The Week Ahead: New Technical Warnings?

&l;p&g;&l;img class=&q;dam-image getty size-large wp-image-1074417130&q; src=&q;×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; US Federal Reserve Board Chairman Jerome Powell (Photo credit should read JIM WATSON/AFP/Getty Images)

It was another wild FOMC-inspired week in the stock market. Things started off slow, as by Wednesday&a;rsquo;s close, the S&a;amp;P 500 was pretty much unchanged. The comments from Fed Chair Powell about no rate hikes this year did cause some selling late Wednesday, but Wednesday&s;s loss of 0.29% did not erase Monday&a;rsquo;s gain. But chaos reigned on Thursday and Friday. Thursday, the stock market opened strong and the S&a;amp;P 500 closed up 1.09%, but the bullishness did not last long. The S&a;amp;P gapped lower on the open Friday, and closed down 1.90% for the day as it settled just above 2800.

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For the week, the small cap Russell 2000 led the market lower, losing just over 3%, followed by a 2.5% decline in the Dow Jones Transportation Average. The Dow Jones Industrial Average was down 1.34%, while the S&a;amp;P 500 was down 0.77%.

All of the market averages are still showing nice YTD gains, with the Nasdaq 100 leading the pack, up 15.8% after it actually closed higher last week. From my perspective, though, the most important consideration is whether there were any changes in the technical outlook.

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Spyder Trust (SPY) has a new high for the year last week at $285.18, but then closed lower at $279.25. The weekly S&a;amp;P 500 &l;a href=&q;; target=&q;_blank&q;&g;advance/decline line&l;/a&g; made a new high the week ending March 1&l;sup&g;, &l;/sup&g;but failed to make a new high last week creating a potential bearish or negative divergence.

A drop in the A/D line below the most recent low (point c) will confirm the divergence. It is positive that the Weighted Moving Average of the A/D line is still rising strongly. There is next good support at the former downtrend (line a), which is in the $274 area. The rising 20-week EMA is at $270.91.

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For the past two weeks, the Invesco QQQ Trust (QQQ) has been leading the SPY higher. It made a convincing new high at $182.83 last week but then closed at $178.56. This was 2.3% below the high. The 20-week EMA is rising and now at $169.55.

The weekly Nasdaq 100 A/D line did not make a new high last week, but is not far below the high from March 1. The daily Nasdaq 100 A/D line (not shown) made a new high on Thursday March 21, and did not form any divergences. It is still above its WMA.

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Some of the other A/D lines are also giving a mixed picture. The daily chart of the NYSE Composite shows its close below the 20-day EMA with next strong support at 12,400 (line a). The NYSE All A/D line did make a new high with prices last week, and is still above its rising WMA and support (line b).

The NYSE Stocks Only A/D line peaked on February 22 and has since formed lower highs (indicated by line c). The A/D line closed Friday below its WMA and a drop below the support (line d) would be more negative.

The weekly Russell 2000 A/D line (not shown), which tracks the iShares Russell 2000 (IWM), is declining but is still above its WMA. The daily Russell A/D line (not shown) failed to move above its WMA last week and has now dropped sharply. The weekly and daily Dow Industrial Advance/Decline lines (not shown) are both still positive, and do not show any divergences.

In terms of sentiment, the latest survey of the American Association of Individual Investors revealed that the Bearish-% dropped 7.6 points to 23.4%. This sudden drop in bearish sentiment is consistent with a short-term pullback. But the Bullish-% is at 37.3%, which is close to the long term average and down from the March 1 high at 41.63%. This indicates that there is no sign of serious market weakness based on the sentiment data.

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Even more important to the outlook for the economy and the stock market is the consumer sentiment. The University of Michigan Consumer Sentiment closed in February at 93.8, but the mid-month reading was 97.8 which was a nice improvement. There is major support in the 87.20-88 area (line a). A drop below this level would be negative for stocks and the economy.

The other economic data last week was mixed to slightly positive overall, but the focus Friday was on the brief inversion of the yield curve, as the yield on the 10-Year T-Note fell below the 3-month T-Bill yield.

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According to the &l;a href=&q;; target=&q;_blank&q;&g;Cleveland Federal Reserve&l;/a&g; &a;ldquo;an inverted yield curve (short rates above long rates) indicates a recession in about a year, and yield curve inversions have preceded each of the last seven recessions&a;rdquo;. Their probability chart highlights the past seven recessions, and they allow you to track the probability point by point. From October 2006 through March 2007 the probability rose from 19.1% to 34.3%.

This week, there is a &l;a href=&q;;amp;month=3&a;amp;year=2019&a;amp;cust=us&a;amp;lid=0&q; target=&q;_blank&q;&g;full economic calendar&l;/a&g;, including reports on Consumer Confidence and GDP, as well as the final monthly rating on the University of Michigan Consumer Sentiment. But for the full schedule, see the calendar. There should be plenty of data to support either a bullish or bearish market outlook by the end of the week.

The formation of the weekly and daily divergences in three of the key advance/decline lines does favor a very cautious strategy for traders. These technical warnings should not be ignored. If these divergences are confirmed by a drop below the early March lows, then a more serious multi-week decline is more likely. The bullish readings from the monthly A/D lines indicates that even longer lasting correction should be a buying opportunity.

Those who followed the four-week dollar-cost averaging plan I recommended &l;a href=&q;;&g;before Christmas&l;/a&g;, are still 75% long at an average price of 2497 based on the S&a;amp;P 500. On February 25, 25% of the position was sold when the S&a;amp;P 500 moved above 2805.

As a stop on the position, sell the remaining position if the S&a;amp;P 500 has a weekly close below 2597, which is the QPivot.

In my &l;a href=&q;; target=&q;_blank&q;&g;Viper ETF Report&l;/a&g; and the &l;a href=&q;; target=&q;_blank&q;&g;Viper Hot Stocks Report&l;/a&g;, I provide my A/D line analysis twice each week with specific buy and sell advice. New subscribers also receive six trading lessons.


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