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Market Snapshot, Sector Overview and Forward Guidance


STUCK IN THE MIDDLE WITH YOU

U.S. equity markets finished the first week in May on a positive note Friday following a rise in short-term volatility which saw the S&P settle inside of a technical range that I call the 'Moving Average Variance Gap.'

http://tancockstradingblog.blogspot.com/2015/09/the-fill-gap-pattern.html

The 50-day moving average acted as a support level for S&P which is being tested for the first time since the market's broad based recovery rally began following January's selloff.

The big question now is, what happens next?

Currently the S&P is in a bullish trend pattern which is characterized by a positive long-term trend (signified by the 50 day moving average) and a low variance to that trend.  Technical trend patterns typically form after an index or stock has experienced a pullback following a prolonged move in a particular direction.  A typical trend pattern will resume the longer term trend move following the pullback. 

However, if markets break below the current support level, the moving average variance will likely turn negative.  Furthermore, if the falling 20-day moving average begins to apply downward resistance pressure, the negative moving average variance metric would likely begin to expand... and that is a hallmark of bearish market breakdown.

http://tancockstradingblog.blogspot.com/2016/03/analysis-of-variance-empirical-study-of.html


SECTOR OVERVIEW

I've discussed, at length, the influence that the dollar currently has on this market.

http://tancockstradingblog.blogspot.com/2016/02/the-death-of-dollar-rally-and-why-it.html
http://tancockstradingblog.blogspot.com/2016/04/its-all-about-tubmans.html

Last week's price action for the greenback was particularly interesting as it pulled back to resistance levels after becoming a bit oversold in the short term.  Downward momentum is beginning to show signs of ebbing for the dollar - for the time being at least.


The ramifications of the dollar pullback were felt across the commodity and natural resource sectors as oil, metals & mining all saw their price rallies lose steam.

Oil:

Metals & Mining:

Market participants will continue to keep an eye on the dollar especially as global growth fears continue to escalate... should the dollar continue to bid higher (which I don't expect), then market volatility could be exacerbated.  However, if the dollar resumes its bearish trend, this could be a nice buying opportunity for natural resource and commodity plays.

Natural resource sectors weren't the only ones that saw notable moves last week as numerous sectors began to see support levels breakdown.

Airlines, apparel retailers and solar have all been hit hard of late as each sector has already broken out violently to the downside.  AAL, ALK, DAL, UAL, ANF, GPS, FSLR, SCTY, SPWR

The next shoe to drop looks to be in tech and biotech as both sectors have moved below support levels.  Not to be outdone, travel and leisure companies like PCLN and EXPE are starting to show signs of stress as well as cruise lines NCLH, RCL and CCL.


FORWARD GUIDANCE - A TROPICAL DEPRESSION

So what does all of this mean for the broad market?

Bullish technical trends for the S&P are weakening, numerous sectors are already in bearish trading patterns and China fears are mounting...

http://tancockstradingblog.blogspot.com/2016/05/is-china-next-japan-continuing-case.html

Given all of the red flags facing the markets and the continued formation of long-term bearish technical patterns, I don't see why equity markets would resume their 3 month rally.  However, the weakening dollar and rally in natural resource sectors could possibly stave off a third round of pronounced market volatility like we saw in August and January.

Markets are not currently pricing in a market correction as the cost of 1 month S&P put options are in line with historical volatility.  Furthermore, the ominous breakdown technical pattern has not fully taken shape just yet.  If I were to relate this market to the National Weather Service hurricane warning system, I'd say we are looking at a tropical depression... but given a few more of the right factors, we could easily be looking at a category 3 hurricane in very short order.

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