The tough tariff talks got tougher with China reneging on a few previously agreed upon data points. The timing could not have been better for the Bears as several indices/sectors broke out the previous week. They appeared poised to bullishly follow through, but failed kinda miserably…so far. You think President Xi is delaying to wait till 2020 for a potential US regime change? A failed deal would definitely hurt Trumps reelection chances allowing XI to  negotiate with Joe Biden (probably?) who doesn’t seem to understand China’s strength and tactics? Gaffing out the gate?

It would be a risky gamut considering Chinese debt levels look to have reached a tipping point? Last week one of their large investment companies, China Minsheng, announced they are resorting to an employee GoFundMe strategy to avoid bankruptcy. And with the US currently the solo powerful economy the rest of the weak world could put dents in our resiliency. IMO a trade deal is already in equity valuations and the inking of the deal could have been the sell signal. But it’s difficult to argue with collective breakouts. Those failed breakouts have now become serious levels of contention.

A number of long term negative divergences are still play and they now loom even larger. The NASDAQ Composite with the FANG horsemen have led the way, but the broader index is showing clear fatigue. I wrote about the significant Monthly MACD Divergences back in March and even with the relentless rally they have persisted. The updated chart below depicts the divergence cleanly, yet I believed a communal breakout follow through could have defeated them. The concerning aspect is every major sector/index paints this gnarly picture.

The NASDAQ has two other internal indicators flashing similar warnings. The Bullish Percent chart shows the number of stocks in a Bullish Point & Figure formation while the Advance-Decline reveals just what it describes. As you can see both show the recent rally having fewer participants then when highs were made last fall. Again this reveals deteriorating internals. The new high in the index was nominal for the negative divergence, but it still counts.

The last three highs have produced consecutively lower Bullish Percent numbers.

These type of situations have produced speed bumps at best since the decade long rally began. This appears a little more ominous. One possible scenario is the overwhelming selling (strongest since 2009) in Q4 ’19 was the omen and the subsequent rally a Bear Trap? The across the board monthly divergences are the most troublesome and portends to another correction of 15-20% possibly more? Timing is probably days to weeks.

A relatively quick rebound and return to new highs could solve these ills, but I don’t think so. The win-win in the global Pai Gow Poker game could delay the correction, but I think neither participant will blink anytime soon. Equities won’t appreciate that delay, which could determine the magnitude of the correction.

Here’s to dry powder!

Final Thought
“It could be worse, you could be a Lyft/Uber shareholder” – Trading Floor Banter

More later,
Max Power

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