Weekly Technical Market Outlook 12/15/2014

After a seven week run up to new highs it appears sellers woke up from their winter naps and turned on their trading terminals. The S&P 500 ($SPX) fell 3.52% last week while small caps ($IWM ) dropped 2.53%, International stocks also finished in the red by 4.66%. Of course we can’t forget the oil market which stumbled 12.4% over the last five trading days.

Trend
While the trend for the U.S. equity market remains positive, I did not like seeing price fall under the prior September high in the final hour of trading on Friday. Because of its round number status no doubt we’ll hear a lot about 2,000 for the S&P this week and why it ‘matters.’

trendBreadth
While breadth had been improving we still have yet to see the NYSE Common Stock Only Advance-Decline Line break back above its prior high. Two weeks ago I discussed how the other A-D lines had confirmed the most recent high but the broader, NYSE equity only has yet to do so. The Percentage of Stocks Above Their 200-day MA has continued to hit new lows which has only been intensified after last weeks selling.

breadthDecrease in New Low-High 
One of my favorite follows on Twitter is Dana Lyons. Dana does some really interesting analysis and produces some great charts that he also shares on his Tumblr.  Below is a chart Dana recently shared that shows the data points where the S&P 500 has been near a 52-week high but the breadth, as measured by the number of new lows minus new highs is greater than 2%.

Dana notes that we last saw this occur in August of last year, which as we know did not put a stop to the up trend in stocks. However, the previous instances are hard to ignore.

Dana chart

LIBOR
Over the last several years the 3-month LIBOR rate has been fairly uneventful in its decent. In its simplest form, LIBOR is the international rate that banks charge each other for short-term loans. When the trend in LIBOR begins to rise that often means banks are growing nervous and are charging a higher premium for loans to one another. During previous dips in the U.S. equity market we haven’t seen a noticeable rise in LIBOR.

However, this last week has been difference. While the market is off just a couple of points LIBOR rose 3.10% which is the largest 1-week increase since 2011 when the S&P downgraded the U.S. and politicians were debating whether they should do their job keep the government open.

A one week move is not something to ring the siren over but I don’t believe it’s something to simply ignore either.

LIBORMomentum
Many traders will point to this chart as a reason for last week’s selling. While the S&P made a new high the Relative Strength Index put in a small bearish divergence. Two weeks ago I highlighted the divergence in the MACD histogram as a sign of potential weakening momentum. This lower high in the RSI helped confirm that.

momentum

Gold
It seems Oil has gotten most of the attention recently but before that it seems the focus had been on the slide in Gold prices. As Gold broke through its 2013 lows I think many traders wrote it off as a dead asset. But those lows have once again been breached and the bulls have been putting bids under gold over the last two weeks. We now have a sign of a possible false break which is being accompanied by two bullish divergences in momentum: the RSI and MACD indicators.

It appears the bears just didn’t have enough left in the tank to keep driving Gold prices lower. Or many they shifted their focus from the shiny metal to the black gold market, oil, to tickle their fancy. Nonetheless, spot gold prices are back above their prior low and with these weekly bullish momentum divergences, this asset may become interesting to some. However much work is to be done to regain the trust of the market and see the down trend broken. Two weeks of gains is hardly enough to base a complete turnaround on.

gold60-Minute S&P 500
It seems the fairly long divergence on the MACD is finally getting its day in the sun as price begins to follow its lead. The Relative Strength Index also started putting in a series of lower highs near the intraday top for the S&P 500. Which was soon followed by multiple ‘oversold’ readings which as I wrote about last week, doesn’t mean a bounce has to be produced.

60min

Last Week’s Sector Performance
As the major indices sold-off last week traders sought the ‘safety’ of the defensive sectors, most notably Utilities ($XLU) and Consumer Staples ($XLP). Relative to the S&P 500, Energy ($XLE)  was the worst performing sector followed by Materials ($XLB).

last week sector

Year-to-Date Sector Performance
The trend continues another week of Health Care ($XLV), Utilities, and Technology ($XLK) in the top spots of relative performance YTD. Energy, Materials, Consumer Discretionary, and Industrials remain under-performers with just a couple of weeks left of 2014.

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.

Being ‘Oversold’ or ‘Overbought’ Is Often Not Good Enough

One of the first mistakes many new traders make when using technical analysis surrounds the words ‘overbought’ and ‘oversold.’ While the Relative Strength Index (RSI) is one of the most popular technical indicators, it’s often used incorrectly. Stocks and markets that become ‘overbought’ or ‘oversold’ can often become more overbought and oversold.

While this applies to many momentum indicators, I’m going to focus this discussion on the RSI. Momentum is often thought of as a mean-reverting indicator. It’s believed that something cannot rise or fall forever and the momentum of the trend will likely correct itself. While 70 and 30 are often the ‘trigger’ lines for the idea of being ‘overbought’ and ‘oversold’ respectively, this ignores the whole notion of momentum.

A break above these numerical levels just tell us how strong or weak momentum actually is. It does not mean momentum nor the RSI indicator has to revert. This is why I often look for bullish or bearish divergences as signs of changing momentum. Which involves price continuing a trend after a brief decline but does not receive confirmation in momentum as the indicator begins to diverge and change direction. The chart of Crude Oil does a great job at showing why a break outside an ‘overbought’ or ‘oversold’ level is not good enough to forecast a change in trend.

Oil saw its first reading under 30 on October 9th on the daily chart and while the next day the price of Crude rose, it did not put a stop to the selling within this commodity. However, it did tell us how weak momentum was and the price of a barrel of crude oil has continued to fall over 20% since then. During this time the RSI indicator has broken under the ‘oversold’ level six additional times. Sellers have been relentless in pushing oil prices lower and momentum has shown us this by staying consistently weak.

WTICOne caveat to the idea that being ‘oversold’ or ‘overbought’ in momentum is not good enough to begin expecting a change in trend is the time frame. The above example in Crude Oil is a daily chart but there can sometimes be interesting setups in a weekly or monthly chart when momentum gets extended in one direction and quickly reverses course. This is not to say that when coupled with other forms of analysis that over-extended momentum can not be a good tool. But by itself, in my opinion, it is often signaling the opposite of what many traders believe and the trend in price continues.

 

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.

Dr. Copper Has Been Replaced

There used to be a belief on Wall Street that copper had a Ph.D. in economics since it was often used as a barometer for the economy and often the market. Traders would look for divergences between the copper and the equity markets for signs of potential danger. If Dr. Copper began to weaken it was believed that the stock market would soon follow. While this may have been the case at one point I would argue it no longer is today or has been for a few years now.

Dr. Copper in my opinion has been replaced by technology, specifically semiconductors. The market seems to be much more focused on the happenings of Silicon Valley rather than Milwaukee or Detroit. While the industrial sector still remains a large piece of our economy it no longer is the driver of growth. At least that’s what price action has been telling us.

The chart below shows the performance of the S&P 500 (black line), the Semiconductor Index (red line), and the spot price of Copper (green line). You can clearly see that copper has not been enjoying the bull market party while semi’s have been moving right along with the market. It’s a little hard to see, but in 2011 we saw semiconductors break away from the S&P 500 as the industry made a lower low, a divergence that the equity market eventually fixed by falling in price by nearly 20%. Ever since then we’ve gotten confirmation by the semi’s of the new highs in the S&P.

It seems Copper has been expelled while the semiconductors step to the front of the class.

semi vs copper

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.