The 42% Line Decides Whether This Market Breaks Down...

Jul 09, 2026

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KR Opinion

Yesterday’s action was once again very dynamic. Markets traded off sharply overnight after the US launched military operations, crude oil moved back up to 76 dollars, and equities responded with the kind of reflex selling that looks dramatic in the moment and means much less by the close. But the story that matters most right now is not the geopolitics. It is the WaveTech Database, where the percent bullish reading is sitting almost directly on top of the 42% threshold, the critical dividing line between a market that can sustain an upside bias and a market that slips into liquidation mode. That line, not the headlines, is what decides whether this choppy tape finally breaks down.

Start with crude, because it is the cleanest example of how I want readers thinking about reactionary moves. In the previous night’s YouTube video I laid out that oil was likely to travel into the 74 to 76 zone, and we have now satisfied that target. From here I believe the oil market continues to pull back toward the 72 level and settles in. The overnight spike was one of those reactionary actions, a burst of positioning around an event, not the beginning of a new trend. The equity markets followed the same script, selling off sharply and then starting to recover, and the recovery is the tell. It is becoming obvious that this is not a US escalation of the war but part of a plan that was already in place. The US was giving Iran an opportunity to settle this thing on paper, and when they did not want to do that, this was the next step, starting to tear down further infrastructure. Markets are quick studies on this kind of thing. Once the action reads as scripted rather than open-ended, the risk premium comes back out, and that is exactly what the recovery off the lows was telling you.

The two stories that actually matter

The real story coming into the markets right now is two things. The first is earnings. Next week we start the earnings reports, and on Tuesday we will be getting some pretty major tech names as well as AI names reporting. The second, and to my eye the bigger one, is what just happened inside the WaveTech Database, because what we are seeing there is a massive amount of selling. Yesterday’s move down, even though it was only a short-term event, has broken a lot of fragile trends that had been built up over the last couple of weeks. On the surface the markets were stabilized, just maintaining their percent bullish, but underneath, the structure was very fragile, and the exits prove it. Quite a few positions came off, and the reading is now right down at the 42% threshold.

Here is why that number carries so much weight. The threshold framework treats 42% as the dividing line for the entire database. Above it, enough of the market is participating that an upside bias can sustain itself. Below it, participation is too thin to hold prices up, and the models shift into liquidation mode. When the reading sits this close to the line, there is no cushion left. If we break a bit lower, we are going to lose the traction we need to hold stability in the markets at these levels.

This is also why I lean on the database over the price chart in moments like this. Price can be held up by a handful of leaders long after the average stock has quit. The database counts every symbol, every group, every sector, so it catches the quitting early. A tape that holds its levels while the participation reading bleeds toward 42% is not a strong market, it is a narrow one, and narrow markets break faster when they finally break.

If that happens, the downside case I have been talking about for a couple of weeks comes into play, the S&P 500 moving down to the 7200 level. Overnight we are seeing strength following through after yesterday’s rebound back to 7550, and in yesterday’s YouTube video I gave the working range as 7550 to 7450. That range is the market until the database says otherwise. But if the database breaks below 42%, the metrics start pointing toward breaking down a bit further, and the algorithms on the intermediate weekly charts are suggesting the same thing as we come toward next week, that we are likely to see some further breakdown as well. So there is somewhat of a weaker tone coming in underneath a tape that still looks calm on the surface.

Earnings, and the problem with perfection

The weaker tone matters most because of what the calendar is about to deliver. Earnings are expected to be up, I believe, 24% more than just a year ago. Whether that is a little over-pumped is hard to say, but we could start to see some disappointments coming into that level, and maybe we will see some other items being addressed in the earnings numbers as we start to dig into a bit of Q2. Think about what a 24% growth expectation actually demands. It means companies do not just have to be good, they have to be exactly as good as a very optimistic consensus already assumes. We have already seen a number of stocks print strong earnings numbers that still came in under the expectations, and that is the trap. The expectations are coming into place so frothy that if markets do not get exactly what they are asking for, then there might be some punishment on the table. After a year of amazing prints, it is possible we will see some surprises in the next couple of weeks, and not all of them will be pleasant.

Thursday’s calendar itself is routine. We get the typical claims and continuing claims, and I do not expect anything really material to happen there, though these numbers come out every week and are always something to watch. We also get existing home sales, and I do not expect to see any big boost. Especially after the reports we got today, we are likely to see further softness in the housing market. The reality is that there is just not any movement going on in housing, and with the 10-year moving back into the 4.50% level, that is not going to stimulate anything new here.

Distribution is the pattern to respect

The pattern that is unfolding on the charts also suggests that it is possible we are coming into more of a distribution. I want to be precise about what that means, because it is the difference between an annoyance and a problem. Rotation is money moving from one part of the market to another, and it is survivable, even healthy. Distribution means the money is not rotating, it is leaving. Not only a rotation but possibly some outright liquidation, some money being raised. You can even see hints of it in single names. Since the most recent high-profile addition went into the NASDAQ 100, it is now down to about 149, still above the initial offering price, I believe at 135, but the direction of travel tells you something about appetite at these levels.

There are some numbers overhead that will mean a lot. We do have Fibonacci targets suggesting the S&P could see higher prices, but the algorithms on the PPMs are not confirming this at this time, and I do not chase targets that my momentum work will not underwrite. So I suspect that, if anything, we will stay in this sideways choppy range and be waiting for earnings and the other things that come in next week. I have been pointing for a couple of weeks now at the algorithms pointing to mid-July, the second week of July and into the third, to start to get into a pivot point in the market that is likely to give us some further direction. Right now just about everything is in a 50/50 mode. We are not really getting any real conviction anywhere, and I think the earnings that start next week, along with watching the WaveTech Database to see if it dips under 42%, will be how we determine whether we are going to see further downside or more choppiness.

As I have been saying for a while, this is where you earn the big bucks, because these are very difficult markets. After you have had a big earnings expansion and a price movement into all-time new highs, the hardest job in this business is figuring out whether that type of action is going to continue as we go forward. Trending markets pay everyone. Transitional markets pay the people who respect the thresholds and wait for the data to declare itself.

The playbook for today

Today I would expect the markets to remain somewhat positive. There will just be some pivot points to respect, and they are worth writing down. Everything will come back on crude oil. If it does go above 76, there are targets pointing to the market going to about 80, and an oil market at 80 changes the inflation conversation quickly. On the treasuries, if we get above 4.69 on the 10-year, then there could be some real issues with higher interest rates, which is not going to help gold, and on equities we are going to see most likely some downside action. So I am still arguing that we are in this choppy sideways market, that we are not likely to break out in a big way to the upside, and that at the moment the distribution patterns are a bit concerning. I do not think we will get any of these answers until we get to this time next week, after we have seen a few days of the earnings, especially starting on Tuesday. Until then, the 42% line is the scoreboard, and I am watching it every session.

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