Weekly Technical Market Outlook 3/31/2014

On Friday we saw the energy sector break out of the resistance I discussed in last week’s Technical Market Outlook, confirming the bullishness that had been taking place in volume. The Advance-Decline Line for $XLE also broke its down trend, which is positive for energy bulls. I’ll be watching to see if the strength continues this week or if it turns into a false breakout. Also on Friday I wrote a blog post looking at the Kitchin Cycle. This cycle, which turned lower ahead of the 2000 peak, 2007 top, and 2011 high, will be turning negative later this year. This cycle also fits into the historically bearish period of time for mid-term election years, which we are currently in. It’ll be interesting to see how the market reacts as the cycle peak approaches.

Equity Trend

The trend of the S&P 500 ($SPX) is still positive although we are starting to see some short-term signs of lower highs. The channel that I discuss in the 60-minute chart is still in place and keeps the equity market in an up trend. trendBreadth

I’m still seeing a larger increase in the broad NYSE Advance-Decline Line (shown) compared to the Common Stock Only Advance-Decline Line (not shown). This means that breadth is still not as strong as we’d like it to be in equities for a chance to make a run at a new high; but this does not mean a new high is not possible.

The NYSE Advance-Decline Line, while still in an up trend, did break its short-term trend line as shown by the dotted red line. It has yet to make a lower low or diverge from price, which is what we would likely see at the start to a more substantial bearish move. The Percentage of Stocks Above Their 200-day Moving Average has begun putting in lower highs and lower lows but it is still above 70% which has been the level of resistance/support we’ve been watching for the last several months.

breadthEquity Momentum

With the consolidation in the S&P 500, the negative divergences in momentum I’ve been highlighting the last several weeks have yet to work themselves off. I am currently watching the 49 level on the Relative Strength Index which had developed into potential support last week. If we do break 48 then the longer-term support of 35 will likely come into play.momentumSmall Caps

The Russell 2000 ($IWM) index has garnered a lot of attention lately due to its sudden period of weakness. With that, I thought it would be a good time to check in on the chart for $IWM. Right now price is approaching potential support at the 100-day Moving Average. This MA has held up as support in February as well as April and June of last year. We also have the Relative Strength Index touching its own support level. This momentum indicator has been bouncing off 35 for the last twelve months, and if the up trend is still in tact, should hold up this week. IWM 60-Minute S&P 500

Right now this is the only chart that matters for the equity market. The S&P 500 ($SPX) has been in a channel since the start of March. The bulls view this as short-term consolidation before the next leg higher while the bears think traders have grown exhausted and unable to take stocks higher. Over the last week we do see a short-term down trend with lower highs in the S&P (as shown by the dotted blue line). The levels of lure are 1840 for support and just over 1880 as resistance. The overall trend remains positive until proven otherwise. 60 miinQuarterly Performance

This table was created by Scheafer’s and tweeted by @ukarlewitz. If the S&P is able to close above 1848 today then we will see the fifth positive quarter for the index. As the table shows, the following quarter hasn’t seen great returns after the equity index has completed five consecutive positive months, with the average performance of -2.89%. It’s important to note that the table obviously doesn’t have a robust data set available for this average return with just five past instances. I’ll let you make your own conclusions about the level of importance for this type of data.

qtr performanceLast Week’s Sector Performance

As I mentioned in the first paragraph, we saw energy ($XLE) have a strong week last week – most notably on Friday. Utilities ($XLU) came in second with the financial sector ($XLF) the worst performer for the week.

Week sectorYear-to-Date Sector Performance

Not much as changed with the YTD sector performance. Utilities ($XLU) and health care ($XLV) continue to be the star performers. With consumer discretionary ($XLY) and industrials ($XLI) as the weakest YTD.

YTD sectorMajor Events This Week

With Janet Yellen announcing the decrease in importance of the unemployment rate for their decision regarding QE and interest rate policy we will likely see a decrease in market anxiety surrounding Friday’s NFP report.

Monday: Chicago PMI
Tuesday: ISM Manufacturing and Construction Spending
Wednesday: Factory Orders
Thursday: Jobless Claims
Friday: Non-Farm Payroll

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.

Is A Cycle Peak Coming Later This Year?

I don’t spend much time looking at market cycles, but it seems there’s an important one that’s peaking out later this year. Readtheticker.com is a site that spends a great deal of time looking at market cycles. One specifically that has been brought up is the Kitchin Cycle.

According to Business Cycles and Depressions:

The Kitchin cycle is a cycle in the level of economic activity with a period of about 50 months or 3.5 years. It is named after Joseph Kitchin, a British statistician who identified both minor cycles of 40 months and  major cycles of 7 to 10 years. [….] Kitchin examined monthly statistics on bank clearings, commodity prices, and short-term interest rates in the United States and Great Britain from 1890 to 1922. All three series apparently moved together through 40-month cycles.

I’ve re-created the Kitchin cycle on the chart below. As you can see, the past four cycle peaks have lead to bearish periods of trading. We have the 2000 tech bubble top, the flat/down year in 2004, the 2007 peak, and the mini-bear market in 2011. If history continues to repeat itself, then the next Kitchin cycle peak will be later this year around July to September.

cycleI’m by no means calling for a market top later this year. I’m simply presenting one piece of data and you’re free to make you’re own conclusions. I continue to let price dictate my bias and will watch the market internals for clues to potential weakness in the current equity up trend.

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.

Consumer Discretionary Sector Weakens

In this week’s Technical Market Outlook I noted that year-to-date the worst performing sector so far has been consumer discretionary ($XLY). The retail space as a whole has been under performing the market for several months now as traders have shown favor to the lower-beta sectors like utilities and health care. Today I want to focus on $XLY and the current chart setup.

In early March we saw the consumer discretionary sector put in a false break above its January high. Buyers were unable to maintain control as $XLY retreated back under $66 and continued to weaken from there. With the false break we saw a host of negative divergences take place. First, in the top panel of the chart below, we have the Relative Strength Index (RSI) which put in a lower high, a bearish divergence.

In the third panel of the chart I’ve included the Advance-Decline Line for $XLY. This tells us how the individuals stocks that make up the underlying index are performing. The Advance-Decline Lines rises when more stocks are heading higher than falling – which is a healthy sign of breadth for the sector. However, this did not happen with the Advance-Decline unable to find its January high, ultimately diverging from price.

When viewing a specific sector we want to see strong relative performance. That’s what the last panel of the chart shows. When the solid line is rising we know that $XLY is outpacing $SPY. But yet again, the ratio between these two ETFs made a lower high, unable to confirm the breakout in price.

xlyAll three of these metrics, momentum, breadth, and relative performance, have continued to weaken since the false breakout earlier this month. Traders do not seem to be showing signs of bullishness for this sector and with the latest price action, it doesn’t seem the mood is shifting anytime soon.

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.