Mega Caps Also Bleed

We are back at testing the February lows, whatever hope there was with Thursday's powerful upward movement was crushed during Friday as stocks plunged. A week ago, in the article I publish during the weekends, I mentioned that the most likely scenario was that there would still be selling pressure entering the Market but I believed that the 4,191 support would hold. That's exactly what ended happening but if the decline continues the support will be officially broken.

Market Overview

The Tech stocks that last Thursday (Apr/28) fueled a one-day rally, got crushed on Friday. Amazon (AMZN) was severely punished with a -14% loss as well as other important names that weight heavily on the indexes such as Nvidia (NVDA) -6.24% and Microsoft (MSFT) -4.18%. The 4,191 support in the S&P 500 can still hold if the index posts some gains on Monday.

From the perspective of the daily chart, I don't like the way the trading week closed. If you see the three previous times the index tested that level (green arrows), the index either rebounded or stalled with bars that weren't that tall and bearish. The Friday bar is very tall and closing at its lows, that denotes a huge supply and very little demand. If the support is going to hold it needs to bounce from that level and stay above 4,191. This support has hold for the past year, it will be very significant if it breaks.

Large cap companies were holding much better during the last Correction than the mid and small cap companies. That's no longer the case, large cap companies are suffering through this earning season and it's being reflected in the index.

Reviewing the mid-cap companies, the S&P 400 is just in a similar case than the S&P 500. If the index doesn't recover it's 2,571 level, it will move to uncharted territory. The screenshot below shows a trading year, since 2022 started, the index has heavily tested the 2,571 weekly support, but it has hold so far (green arrows). If the large-cap support breaks, and this one breaks too, there will be troubles ahead. It would be nice to see a rebound on Monday's session.

The small-cap weekly support is officially broken and now it will be a resistance. The 1,292 level had hold for the past year, tested several times (green arrows), but now it's gone. If you are planning to go long on small-cap company, it's not impossible to pick a winner, but the universe of winners got reduced drastically. I'm not into trying to pick bottoms, it's a very risky business, especially with the weakness that the indexes are displaying lately.

The idea is not to show how weak every important index is, especially the Nasdaq Composite that is heavily composed by tech companies. They are all weak and the New High and New Low (NH-NL) numbers still confirm a lot of selling pressure in the Market. The only minor good news is that the Monthly numbers showed some improvement (columns G, H, I in the screenshot below), it could be a signal that the Correction is losing some steam. It will be important to see how those numbers change during the first couple of trading days next week.

The daily charts displayed above are in oversold conditions (-3 Keltner Channel). If the indexes are unable to rally from oversold conditions, and the NH-NL numbers don't improve it will be a very bearish scenario for the rest of the week.

Industries

The number of Industries where I see strength got reduced from eleven to six. There are 68 Industries that compose the Global Classification Standard (GICS) and only 10% are displaying strength. The worst part is that half of those Industries where I see strength, belong to the Consumer Staples Sector, which is considered a defensive sector. That signals a high risk aversion.

Scenarios

Scenario #1: The most likely scenario, from my personal point of view, is that there will be at least a small rally, lasting one or two days that will get the index levels back around the weekly supports. The reason I picked this scenario as the most likely, is that there was a slight improvement in the NH-NL Monthly numbers. As bottom pickers start buying and people with open short positions start covering them, some relief rally could move the indexes back above their weekly support lines. In this scenario, I wouldn't think to go long, my personal strategy requires a stronger Market, when the S&P 500 crosses above 4,500 I'll think about opening new positions. I'm back to all cash at this point.

Scenario #2: The second most likely scenario, is that the Correction continues and it could even send all the important indexes to Bear Market territory. There is a constant flow of bad news, and even if they are the same old news the Market reacts negatively. The attempts to rally get crushed pretty fast, only lasting a day or two. I wouldn't think about opening new long positions with my trading strategy based on Mark Minervini's books.

Scenario #3: The less likely scenario is that we get a powerful rally, the demand finally overcomes the supply. This scenario would require a surprisingly good catalyst. Maybe some positive news regarding Ukraine, or the Covid spread, incredible earnings reported next week, or something like that. Even if we get those good news, they have to be able to overcome the current selling pressure which is pretty high. The NH-NL would need to improve drastically and fast. As I have mentioned in past articles, nothing is impossible in the Markets, but this scenario is highly unlikely.

Summary

The big question is, are we at the end of the road for the powerful Bull Market that started after the 2008 subprime mortgage crisis? It's hard to tell, there were powerful declines such as the one we had a couple of years ago triggered by the Covid, but the recovery was pretty fast. If we check the monthly S&P 500 chart below the Market has been declining all 2022 from 4,800 to almost 4,100.

There's no point trying to forecast what will happen, but definitely is a warning signal that should give huge importance to risk management. I'm waiting on the sidelines until there is a clearer Market direction. If the Correction continues, even if it turns every single important index into a Bear Market, eventually that will open great opportunities. That could take weeks or months, so it's important to keep monitoring how this Market situation develops.