Trouble for Equities But With a Chance of Sunshine

Before yesterday’s sell off, which was the first 1% decline in the S&P 500 since late-July, a form of consolidation had been taking place in the major indices while things began to fall apart below the surface.

First up I want to look at the relationship between consumer discretionary and consumer staples. Typically when discretionary stocks outperform staples it’s a sign that traders are comfortable in a ‘risk on’ rally. But when this relationship breaks down and staples begin to outperform, which has they have been the case for over a week now, a warning flag goes u as traders shift into the lower beta names.

We are seeing the same type of breakdown when comparing the relative weekly performance of the Nasdaq Composite to 30-year Treasury bonds. I’ve marked with  dotted red lines each time since 2006 this relationship has fallen below 22, which historically hasn’t lead to happier days for equities prices. However, we did see a whipsaw in 2011 before substantial declines in the S&P took place, so this doesn’t necessary mean we drop like a rock just because of this weakness.

There are still some technical components that give us some hope for a continued advance. First, we have to remember this is how the market initial responded to the QE 2 announcement back in November 2010, a 40 point dip before bulls take back the reins to finish the year on a positive note. Also I’m noticing momentum, based on the McClellan Osc. appears to have entered oversold territory on a very short-term basis based on certain metrics.

So while it seems traders are taking risk off the table with the outperformance in the lower-beta consumer staples space and 30-year Treasury’s, the current price action in equities doesn’t seem to be out of the ordinary when it comes to QE announcements. It still seems that 1430 is the level to watch on the downside, if we get to that point.

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+.

Divergence in Gold

Gold has been on a tear recently, participating heavily in the ‘risk on’ rally thanks to the Fed. I now see a divergence in gold from two momentum indicators that could be trouble for the rally to continue. We last looked at gold on when it was up against resistance on August 22nd, the shiny metal was able to break past the noted resistance and continue higher. Will gold be able to do the same thing with the current technical setup?

Currently, we have a slight divergence in the slow stochastic indicator, as it makes a lower lower and lower high as gold continues its advance. RSI is also diverging, moving sideways over the past few trading sessions as it stays above 70.

On the other side of the coin we have very prominent investors like Ray Dalio, who runs Bridgewater Associates, calling for all investors to be invested in gold to some degree. These types of statements can be strong tailwinds for the metal and could power through these momentum divergences.

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+.

 

S&P 500 Has Fallen to Support

The market has been enjoying a nice advance over the past few weeks, largely due to the expectation of QE3 which Bernanke announced last week. But now we sit right above a previous level of resistance. I’ll admit that I didn’t think the Fed would come right out and announce another round of easing, I was wrong and thus must adjust my viewpoint accordingly.

Last Friday, I mentioned that I wouldn’t be too surprised to see things begin to weaken and/or consolidate, which it seems is exactly what Mr. Market is doing. Bulls will this this as an opportunity as many hedge funds and institutions continue to chase performance while bears will likely continue to point to the weak economy as justification to continue lower.

Below we have a daily chart of the S&P 500 with a rising trend line that had been acting as resistance throughout the rally off the June low. With today’s weakness following the down market yesterday we have reached this trend line and are testing it as support.

Three days ago we received a warning from the candle formation displayed. On Friday a bearish shooting star was created which can trigger a short-term potential top. A shooting star candle is created when bulls come out of the gate on the open in control and take the market higher only to lose that control to the bears, closing off the day’s high. Click the link above to learn more about this pattern. Typically we like to see a shooting star gap up, which we can’t see in this S&P 500 index chart, but when looking at $SPY, it did in fact gap up.

From here we need to see how the market treats this trend line and if it does in fact hold as support. Bulls will probably do all they can to hold things above 1450, we’ll see if they can be successful.

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+.