Weekly Technical Market Outlook 7/28/2014

Something just don’t feel right about the current rally to new highs. We are beginning to see signs of deterioration while at the same time not the same characteristics that have been present at previous bull market peaks.

For instance, momentum is creating a negative divergence on the daily chart but not the weekly. The Advance-Decline Line didn’t confirm the most recent high but the divergence is minor and not as large as in 2000 or 2007. Margin debt has begun to turn lower over the last several months, but we have continued to see the Dow Industrial and Transport Indices confirm the new highs each have been making. If we do begin to correct, which I think is possible (anything is possible!). I would be surprised if it turned into a bear market. Corrections are healthy and part of an up trend. We’ll see what price brings us.

Trend

As I wrote last Wednesday, Trend matters and isn’t something we should forget about. The S&P 500 ($SPX) continues to be in an up trend as price remains above the 100-day Moving Average, 20-day Moving Average and both the short-term and long-term trend lines.

TrendBreadth

While the S&P 500 ($SPY) may have made a new high last week, breadth did not confirm. Both the Advance-Decline Line and the Percentage of Stocks Above Their 200-Day MA were off their respective highs as the equity index broke to a fresh level. The A-D Line finished out last week at its short-term up trend line, which keeps breadth in the bulls favor but just barely.

breadthNasdaq Participation

This next chart comes from Dana Lyons which is a must follow on Twitter. This chart looks at the Nasdaq 100 index ($QQQ) going back to 1998 while also showing the percentage of Nasdaq stocks making new highs at the same time of the underlying index. As Dana points out, last week’s new high saw the fewest new highs in the stocks that make up the index. This is not what bulls want to see.

Based on Dana’s calculations, even in 200 when breadth was awful and there was very little participation in the up trend by individual equities, there were more than there is today. That’s pitiful.

BtY42EUCUAEnmGR

Momentum

Like Breadth, we have a negative divergence in the Relative Strength Index as this momentum indicator made a series of lower highs going into last week’s new high for the S&P. We also have a divergence in the MACD and Money Flow Index indicators.

momentumSemiconductors

In the webcast I did with MarketWatch in early June I said that one of my favorite indicators to watch was the Semiconductor sector ($SMH). I like to see semi’s confirm the price action that takes place in U.S. equities. While 2014 has been the year of “new highs in stocks” we’ve seen the semiconductor sector market right along hitting new highs as well. Until last week.

Last week I tweeted out a similar chart to the one below, showing that semi’s were not confirming the new high. As of the close on Friday, $SMH has wiped out all of its July gains. We don’t normally see this type of behavior and this kind of divergence unless stock prices are preparing to head lower. Do semiconductors always foreshadow corrections in stocks? No, nothing is perfect. But based on the small bit of weakness we saw in the S&P on Friday, I think it’s possible we start seeing equities chase after semi’s.

semi

60 Minute S&P 500

On the intraday chart of the S&P 500 we can see negative divergences was created as the RSI and MACD indicators made lower highs as the S&P made a new high. This was then followed by price dropping back below the prior high.

60minLast Week’s Sector Performance

Once again the Energy Sector ($XLE) led in relative performance for the week. Followed closely by Technology ($XLK) and Health Care ($XLV). The Consumer space got hit with Consumer Staples ($XLP) and Discretionary ($XLY) the two worst performing sectors last week.

last week sectorYear-to-Date Sector Performance

Utilities ($XLU) and Energy are still the two leading sectors for 2014. Tech, Health Care, and Materials ($XLB) round out the group of sectors that are still outperforming the S&P 500. Consumer Discretionary and Industrials ($XLI) are the worst performing sectors YTD.

YTD sector

 

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Why The 10-Year Treasury Yield Could Drop Under 2.4%

With each passing day it seems the bearishness towards bonds refuses to ease. The survey’s of economists still show a heightened distrust for the Treasury market, even though prices have marched higher for the bulk of 2014. When we look at the weekly chart of the 10-year Treasury Yield ($TNX) we can see that support may be under 2.4%, and if prices do in fact break 2.4% that may open the next wave of shorts to get squeezed.

Below is a weekly chart of $TNX going back to 2008. I’ve included the 200-week Moving Average as it has been an important level of support and resistance for the 10-year Yield. In 2010 and 2011 we saw the 200-week MA act as resistance when bond prices were falling prior to the corrections in equities that took place each of those years. In 2013 we saw this long-term Moving Average act as support when yield was falling in October. And once again this MA acted as support in late May of this year when $TNX last approached the 2.4% level.

Once again we see yield approaching this critical level of support that currently sits at 2.38%. A break under 2.4% would shock a lot of traders. If we look at momentum, using the Relative Strength Index (RSI) we aren’t even close to seeing oversold conditions. During past bottoms in yield the 14 week RSI dropped to under 30. Of course it’s not a requirement for momentum to become ‘oversold’ on this weekly chart for yield to rise, but that’s been the case during previous intermediate-term bottoms.

tnxWhen we look at the latest batch of Commitment of Traders (COT) data in a chart from SentimenTrader we can see a lack of concern for Treasury yields continuing to fall, with over 3,000 contacts net-long. While the previous three bounces in yield have occurred when traders lessened their bets in favor of a higher yield down to under 200,000 contracts. There appears to still be too much optimism for yields to rise for them to actually do so.

COT tnxGoing forward I’ll be watching to see how the $TNX reacts if it makes it back to 2.4% and the prior May low. If we do break under 2.4% then the 200-week Moving Average may come into play as the next possible level of support.

 

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

We Can’t Forget That Trend Matters

I often write about mean-reversion and look for different charts that show where the proverbial rubber-band appears to be overextended and ripe for a correction back to the mean. These types of setups have shown themselves in several markets and lead to shifts in short and intermediate trends.

However, we can’t forget that the trend is still important. The overarching direction of a market matters and is not something I ignore when reviewing a chart. That’s why the trend of the S&P ($SPY) is always the first chart I show in my Weekly Technical Market Outlook. It’s rarely changes and I often just attach a sentence or two to it. But before we can dig into the internals of an asset class or look at other interesting charts I believe it’s critical to acknowledge the prevailing trend. Those higher highs and higher lows matter!

Today we are seeing new intraday highs in the S&P and the Nasdaq 100 ($QQQ). The trend in the ‘big 3′ indices is firmly positive. While part of my analysis includes looking for turning points, we must still respect the trend itself and is something that can be extremely difficult to do at certain points.

Will the current up trend end? Of course it will! Will we be able to foretell its demise? Studies have shown that it’s unlikely. Will we continue to watch the internals of a market by charting things like breadth and momentum to understand its ‘health’? Absolutely. But we must allow the current up trend to be innocent until proven guilty and at this point the judge has yet to slam his hammer down convicting this bull market to death.

SPY QQQ DIA

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.