US Divergence from Asia, Europe Will Signal Short-Term Top

The major U.S. stock indexes retreated on Thursday as investors reacted to reports of a big jump in reported coronavirus cases and the virus’ possible economic impact. As per the book, investors trimmed a little off the top on the first sign of smoke.

Most of the selling was done early, during the pre-market futures session. That was probably because Asian and European traders wanted to get the jump on their American counterparts. If you look at the day-session only daily chart, you’ll see that the major U.S. stock index futures charts closed well above their openings.

In the cash market on Thursday, the benchmark S&P 500 Index settled at 3373.94, down 5.51 or -0.17%. The blue chip Dow Jones Industrial Average finished at 29423.31, down 128.11 or -0.44% and the technology-based NASDAQ Composite closed at 9711.97, down 13.99 or -0.15%.

Price Action Suggests Asia, Europe Controlling the Show

Since the coronavirus outbreak became front page news in mid-January, Asian and European traders have been controlling the U.S. markets. Take a look at the charts and you’ll see that the direction of the U.S. futures markets early in the session have been sold aggressively in reaction to the activity in Asia and Europe, then bought aggressively by the same traders.

The intraday price action during the U.S. session after the European close has been very limited. This suggests that U.S. investors haven’t been chasing stocks in either direction. The bulk of the daily price action has been all Asia and Europe.

On Thursday, it was a different story. U.S. investors actually bought on the early dip. This suggests that they are still bullish stocks overall, but would prefer to buy on the dip or when they can get them at cheaper prices than the day before. I don’t think they are very interested in buying new highs aggressively at these current price levels, given the current unstable conditions.

Friday Outlook – Will US Investors Buck the Trend?

In my opinion, Asia and Europe took the market up and they can take it down. So if you’re looking for a top in the U.S. markets, you’ll see it first in the U.S. futures markets. The second sign of a top will be the failure by U.S. investors to buy the early dip.

Top-pickers should use Thursday’s session as a blue print. Since the trend is up, assume that U.S. buyers are going to buy the early dip until they don’t.

The U.S. markets have traded lower the last two Friday’s as traders took protection ahead of the week-end. Therefore, I’ll be looking for weakness later today. Especially since, a senior Trump administration official told CNBC the U.S. does “not have high confidence in the information coming out of China.”

Asian stocks are trading higher on Friday, helping to drive up U.S. shares. Like I said before, this has been the theme lately. If the U.S. market start to weaken on its own later in the session then consider this to be real selling. This will be U.S. investors taking protection over the weekend.

Basically, the U.S. market is going to be supported as long as Asian and European money keeps coming in to chase the higher-yield. But if they start to come down later today and finish lower, then this will tell us that the U.S. professionals have had enough and the market could start to come down.

In simple terms, a higher-higher, lower-close will tell us the rally is over at least in the short-run.