Retail stocks bounced off eight-month lows on Tuesday after the White House announced that some tariffs scheduled for implementation on Sept. 1 would be delayed into December. The news also triggered a broad-based short squeeze in major benchmarks, lifting the S&P 500 index more than 1.5%. However, a more bearish tone has returned overnight, powered by a bond breakout, yield inversion, and contraction in German GDP.

Mixed messages were also making the rounds in Wednesday's pre market, with a senior White House official denying a thaw in China-U.S. relations. Unfortunately, endless flip-flops and misdirection are wearing on traders' nerves while undermining the sentiment needed by investors to take equity exposure. And time may be running out to save the ticker tape because the bond market has issued a red flag warning that the United States is headed for a recession.

Chart showing the share price performance of the SPDR S&P Retail ETF (XRT)

The SPDR S&P Retail ETF (XRT) topped out in the lower $50s in 2015 after a multi-year uptrend and turned sharply lower into 2016, finding support in the upper $30s. A 2018 breakout attempt failed, giving way to a steep decline into December, followed by a proportional bounce that failed at the 200-day exponential moving average (EMA) in March. Lower April and July highs have added to the bearish price structure, generating the current test at 2018 support.

The on-balance volume (OBV) accumulation-distribution indicator has been in distribution mode since September 2018, when it hit the highest high of the decade. Selling pressure eased in January and resumed in April, dropping OBV within a stone's throw of the deep December low. It could take a full-fledged trade deal to stem the downward tide at this point and give sidelined investors a legitimate reason to buy retail stocks. 

The fund surged to a three-day high after the tariff delay but pulled back as soon as market players got a close look at the divided lists and discovered that hundreds of retail shelf items are still scheduled for September implementation. It's hard to get an accurate reading on where the sector will open on Wednesday, but big retail guns Target Corporation (TGT),, Inc. (AMZN), and Dow component Walmart Inc. (WMT) are posting losses in excess of 1.0% in the pre-market.

The stakes are high because a sell-off through 2018 support at $38.10 for the XRT fund will also signal a massive double top breakdown, ending the uptrend that started after the 2008 economic collapse. In turn, that would be bad news for other cyclical plays that include banks, transports, and industrial operations. Unfortunately, mall anchor Macy's, Inc (M) isn't helping the equation this morning, dropping more than 12% to a nine-year low.

Chart showing the share price performance of the SPDR S&P 500 ETF (SPY)

Owners of the SPDR S&P 500 ETF (SPY) also have a bad case of whiplash after Tuesday's rally posted an eight-day high on the underside of the 50-day EMA near $293. It broke that support level on Aug. 2 and failed a first test at new resistance four sessions later. Unfortunately for bulls, the fund is trading below $289 in the pre-market, signaling a second rejection that favors a breakdown trough the last swing low at $282.

That selling impulse could reach the June low at $273 and fill the third gap into support. The low is bisecting the .382 Fibonacci rally retracement level while marking the only apparent trading floor between the December low and July high. Ominously, OBV dropped to the level it posted in June last week, signaling bearish sentiment that may need much lower prices to motivate buying interest.

The Bottom Line

The broad market is in full retreat on Wednesday morning, trapping bulls in a major reversal after Tuesday's wide range rally.

Disclosure: The author held no positions in the aforementioned securities or their derivatives at the time of publication.