Morning Comment: Beware of the "Rising Bearish Wedge"


The stock market saw a pull-back yesterday…which was not a big surprise given how much it had rallied over the previous five week…and how much it had shot-up on Wednesday. In other words, the market was getting extended on both a short-term and intermediate-term basis…and thus had become ripe for a pull-back (or at least a “breather”). The decline came on high volume and poor breadth, but neither of these readings were any more extreme than they were in the other direction during Wednesday’s rally. Therefore, we shouldn’t be overly concerned by the (expected) drop we experienced yesterday.

That said, the futures are trading considerably lower this morning, so if there is some significant downside follow-through as we move into early May, it will raise some concerns rather quickly. (BTW, the few overseas markets which are open are down by quite a bit as well. However, many/most of them are closed for the May Day holiday.)

The blame for much of this morning’s decline in the futures is focused on the earnings reports from last night…with particular emphasis on Amazon (AMZN) and Apple (AAPL). Given that AMZN is down more than 5% in pre-market trading and AAPL is down almost 3% as we write, this blame seems to be pointed in the correct direction. However, we also wonder if some of the data out of South Korea is having an impact as well.

As we have highlighted many times in the past, South Korea’s economy is an export-based one and thus their economy and their stock market are usually good indicators to keep an eye on. Their stock market was closed last night, but they did release their export data on the Thursday the 30th and it was quite poor. It fell 24.3% in April…which was its biggest decline since May of 2009. The decline was broad based…and led by sharp falls in ship, care & auto parts, semiconductors and oil products.

Of course, everybody has known for many weeks that the economic data from around the globe for April was going to be horrible. We also know that the global stock markets have been able to look past a lot of poor data over the past few weeks. However, sometimes a deluge of poor data can become over-whelming. Sometimes it can finally build up so much that it eventually leads people to step back and reconsider the situation. It can lead them to question just how deep the valley might be…and also lead them to wonder if the other side of the valley is further away than they originally thought.

Either way, investors do have to be careful after the huge rally we’ve seen off of the March lows. The S&P 500 index can be seen as having formed a “rising bearish wedge.” This is particularly concerning because if you see this pattern evolve after a large decline…and if the asset involved breaks below that wedge pattern…it is usually followed by a substantial decline.

No, this does not mean that a break below this rising wedge pattern will result in a retest of the March lows. In fact, rising wedges tend to be less compelling if the bounce that the asset is experiencing retraces more than a 50% retracement of the initial decline (and the S&P had retraced 61.8% of its decline by Wednesday’s close)…….However, there is no question that a rising wedge is a classic reversal pattern, so if the S&P 500 does see a material drop today (like the futures are indicating it will right now)…and if it continues as we move into next week…it could/should mean that the market is going to suffer another considerable decline.





Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

TheMaleyReport.com

275 Grove St. Suite 2-400

Newton, MA 02466

617-663-5381

mmaley@millertabak.com


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on May 01, 2020 — 8:05 AM
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