Midweek Market Trend for February 21, 2018:

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The question I posed last week was whether we are in the midst of forming a “V” shaped bottom in the S&P 500 (SPX) or if we are going to test the February 9th low. As of this writing (1:30 PM Eastern on February 20th), the jury is still out. Notice that the SPX tested the 61.8% retracement level of the decline from the all-time high and failed, forming a shooting star candlestick (Figure 1)(A). A shooting star forms when the upper shadow is longer than the real body and the lower shadow is small or non-existent. It is considered a bearish short term reversal signal.

Figure 1:

LeeBlog 2.21.18 Fig 1

Source: StreetSmart Edge®

An examination of the 2015 bottom shows a similar shooting star at the 61.8% level which led to a retest of the lows (Figure 2)(A). The 61.8% retracement level is important. Many technical analysts feel that if an advance off of a low can carry past the 61.8% area, the odds that the decline is over increases.

Figure 2:

LeeBlog 2.21.18 Fig 2

Source: StreetSmart Edge®

The market also has to deal with rising interest rates. The yield on the ten year treasury is now over 2.9%, the highest level since 2014 (Figure 3). For now, both stocks and yields can potentially move higher in unison, but if the pace of the rise in yields accelerates again like it did earlier this month, we could trigger another bout of nasty volatility. It will be interesting to see what the stock market will do if the yield breaks the psychologically important 3% level.

Figure 3:

LeeBlog 2.21.18 Fig 3

Source: StreetSmart Edge®

Turning to sector action, the iron and steel stocks have been showing good relative strength in their rally off of the lows (Figure 4)(A). Recent news that the U.S. Department of Commerce has recommended imposing tariffs on steel and aluminum imports is providing some fundamental support to the group.

Figure 4:

LeeBlog 2.21.18 Fig 4

Source: StreetSmart Edge®

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