Mid-week market update: What should investors make of the market reaction to the trade war drama? The S&P 500 remains range-bound. The bulls will argue that the index is on the verge of an upside breakout from a bull flag (dotted lines), which is a bullish continuation pattern. The bears will argue that momentum is negative, as evidenced by the recycle of the stochastic from overbought to neutral (top panel) and the percentage of S&P 500 above their 20 dma. One key test of market strength is whether the price gap (shown in grey) at just below 5900 is filled in the near future.
As for me, I am in wait and see mode for the next market catalyst.
Market internals
An analysis of market internals reveal a mild bearish bias. Equity risk appetite factors present a neutral to negative picture. While the ratio of consumer discretionary to consumer staple stocks is tracking the performance of the S&P 500, the relative performance of high-beta to low-volatility stocks is flashing a negative divergence. Negative divergences are also evident in the cyclically sensitive copper/gold and base metals/gold ratios (bottom panel).
The relative performance of defensive sectors shows that they are all trying to bottom, but conditions aren’t definitive enough to assert that the bears have taken control of the tape.
My assessment of the market environment is a choppy trading pattern with a slight bearish bias. Until I see signs of either an upside breakout or downside breakdown, this remains a “buy the dip and sell the rips” market.