hr chart break below 1.20 would bring 1.19, 1.18 and 1.17 back into focus.

  • Watch 1.20 for any new make or break:

 

 

 

AUD/USD: The Aussie closed with a bearish-coloured Spinning Top-style weekly candle and the recent 4hr chart wedge breakout tally remains at 150 pips. It is worth noting that the monthly candle closed as a bullish-coloured Spinning Top and so there is clearly some indecision here.

Price action is back down near the 0.77 level so will be the one to watch for any new make or break.

NB: The longer-term target for any bullish continuation from the weekly/monthly chart’s Descending Wedge breakout is the weekly 61.8% Fibonacci, near 0.90. This monthly wedge trend line breakout was also flagged back in the post on August 2nd 2020. Price at the breakout was around 0.71 and has reached up as far as 0.80, a move of around 900 pips, so has been another breakout worth monitoring.

Bullish targets: Any bullish 4hr chart hold above 0.77 would bring 0.78 into focus. After that, watch whole-numbers on the way back to the 12-month TL and, then, whole-number levels on the way up to the weekly chart’s Descending Wedge breakout target of 0.90.

Bearish targets: Any bearish 4hr chart breakout below 0.77 would bring 0.76 into focus. After that, watch whole-number levels on the way down to 0.65 as this is near the 61.8% Fibonacci of the March 2020 – Feb 2021 swing High move.

  • Watch 0.77 for any new make or break.

 

 

 

AUD/JPY:  Not a whole lot has changed here again this week. The AUD/JPY closed with a bullish weekly candle but still under the key 85 level and within a 4hr chart sideways consolidation-style triangle. As with the Aussie, the monthly candle closed as a bullish-coloured Spinning Top and so there is clearly some indecision as price navigates under the 85 level.

As noted over recent weeks:

  • The weekly chart reveals that the 85 level has been a significant reaction zone for the AUD/JPY and has been resistance for the last three years; this level was peppered many times throughout 2018 but could not be broken. The next major level above 85 is 90 so watch this target level if 85 is broken.
  • AUD/JPY traders also need to keep an eye on the sentiment with stocks though, especially the S&P500 index, as the two are generally highly aligned; as the chart below reveals. Any pause or serious pullback with stocks might render similar for the AUD/JPY:

 

AUD/JPY versus S&P500 (gold line): a high degree of positive correlation:

 

There are revised 4hr chart trend lines to monitor for any new breakout.

Bullish targets: Any bullish 4hr chart triangle breakout would bring 85 S/R back into focus followed by whole numbers on the way to 90 S/R.

Bearish targets: Any bearish 4hr chart triangle breakout, below the 12-month support trend line, would bring 83 S/R into focus. After that, watch whole-numbers on the way down to 76 as this is still near the recently broken 7-yr bear trend line, and then 72 as this is near the 61.8% Fibonacci of the March 2020 – March 2021 swing High move.

  • Watch for any new 4hr chart triangle breakout:

 

 

 

NZD/USD: The Kiwi closed with a bearish-coloured Doji weekly candle, and a bullish coloured Inside monthly candle, with both reflecting indecision.

The recent 4hr chart wedge breakout tally peaked at 230 pips and note how price action reached up to the 61.8% Fibonacci with this breakout move before reversing!

 

 

Price action pulled back to the 4hr chart’s 200 EMA so watch this fluid trend line for any new breakout.

Bullish targets: Any bullish hold above the 4hr chart’s 200 EMA would bring 0.72 back into focus. After that, watch whole-numbers on the way up to the recently broken 12-month support trend line.

Bearish targets: Any bearish break below the 4hr chart’s 200 EMA would bring 0.71 and 0.70 into focus followed by the monthly 200 EMA and 0.69. After that, watch whole-number levels on the way down to 0.63 as this is near the 61.8% Fibonacci of the March 2020 – Feb 2021 swing High move.

  • Watch the 4hr chart’s 200 EMA for any new make or break.

 

 

 

GBP/USD: The Cable closed with a bearish weekly candle and back down near 1.38 making this the next horizontal resistance level to watch for any new make or break. The monthly candle closed as a bullish-coloured Spinning Top and so there is clearly some indecision as price navigates under the key 1.40 S/R level that is just above.

NB: The longer-term target for any bullish continuation above the previously broken 14-yr trend line, noted here in my article on December 20th, is the monthly chart’s 61.8% Fibonacci, near 1.75. Price action at the initial breakout was around 1.35 and has reached up as far as 1.42, a move of 700 pips, so this trend line breakout was a great clue about things to come and the target for this move has not even been reached yet!

There are revised 4hr chart triangle trend lines to watch for any new breakout. 

Bullish targets: Any bullish hold above 1.38 would bring 1.39 and a 4hr chart resistance triangle trend line into focus. After that, watch for any push to 1.40, 1.41 and the recently broken 12-month support trend line followed by whole-number levels on the way up to 1.50 as this is a previous S/R region on the weekly chart. Any bullish continuation after that would bring whole-number levels on the way up to 1.75 into focus.

Bearish targets: Any bearish break below 1.38 and a 4hr chart support triangle trend line would bring 1.37 into focus. After that, watch whole-number levels on the way down to 1.25 as this is near the 61.8% Fibonacci of the March 2020 – Feb 2021 swing High move.

  • Watch 1.38 and for any new 4hr chart triangle breakout:

 

 

USD/JPY:  The USD/JPY closed with a bullish, almost Engulfing, weekly candle and made a bullish breakout from last week’s profiled 4hr chart wedge pattern in a move that has given up to 120 pips thus far. This wedge breakout is still in progress so watch for any push to the 61.8% Fibonacci level. However, the monthly candle closed as a bearish-coloured Inside candle and so there is clearly some indecision here.

NB: The bullish weekly-chart descending wedge breakout was first noted in my article of January 31st. Price action at the initial breakout was around 104.5 and has reached up as far as near 111, a move of around 650 pips, so this trend line breakout was a great clue about things to come!

Bullish targets: Any bullish continuation would bring the 61.8% Fibonacci, near 109.60, and 110 into focus. After that, watch whole-numbers on the way up to 115.

Bearish targets: Any bearish retreat below 109 would bring 108.50, 108 and 107 into focus.

  • Watch for any continuation with the 4hr chart wedge / channel trend line breakout.

 

 

 

GBP/JPY: The GBP/JPY closed with a bullish weekly candle and the recent 4hr chart breakout above 150 peaked to give 230 pips before reversing. As with the USD/JPY, the monthly candle closed as a bearish-coloured Inside candle and so there is clearly some indecision here too.

Price action is back down near 1.51 so will be the one to watch for any new make or break.

NB: The longer-term target for any bullish continuation above the previously broken 40-yr trend line, noted in my post of January 3rd, is the weekly chart’s 61.8% Fibonacci, near 170. Price action at the time of this breakout was near 141 and has reached up as far as 153, a move of around 1,200 pips, and so is another trend line breakout that has proven to be worthwhile monitoring.

Bullish targets: Any bullish hold above 151 would bring 152 into focus. After that, watch 153 and the 19-week support trend line followed by whole-number levels on the way up to the weekly chart’s 61.8% Fibonacci, near 170.

Bearish targets: Any bearish 4hr chart break below 151 would bring 150 and 149 back into focus. After that, watch whole-number levels on the way down to 135 as this is near the 61.8% Fibonacci of the March 2020 – March 2021 swing High move.

  • Watch 151 for any new make or break.