What’s Happening?

Last Friday, there was a major bearish divergence in US markets. Just after traders cheered a new all-time high for the Dow Industrials, the NASDAQ fell off a cliff to put a big crack in the bull market. Worse, the NASDAQ has continued to fall into the new trading week, indicating this was not a one-day wonder and could be a sign trouble ahead for world stock markets. 

Technicals

Since the November election, US markets have been trending upward. Through the initial rally phase and the March consolidation, NASDAQ performance was similar to the Dow and S&P. Since Mid-April, however, the NASDAQ has outperformed its peers, indicating a concentration of the advance into big cap technology stocks. This appeared concerning because technology tends to outperform at the end of a bull market.

On Friday, the NASDAQ turned sharply downward, breaking the 5,800 level and an uptrend support line which has since become resistance. Into the new trading week, old support has become new resistance, and the RSI has broken under 50 confirming the breakdown and a shift to distribution.

The comparative chart above shows that there is a lot of air between the performance of the NDAQ relative to the US 30 and US SPX 500, leaving the NDAQ particularly vulnerable to a correction.

An initial support zone appears between 5,580 and 5,602 between a 23% Fibonacci retracement and the 50-day average. A break of that zone would signal the start of a new downleg with next support possible near 5,385 then 5,225, the 38% and 50% retracement levels. 

Fundamentals

To date, the post-election honeymoon rally in US stocks has been really powerful, but the break in the NASDAQ indicates sentiment may be changing. The index break has coincided with breakdowns for a number of the sectors leaders including Amazon.com (which is back under $1,000) and Apple. One could say that traders have started to take profits in the stocks where the most profits have come lately and that this is a correction. However, when the Generals of a sector are being taken out and shot, often the troops aren’t far behind.

With earnings season now over, very high expectations have been built into share prices heading into a time where news could be more volatile. This week’s Fed meeting could have an impact on sentiment. After weeks of declines that helped stocks, the US Dollar has been starting to rebound on anticipation of a rate hike this week. With traders having been leaning dovish lately amid slowing economic data and political turmoil, if the Fed comes in hawkish and boosts the dollar,  or gives any sign the easy money liquidity party could be winding down (like running down its balance sheet) it could become a headwind for US stocks in general and momentum plays in particular.

Traders should note that although we haven’t had a seasonal spring correction in US markets, we’re still well into the more volatile and weaker time of the year for stocks which runs from May through October. We’re also still in the historically weaker first half of the Presidential Cycle, and with the US heading for a big budget battle, stocks could be in for a wild ride this summer.