Market’s Extremities Wounded, But Core Intact

Given the ongoing spread of the Coronavirus, nobody should be surprised to see the selling that came into the market today.

Over the weekend, we reviewed some of the early warning signs the market had already signaled.

For example, junk bonds and regional banks sold off. Interest rate yields fell sharply, and gold had a sizeable rally.

The focus coming into today, however, was the Russell 2000 IWM or our Granddad of the Economic Modern Family.

But before we get into the analysis and what we might expect next, I’d like to share with you a question I received about the Economic Modern Family and how it measures market breadth.

The basis of the Family is to gauge the key cyclicals and non-cyclicals of the US economy.

Each member serves a distinct role in helping us determine these key cycles. Yet, it’s the phases that help us see easily, the aggregate of the market’s breadth.

Once Regional Banks KRE deteriorated in phase, that threw up a red flag.

From there, we prepared for a diminishing overall market breadth.

Lo and behold, 4 more Family members saw deteriorating phases.

Granny brick and mortar retail XRT, Big Brother Biotechnology IBB and Transportation IYT not only broke their 50-DMAs but did so with a significant gap down.

Interestingly, Grandpa Russell held the 50-DMA until the final minutes of the trading day. Hence, he broke the 50-DMA and the bullish phase, but only marginally so.

The illustration depicts the 6 arrows to the body the market endured.

Yet with his sword help up high, it may not necessarily have been the lethal blow.

(Click on image to enlarge)

Here are the weekly and daily charts of the Russell 2000 IWM.

Though we broke the inside week pattern we came into today with, IWM only slightly broke the 50-DMA.

As 164.07 was the low the week ending January 17th, that now becomes a key pivotal area.

Moreover, IWM must clear/hold the 50-daily moving average or 163.67.

This support between 163.67-164.07 becomes critical for this entire week.

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