Indexes were volatile Monday, gapping up at the open, then selling off through the lunch our – taking another leg down down mid afternoon which pushed all the indexes into the red, before a late day surge led to a mixed result. We continue to see a rotation into safety sectors such as consumer staples and utilities and away from more risk oriented parts of the market – the S&P 500 gained 0.32% while the NASDAQ fell 0.03%. Geopolitical risk remains due to the Ukraine situation. We have a Fed meeting in the next 2 days with expectations of another $10B/mo reduction in QE, and later this week we have the first pass of 1st quarter GDP, a key ISM report, and the monthly employment data.
We’ll look at charts today using Dan Zanger’s newsletter; keep in mind these charts are from Friday’s close but since he is pointing out larger trends – namely the “head and shoulders” formation in a lot of charts, it is fine to use. A head and shoulders formation is a bearish condition marked by one peak (the left shoulder) a higher peak (the head) and then a lower peak (the right shoulder). This obviously creates a situation where the most recent high was not higher than the previous one. However for this formation to play out the “neckline” must break – which has not yet happened; so we are in a monitor stage to see if it does.
As we have stated Dan points out how the S&P 500 has held up much better than the more “growth type” indexes; the NASDAQ and the small cap Russell 2000. The neckline in Dan’s examples below for charts such as the NASDAQ and Russell 2000 are the lower pink line.
Meanwhile, here is a group of very well known “momentum” type growth stocks – all have potential head and shoulders patterns; although Amazon’s has triggered. If you remember last week, Amazon was actually up in after hours then the next day came in and punched anyone who left feeling good about that with a 10% loss!
With this pattern if you start to see stocks begin to fall through their necklines en masse you have the makings for a tough summer. Amazon shows that while Netflix and Facebook are not there yet.