It was a tough day for the stock market as the combination of disappointing economic data and the Fed's less positive view of the economic recovery hit stocks hard. The weaker ADP Employment Report raised concerns that Friday's jobs report would also disappoint investors.
It was almost a month ago when I first discussed the "yellow flag" or caution signal that was caused by the divergence between two previously market-leading segments and the S&P 500. The Dow Transports and Russell 2000 both peaked in the middle of March. At its high, the iShares Dow Jones Transportation (IYT) had outperformed the Spyder Trust (SPY) by 9%.
Both of these averages have rallied sharply over the past week and had reached strong resistance. They both dropped sharply Wednesday on heavy volume, which is consistent with the top-building process.
The ECB cut rates as expected early this morning and the jobless claims dropped to the lowest level in five years. The US futures are higher in early trading so is yesterday's action important for the investor or trader? Is it worse that a yellow flag?
Chart Analysis: The Spyder Trust (SPY) made a new high Tuesday at $159.72, which was just one cent higher than the April 11 high, line a.
- There is next support at $157.54 with monthly S1 support now at $155.58.
- A decisive break of the support at $153.55, line b, would complete a double-top formation.
- This would have downside targets in the $147.40 area.
- The quarterly pivot level is at $152.65 and one should keep any eye on the quarterly levels for all the key markets.
- The daily NYSE Advance/Decline did make new highs this week, and so did the weekly, as I noted in yesterday's column.
- This is positive for the major trend and indicates that a deeper correction will be a buying opportunity.
- A drop in the daily A/D line below its WMA and the uptrend, line c, will signal a deeper correction.
- The OBV did make new highs this week, line d, and is well above key support at line e.
- The main cautionary note from the volume is that it was the highest during the April decline.
- The quarterly R1 resistance is at $160.31.
The iShares Dow Jones Transportation (IYT) peaked at $112.30 and reversed sharply yesterday as it closed below the lows of the prior five days.
- A weekly close below last week's low at $106.08 would be even more negative.
- The quarterly pivot is at $105.99 with trend line support now at $105.23, line g.
- There is additional support now at $104.40 and $103.30 with the 38.2% Fibonacci support at $102.04.
- The relative performance dropped below its WMA on March 21 and is now close to making further new lows as it is just above support at line h.
- The daily OBV just barely moved above its downtrend, line i, but is still above its WMA.
- A drop in the OBV below support at line j, would be more negative.
- It would take a close back above $110.03 to turn the chart around.
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The iShares Russell 2000 Index (IWM) peaked at $94.96 on March 14 and then dropped 6% into the April low at $89.13, line b.
- This is now important support with the 38.2% Fibonacci retracement support at $87.74.
- The 50% support level is at $85.51.
- The relative performance shows a pattern of lower highs and lower lows and is now testing important support at line c.
- The OBV has turned down after testing its downtrend, line d.
- The volume Wednesday was three times the daily average, which was the highest since late 2011.
- The OBV has dropped back below its WMA with important support now at line e.
The Proshares Short Russell 2000 (RWM) had a strong close Wednesday as it was trying to form a bottom in the $21.40 area. A daily close above the resistance at $22.50 would be a more positive sign.
- The relative performance has turned up from its WMA but is still below it.
- A move in the RS line above the April highs would be a positive sign for RWM.
- The on-balance volume (OBV) broke its long-term downtrend, line h, in April but has not yet moved back above its WMA.
- The volume was not impressive yesterday but was very high in the Direxion Small-Cap Bear 3x (TZA).
- If a bottom is completes, the 38.2% Fibonacci resistance should be at $23.43 with the 50% level at $24.15.
What it Means: If the stock market, and especially the iShares Dow Jones Transportation (IYT) and iShares Russell 2000 Index (IWM), can close higher today it will help stabilize the short-term outlook.
In any case, the stock market is looking more treacherous and has changed from a yellow flag to a yellow flag with red stripes. For Indy car racing, this means a track that is slippery or has oil/debris on it. For investors this is a market where one should not be complacent.
I will wait for stronger buy signals before recommending any new positions in the inverse funds, which could help hedge one's stock portfolio. Be sure to keep an eye on my Twitter feed.
How to Profit: No new recommendation for now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.