Are Storm Clouds Building to Bigger Correction?

04/21/2017 2:45 am EST

Focus: STRATEGIES

Jeff Greenblatt

Director, Lucas Wave International, LLC

Wall Street was taken by surprise with Goldman Sachs (GS) and IBM.  Is the glass full or empty, asks Jeff Greenblatt.  He’s the director of Lucas Wave International and editor of The Fibonacci Forecaster.

Last week (April 12) we discussed a test of important support in the SPX. We looked at the near-term Andrew’s channel and the 78-hour square out. Whether we are looking at trend lines, Fibonacci retracements or square outs, eventually support is meant to be broken. Since markets are non-linear, each piece of new information is part of what the market is trying to tell us.

The SPX broke near term channels the next day before a holiday weekend. For this week’s chart, we look at the channel one time frame larger, the daily. This is the channel for the leg of the rally up from the Brexit low last year. Not only did the near term hourly channel break, but at the same time the daily was pierced as well. Right now, the SPX is giving us mixed signals. One would expect a breakdown to be retested at some point, but this one did it the very next day as opposed to a few days later.

Chart

Is the glass half full or empty? On the one hand, it’s somewhat bullish under the circumstances the retest came as quickly as it did and they are still holding the March 27 low by a thread. On the other hand, there was no follow through and two channel lines were pierced. Additionally, the market got hit by two important market leaders which received bad earnings reports.

Wall Street was taken by surprise with Goldman Sachs (GS) but IBM was hit as well. The significance is Goldman is the number one weighted stock in the Dow at 7.19%. IBM is fourth at 5.67%. Goldman and IBM are important stocks but let’s face facts. It’s not like they were holding the market up. As opposed to heavily weighted NASDAQ names we’ve discussed like Apple (AAPL) and Amazon (AMZN), these Dow names are leading to the downside. IBM peaked on February 16 and Goldman topped with the Dow on March 1.

Having only heavily weighted stocks holding the market up is not a good sign but neither is heavily weighted Dow names leading to the downside.

Facebook (FB) is another important leader which recovered this week along with Google (GOOGL) but biotech sprung another leak. The BTK is treading water on a trend line off the recent high which means bears have a slight advantage.

The big news of the day is oil was hit very hard and it has answered a question I’ve been wondering about for a couple of weeks. Recall oil stocks found a low and started to bounce on March 27. By that time, the Dow was already four weeks off the high. Crude was in a nice rally and the question was whether oil stocks would go against the grain in the event the market continued to pull back.

The logic behind this line of thinking is oil is in the seasonal sweet spot for the year. By Memorial Day, oil is near the traditional seasonal peak for the driving season. If oil is going higher, it should do so from April to May. But this year has been different as it was strong in the traditional seasonal weak point in November and December.

What should concern us is whether the oil market is acting as a leading indicator for the economy. If it can’t accelerate higher now, when will it?  It’s starting to feel like 2011 when the stock market and oil topped in May. 2011 turned out to be a rough year for the economy as GDP grew only at 1.7% for the year according to Business Insider.

Right now, there is some technical damage to the SPX but it’s not terminal yet. Let’s see what happens if and when the lower trend channel line is tested.

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