Another Correction or Something More?
Stocks finished lower for the day as the S&P 500 Index fell -1.23%, Dow Jones Industrial Average declined -1.31%, the New York Composite Index drop -0.46%, and the NASDAQ Composite Index plummeted 2.29%. Despite today’s sharp setbacks, the US stock market remains in a decisive rising uptrend.
Thursday’s rotation was heavily concentrated on the popular Technology and momentum trades as profit-taking led to rotations into some of the undervalued and out of favor defensive and battered stocks. The sell-off today in the Technology and momentum areas need to be monitored closely as overbought conditions during summer months can lead to further volatilities.
Macro factors have visibly diverged from stock market trends signaling increased market uncertainties. It appears pivotal tests of supports are now imminent. The VIX index is rebounding from key support along with the Jun/Jul 2020 lows at 23.5-24 as a positive outside day developed today. However, VIX still needs to surge convincingly above 32.5-33.5 or the Mar 2020 downtrend and the mid-Jul 2020 highs to confirm a breakout. 10-year US Treasury yield (TNX) is also testing major support at 0.543-0.573% coinciding with the Apr/Jul 2020 lows. Violation of the neckline support would confirm a potential 4-month head and shoulders top pattern. If this occurs, then TNX can retest the March 2020 reaction low of 0.398%. The US Dollar Index (USD) has also fallen to crucial support at 94.64-94.61 corresponding to the 2019 and 2020 lows. Violation here confirms a major technical breakdown and warns of the next decline toward 93.39-93.44 and 92.82 (Jun/Jul/Sep 2018 lows).
On the equities front, many of the key US indexes continue to consolidate their Mar-Jun 2020 gains. Apart from the Technology-heavy NASDAQ Composite Index (COMPQ), which has recently recorded new all-time highs, the other US stock indexes are not overly extended, at least based on their relationships to pivotal moving averages. Nonetheless, it is important to track the convergences of the respective 50-day/200-day moving averages and most important, the distance from the 50-day/200-day moving averages for clues as to when and where the recent corrections will find solid bottoms.
Attached are the shorter-term charts of key US indexes and macro indexes.