Weekly Technical Market Outlook 4/14/2014

Selling continued last week with the Nasdaq taking the brunt of the damage being off 3.10%, the S&P 500 down 2.65%, and the Dow down 2.35%. While the selling continued into the final hours on Friday, it appears the selling was strongest on Thursday, where we saw a larger share of volume and issues declining compared to Friday. We closed out the week with the S&P 500 under its lower Bollinger Band. We saw this occur four times in January before the buyers stepped back in and took the equity index higher.  At the end of trading on Friday we had six of the nine S&P sectors trading under their 50-day Moving Averages, at the January low all but utilities were under their respective 50-day MA.

Equity Trend

With last week’s selling we saw the S&P 500 break through the level of support I highlighted last Monday as well as its 100-day Moving Average. We are still 15 points away from the up trend that’s kept many traders bullish for the last five months. If we see the S&P continue to fall, I’ll be watching this trend line as the next level of potential support.

Trend

Volatility Backwardation

On Friday I tweeted out a chart of the $VIX futures curve and mentioned that April prices were now trading at a premium to May and June, which puts the $VIX into backwardation. This typically happens when option traders become more fearful of short-term volatility than longer-term price swings and has been a fairly good indicator of short-term bottoms in the equity market. Below is a chart of the ratio between the one-month $VIX and the 3-month $VIX in histogram form. When a bar breaks above 1.0 we know that the 1-month is trading above the 3-month (i.e. backwardation).

BackwardationS&P SKEW

Sticking with our fear/risk theme, I noticed an interesting development in the S&P SKEW index. SKEW attempts to measure the ‘tail risk’ within the options market. As the chart below shows, we’ve seen spikes in SKEW prior to previous short-term declines in the S&P ($SPX). For instance we saw a break of 135 prior to the drop in 2012 and more recently we saw SKEW begin to rise again over 135 in December, January, and February. However, we did not see SKEW rise prior to or during the most recent bout of equity weakness. It does not seem that option traders felt this was going to be a 2+ standard deviation event – we’ll see if they were right.

SKEWEquity Breadth

The short-term up trend I’ve been discussing in the Advance-Decline Line has now been broken. While the S&P is under its March low, the A-D Line is still above its March low when looking at all NYSE issues. Although when we focus on just NYSE common stock, it has broken through its respective March low – confirming the weakness in the overall equity market.

equity breadthEquity Momentum

With respect to momentum, we are at an important juncture for the Relative Strength Index. For the duration of the 2013 and start of 2014 up trend the RSI indicator has held above the 35 level, which is the lower end of the bullish range for this momentum indicator. With selling on Friday the RSI is now at 38, just a few points above this critical level of support.

We had a momentum break support in January before buyers rushed back in and took stocks higher but did not push the RSI over 70, this was the first chink the bulls armor. If we see another break under 35, after the Relative Strength Index was unable to get into ‘overbought’ status then we may see the creation of a bearish range as the current short-term correction develops into something more serious.

Momentum

Crude Oil

With oil being in its historically bullish seasonality time period, it is also testing its falling trend line resistance. In March we saw oil drop and test its 100-day Moving Average, creating the lower end of a symmetrical triangle pattern. If price of crude oil can break this trend line resistance then we’ll also need to quickly see a break of the previous short-term high around $105.

Crude Oil

60-Minute S&P 500

In last week’s Technical Market Outlook I discussed the rising trend line off the February and March lows, which is where we had finished up trading two weeks ago. This level eventually broke and support became resistance when buyers attempted to regain control last Wednesday. This sent prices lower and the Relative Strength Index once again sits in ‘oversold’ territory as sellers overwhelmed buyers. We now have a lower-high as a down trend on the 60-minute chart is created. If we see buyers step back in this week then this trend line and the 50-1hr MA will likely be important levels to overcome.

60minLast Week’s Sector Performance

Utilities ($XLU) continued to lead last week with traders seeking shelter in the ‘risk off’ sectors of $XLU and consumer staples ($XLP). Interesting enough, health care ($XLV) was the second worst performer last week, largely due to its near 20% biotech weighting. Finally, financials ($XLF) was the worst relative performance sector last week.

Week Sector

Year-to-Date Sector Performance

I could pretty much copy and paste this portion of the Technical Market Outlook since it doesn’t seem to be changing very much this year. Utilities ($XLU) continue to lead while health care ($XLV) is still the second strongest, it’s lost much of its gain as biotech pulls it lower. Just three sectors are under-performing the S&P 500 YTD, with consumer discretionary (cyclicals) ($XLY) leading the pack of losers.

YTD Sector

Major Events This Week

This week we get another set of inflation data with the CPI report on Tuesday. Import and export data out of China has been weakening so it’ll be interesting to see what the Industrial Production numbers look like on Wednesday and if U.S. manufacturers are seeing any of the ripples from overseas.

Monday: Retail Sales
Tuesday: Consumer Price Index
Wednesday: Housing Starts and Industrial Production
Thursday: Jobless Claims
Friday: Market is closed

 

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.

The Best Traders in The World Miss Trades

One of the numerous benefits that are afforded to traders via Twitter, StockTwits, and blogs are different trading styles. Some traders use fundamentals and are more concerned with free cash flow than head and shoulder price patterns. Others may be trend followers who screen for breakouts and new highs with little concern for anything else. While others may seek patterns, cycles, sentiment, or major events that could move a market or security.

Each trader has their own way of viewing the market and by the use of social media you become exposed to tens if not hundreds of different trading styles. This can be a great way to learn but it also can toss you like a buoy in a storm.

You don't need to be this guy to be a successful trader

You don’t need to be this guy to be a successful trader

If you follow me on Twitter/StockTwits or read my blog (which I assume you do since you’re reading it now!) then you know I don’t post trade recommendations. Simply put, I do not write or tweet to make you money. Sorry. I write to express my views and provide (hopefully) unique chart setups that I find interesting or important. However, there are others on social media that post every entry and exit from a position. Some may follow that trader into a trade and others may sit ready to pounce when the trade goes wrong. I suppose that’s what makes a market.

No one trading style can catch every major move in the market. If you stick to fundamentals then you likely missed the momentum names in 2013 like Netflix and Tesla. If you look for mean reversion you also were likely disappointed in 2013 with few major dips to pick up. And if you weren’t concerned with extreme value in 2009 then Citi and Ford probably weren’t in your portfolio.

And that’s okay!

If you set the expectation level to ‘perfect’ then you might as well leave this business all together. The best traders in the world miss trades, and so will you. You’re suppose to. The idea of curve-fitting your strategy to pick up every winner, no matter if it’s an earnings pop, a momentum divergence, or a 3-week breakout is a fools game.

Developing a system or a process that works for you should take time and effort. Learning the psychology behind trading can be a critical and is often an overlooked step. Twitter, StockTwits, and trader blogs can be a great resource to learn and challenge your way of thinking. But understanding that you can not be the wearer of all hats and be successful in the long-term is critical.

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.

Are Internet Stocks Ready To Bounce?

With the recent period of weakness I’ve begun looking for some setups of markets testing support and showing signs of potential mean-reversion, and I think the First Trust Internet ETF ($FDN) looks interesting here. This is the topic of my post for TraderPlanet this week.

Here’s a piece:

I think the Internet index is showing a great example of a potential mean-reversion. On May 18, 2012 I wrote a blog post looking at the Average Directional Index (ADX), specifically the Minus Directional Indicator (-DI) that makes up half of the overall ADX indicator for the S&P 500. ADX is often used to measure trend strength and help forecast potential trend changes. I prefer to use it for signals of when a short-term trend may be overdone by monitoring the level of the -DI (the red line on the bottom panel of the chart below). Back in May ’12 the S&P was off by about 7% from its 2012 high but the -DI had broken above 40 which had previously marked an intermediate lows for the equity index. Price in fact bottomed and we saw an uptrend for the next four months.

Read the rest: Are Internet Stocks Ready To Bounce? (TraderPlanet)

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.