Positive Divergence will happen on a break of SPX 5500

Wednesday’s announcement brought about a rapid about-face in Futures, which have undercut last week’s lows in S&P and NASDAQ Futures following the close on Wednesday. Meanwhile, Equal-weighted S&P is showing positive divergence in trading above January’s lows, and Treasuries and Gold are both extending higher as “safety trades.” Overall, some positive divergence will be present on Equity indices on any break of recent lows on Thursday into Friday of this week, which is often favorable for “buying dips” when sentiment has grown fearful.  Thus, while most view a breakdown as being a huge negative for equity structure, my view is that this will bring about capitulation that only partially occurred in mid-March. Overall, the risk/reward is quite favorable for US Equities in US sectors like Financials, Industrials, Discretionary and Technology. I am skeptical that this recent pullback means that a bear market is imminent, or that a recession is right around the corner. Any break of SPX 5500 should bring about a maximum move to near 5375-5425 before a bottom is in place.

Despite what seems like an awful outcome, as might be discerned by watching overnight activity in US Equity futures, there are a few positives to mention that are important:

  1. Positive divergence is clear on S&P and NASDAQ on daily charts, despite what appears (as of 7:30 pm EST) to be a break of last week’s lows. (Price is set to close under prior lows, while momentum will be quite a bit higher, which is normally considered a positive.)
  2. Elliott-wave structure shows the potential for an undercut of recent lows to bring about a “final” leg of this decline which likely proves short-lived before reversing higher.
  3. Sentiment likely will show evidence of capitulation on a gap-down under prior lows, which is exactly what the market bulls have been waiting for. Specifically, it’s important to watch downside volume and/or evidence of high Equity Put/call ratios for the balance of this week.
  4. Stocks like NVDA and AAPL, despite showing likely weakness on Thursday, have shown some improvement in recent days, which has strengthened the short-term momentum in these stocks (thus, a break to new weekly lows could also create positive divergence).
  5. DeMark’s weekly TD Buy Setup could be complete as early as next week, showing an “8 count” as part of a “9 count”.  This TD Buy setup is nearly complete in S&P 500 and QQQ.
  6. Equal-weighted S&P 500 is also still quite a bit higher than January lows after having recouped this prior low on its bounce. Even on a decline on Thursday, there’s no guarantee that January lows will be broken.
  7. Strong Ichimoku Cloud support is apparent on weekly charts on S&P 500, QQQ and is also apparent on stocks like $AAPL. This adds to the likelihood of support to this decline in the coming week, despite it seeming like a breakdown.
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