The Dow Jones Average’s Battle For New Highs

I apologize for the lack of content on the blog or on Twitter.  But I’m now back from vacation and while I had a great time spending last week with my wife’s family in New England, it’s always nice to be home. 

Even while the bears sound off on the volume last week, we saw the S&P ($SPY) trek higher and make fresh highs.  While volume can be an important tool, we’ve been seeing decreasing volume for nearly the entire bull market off the 2009 low, which makes it a tough bell to ring to signal the end of the run. As The S&P and Nasdaq continue marching, the Dow Jones Industrial Average ($DIA) remains under its prior high.

Those that follow Dow Theory, while among other things, look for the Transports and Industrials to confirm each other’s moves. Yesterday we had the Transports squeak out a new high on both a closing and intraday basis.

It’s not very much of a surprise that the Transports are attempting to set a fresh high while the Industrial Average remains a couple dozen points below its own. Since October 2012, the Transports have been outperforming its Dow counterpart.

Now that we’ve seen $TRAN breakout I’ll be watching if $INDU follows, as it has done for the bulk of the bull market. The Dow Industrial Average is close enough to its prior 52-week high that a divergence does not look likely, but we’ll let price confirm these expectations.

Dow

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 Seasonality is Secondary

Some great trades can come when different sets of data align themselves at the same time. I often look at and write about price, relative strength, Commitment of Traders (COT) report, and seasonality when viewing a sector or asset class. Seasonality can be a great resource for screening and finding the bullish and bearish periods of time based on historical. However, 2014 has been a great example of why we can’t rely solely on seasonality.

A few weeks ago I wrote about the breakout in price for the Internet sector ($FDN) which was happening during a bullish period seasonality. Since then we’ve seen $FDN continue to rise.

However, when we look at the overall U.S. equity market, seasonality hasn’t been as helpful. We came into this year with the 2nd and 3rd quarters being historically the worst quarters in the Presidential Cycle. Over the last three months the S&P 500 ($SPY) is up nearly 6%. Looking at one-year seasonality, May to October hasn’t been the stronger period of trading. But 2014 has seen new all-time highs even during this bearish timeframe.

If all we looked at was the historical seasonality of the market and used that solely as our bearish/bullish bias, then so far this year would leave us scratching our heads in confusion. However, price is what pays and must always be respected. Each week in my Technical Market Outlook post I start with the overall trend of the U.S. equity market and then take a look at breadth and momentum to understand the ‘health’ of the trend. This helps keep us honest and check our emotional bias at the door. While seasonality is currently saying we should have a bearish slant, price is saying something different which makes seasonality a secondary indicator.

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.

Emerging vs. Domestic Markets

The ratio between the iShares Emerging Market ETF ($EEM) and the SPDRs S&P 500 ($SPY) has produced some interesting setups this year. While $EEM hasn’t been the strongest performer YTD, by applying some methods of technical analysis we are able to get an idea of where strength may or may not show up.

From the peak in relative performance against $SPY last October, Emerging Markets underperformed for the next five and half months. During that time we saw the Relative Strength Index stuck in a bearish range, which supported the down trend in the ratio between $EEM and $SPY. While a positive divergence in RSI began to develop in January, the momentum indicator was unable to break above overhead resistance until late March. The break in momentum resistance also coincided with the break in trend line resistance for the price ratio. $EEM was able to then outpace the S&P 500 for the following month.

Starting in April we can see in the chart below that the ratio between emerging and domestic markets began making lower highs and higher lows. This creates a symmetrical triangle pattern. Oftentimes we see the resolution of this type of pattern to favor the previous trend. But what’s interesting about this particular triangle pattern is that it was formed after a ‘trend’ (if you want to call it that) that lasted just one month. is that really enough time to obtain the overall bias?

I’ll be watching to see which direction this period of consolidation breaks and whether Emerging Markets or Domestic markets are able to win out in the end.

EEM SPY

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.