When the market sold off sharply on May 13 a number of technicians declared that the indices were now in a downtrend. However, they bounced strongly over the next three days and called that declaration into question.
Subsequently the market has drifted around and it looked like a trading range might be developing. That may still be the case but the sharp selloff Thursday creates a high risk that the S&P 500 May 13 low of 2800 may not hold.
While a late bounce in the indices gave the bulls some breathing room, it was an abysmal day. Stocks fell sharply on higher volume, breadth was more than 3 to 1 negative and stocks at new lows piled up. Safe havens in bonds and precious metals attracted buyers and both the dollar and bonds hit multi-year highs.
It is possible, of course, that the 2800 level of the S&P will hold but the market is in a very precarious position here. The negative narrative has gained traction as the trade war intensifies and the price action is decidedly negative. There is no strong leadership as financials, semiconductors, oil, biotechnology and even the FAANGs struggle.
What we have to think about is what strategy will come into play if there is a bounce. Will there be an inclination to quickly put on long exposure and ride a new uptrend or will there be a desire to sell into the strength and reduce long exposure?
The bulls have surprised the market many times in recent years when they have shrugged off a slew of negatives. However, the headwinds are blowing much stronger now and even negative seasonality is starting to matter.
This market has much work to do in order to right itself. Proceed with a very high level of caution.
Have a good evening. I'll see you Friday.