Nasdaq Composite - Head & Shoulders Top Formation?

Old-school technical analysts might view the current Nasdaq Composite chart as a possible head & shoulders top formation. I am leaning in that direction.

Nasdaq Composite Index with 200-day Moving Average Line

I actually read a quote from one notable Wall Street analyst this past week who said that a major stock correction is unlikely to unfold with the Russell 2000 Small-cap Index posting record all-time highs as it is now.

However, what if the record high in the Russell 2000 Index is a red herring? What if the weaker current patterns in the New York Composite Index and the S&P 500 Index are really warning signs of meaningful weakness ahead? And what if the Nasdaq Composite Index is now actually completing the right shoulder in a perfect head & shoulders bearish formation?

The widely publicized gradual tightening in U.S. monetary policy from the Federal Reserve has been generally ignored by stock investors who appear to be more focused on solid corporate earnings and record corporate share buybacks. The obvious question is when (if ever) will the Fed's tighter monetary actions have an impact on stock prices? If the S&P 500 year-over-year earnings growth in 2018 is +21.5% and in 2019 the growth is +10.0%, as is now the consensus on Wall Street, then a major correction in U.S. stock market averages is unlikely. However, are these bullish estimates realistic? Not likely !!

I couldn't help but notice this interesting chart from an article on the ZeroHedge.com website. The Credit-card charge-off rate at smaller U.S. banks, of which there are about 4,800 in this category, was 8.0% in the 1st quarter of 2018 !! Looks to me like the U.S. Consumer is tapped out!

Mortgage origination and refinancing are down sharply given the steady rise of mortgage interest rates over the last several quarters. Sub-prime auto loans are a disaster now! And sharply higher gasoline prices are seriously cutting into discretionary income and more than offsetting the trivial Trump tax cuts for anyone making less than $75,000 per year.

Bottom Line: Another 10% slide in the average U.S. stock price, just like one experienced earlier this year, looks imminent to me! And if the average investor begins to realize that the "Powell Put" won't kick in until at least -20%, then downside price action could easily accelerate into a mini-crash!

Short Squeeze or New Up Leg in an Ongoing Bull Market?

Since the recent reaction lows of April 2nd, most major U.S. stock market indexes have posted solid gains. If we include today's intra-day highs, the S&P 500 notched a 6.41% gain while the Nasdaq Composite and the Russell 2000 saw advances of 7.23% and 7.36%, respectively over the last 13 trading days. Through any lens, these are spectacular investment returns considering the short period involved!

So what's the answer? Have we just witnessed a massive short squeeze within a NEW bear market (which began in late January 2018)? OR, should we categorize the dramatic declines in February and March as just natural "corrections" in an ongoing powerful bull market?

In the interest of full disclosure, I began shorting the U.S. stock market in the last hour of NY dealings today. Despite the fact that "after hours" U.S. stock market futures are higher this evening (Wednesday, April 18), I strongly believe that bearish forces will soon re-emerge that will quickly dominate the financial landscape (taking the obvious negative toll on investor capital).

For me, the bearish case is front and center as showcased in the banking sector. The under-performing Bank Stock Sector Index (symbol BKX) is weak and getting weaker despite supposedly bullish higher U.S. interest rates (and relatively strong recent earnings):

Bank Stock Index (BKX) Daily Chart with 200-day Moving Average Line

S&P 500 Index Daily Chart with 200-day Moving Average Line

Bottom Line: Higher U.S. interest rates, ongoing hawkish actions from the U.S. Federal Reserve, and relatively weak bank stocks will serve to castrate the overall U.S. market for equities on the immediate horizon. Lower stock prices are likely over the very near term, with a complete reversal of the recent advance and a probable violation of the key 200-day moving average line on the downside. And here is another negative chart in support for the bearish case: A sell signal was triggered today by my computer trading system in the Utilities Sector Index (symbol XLU).

Utilities Sector Index (XLU) with 200-day Moving Average Line (& computer sell signal today)