S&P futures essentially flat this morning as overseas markets cool off from yesterday’s oversold rally … getting deep into earnings season now, but despite the positive tone in the U.S. (thus far), we are starting to see mixed signals on the charts… remember, very recently there was a notable rotation out of global equities into U.S. small-caps- but look what developed here during yesterday’s session:

“Outside negative day”

Small Cap 600:

Russell 2000:

Both small-cap benchmarks we track (the same ones that made new secular highs against range-bound global markets just a few days ago…) posted what is called an outside negative day… this is when a stock or index makes new highs (over the previous session) then reverses to close below the previous day’s lows (red circles above). Furthermore, the Russell 2K (2nd chart above) appeared to break down instead of out of a minor bullish pattern- which all materialized against overbought/extended conditions across multiple timeframes. Thus we feel some caution is warranted over the short-run as the US markets seek to consolidate recent gains and reduce overbought pressures.

Watch the 1650 zone first on the R2K for support; on the Small 600 we continue to watch the 1000-1020 range for support.

China / VEU

The other area of influence to watch over the coming days will be China and global markets ex-the U.S. (as represented by the VEU)-

Shanghai Comp:

We got the oversold rally we were expecting out of the SHCOMP Index (circle above)- but now we can see that benchmark is running into its declining 50-day moving average, which may offer some resistance over the short-run (and just as U.S. small-caps posted that outside negative day). If the SHCOMP can break and close north of that 50-day MA going forward, then the recent rally should be extended into the low-3000 range- which would boost global markets (VEU below) and would benefit U.S. markets as well.

VEU: Global Equity Markets ex-U.S.:

The VEU includes all global emerging and developed markets (China included) and is really the broadest measure we have of the ‘entire stock market’ minus the U.S. We can see from the chart above that this too recently became deeply oversold and rallied sharply into its declining 50-day MA (pink line)- so we may see some cooling off here in the next day or two as it encounters some minor resistance… similar to the SHCOMP, if the VEU breaks above its 50-day, then the oversold rally will be extended toward the 55-56 level.

Bottom Line:

·        Watch U.S. small-caps- they need to negate that outside day by posting new highs in sessions ahead

·        Watch the global markets- they had a good oversold rally recently but now need to break past some minor resistance to keep it all going- if they cannot, it would likely negatively impact U.S. markets in our view.

Overall, both our secular call (reflationary bull cycle in U.S.) and trading call (volatility to escalate after May-June) appear to be on track at this time. For the benchmark S&P 500, continue to watch the 2700-2750 range for initial trading support in sessions ahead. Thus far there is no technical signal to aggressively sell/short the markets, but it does look like we can go into a period of profit taking / consolidation ahead for the U.S.

Dan Wantrobski, CMT
Director of Research | Technical Strategist
Janney Montgomery Scott, LLC