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.

Weekly Technical Market Outlook 1/27/2014

Last Monday I didn’t write a complete Technical Market Outlook from the lack of price action. This wasn’t the case with last week as we saw the global markets bleed red with domestic markets get lead lower largely by the Transports ($IYT).

In Friday’s report, SentimenTrader noted that when the Transportation Average has closed down 3% or more after hitting a new 52 week high, the data is pretty bearish. Jason goes back to 1900 and there have been eight other instances of this occurring. The median loss one month later has been 4.2% and down 5.2% three months later with the index down a median of 15.3% six months later. Now it doesn’t mean that’s where we are headed but the historical data is definitely leaning bearish for the transport industry. While this is pretty gloomy there are some charts I want to look at that show we may have at least put in a short-term low as traders appear to have shown signs of capitulation.

With that, let’s dig into the important charts for this week…

Equity Trend

This is one of the things I find so interesting about technical analysis. With the panic selling that was taking place on Friday, we ended up closing just a few hairs above our 12 month trend line (green dotted line). Obviously we are now under the 20-day Moving Average (red line) and the 50-day Moving Average (not shown) but until we break the 2013 trend line and begin to see the creation of lower highs and lower lows, the current up trend remains intact.

SPX Trend90% Down Days

It’s often said that when we see 90% of the stocks traded (issues) and 90% of the volume down in a single day that this is a sign of capitulation. While we didn’t see 90% of both volume and issues down on Friday we did see 90% of volume and over 80% of issues lower.

The chart below shows past examples over the last two years where we’ve seen at least 90% of volume and 80% of issues down in a single day. You can see that the market reaction over the following couple of weeks/months has been fairly positive. Now if you were to extend the chart and look at the Financial Crisis in 2008, you’d seen this type of action almost on a daily basis and obviously didn’t lead to higher stock prices. Are we seeing the same type of deterioration in the financial markets as during one of the worst periods in recent history? Few would argue yes. So while it’s possible we see some continued weakness, it does seem, based on this set of data, as well as the 40% move in volatility ($VIX) that nearly every weak hand was folded as traders were quick to head for the exits in fear of losing their precious 2013 gains.

80 90

Equity Breadth

The selling on Thursday and Friday didn’t seem to have much impact to the Advance-Decline Line. While the S&P 500 ($SPX) is back to late-December levels, the A-D Line is nowhere near its December levels. The Percent of Stocks Above Their 200-day Moving Average however wasn’t as lucky. This measure of breadth is now back under the falling trend line but still well above the December low. While we saw some negative movement in breadth, it’s by no means signaling a breakdown in the equity market, at least not yet.

breadthEquity Momentum

While the past few weeks had been enough time for the Relative Strength Index (RSI) to catch up with the equity market and slightly break into ‘overbought’ territory, the negative divergence in the MACD held out and helped pull stocks lower last week. The RSI is now testing the lower level of its bullish range, and I’ll be watching to see if buyers are able to step in this week and push momentum, at least the RSI indicator, higher and keep it from getting ‘oversold’ by breaking under 30. We haven’t seen much movement in the Money Flow Index as it’s stayed fairly constant with a slight negative bias.

MomentumVolatility

Along the same lines as the charts above, we saw signs of excessive fear in the $VIX curve. Below is a chart of the ratio between the 1-month Volatility Index ($VIX) and the 3-month Volatility Index ($VXV). Typically we see the $VIX trade at a discount (read: less than 1) to $VXV. This is normally due to traders being more fearful of market events further in the future than in the current trading environment. However, when we see large swings in the $VIX that show traders paying higher prices for current protection compared to protection from volatility 3-months away it pushes the ratio shown on the chart above 1 (which is called backwardation). Historically we have normally seen a short-term bottom put in for the equity market on past instances of backwardation in volatility. You can see a few examples of this in the chart below, when the $VIX has entered backwardation the S&P 500 ($SPX) has rallied.

VIX backwardationBonds

Make sure you check out my post from last week where I discussed The Bond Chart I’m Watching Right Now.

S&P 500 60-Minute

The resistance I’ve been watching over these past couple of weeks has held strong as the Relative Strength Index (RSI) began to break down and create a slight negative divergence (lower high while $SPX tested the previous high) on the 60-minute chart. The RSI has now broken below 30 and is ‘oversold’. How long momentum stays ‘oversold’ could give us a clue to how strong the sellers are in keeping equity prices depressed.

60min chartLast Week’s Sector Performance

It’s to no surprise that we saw two of the low-beta sectors show relative performance strength (meaning how the sector performed against the S&P 500). Utilities ($XLU) and consumer staples ($XLP), while down on an absolute basis, lead the nine S&P sectors for the week. Materials ($XLB) and industrials ($XLI) were the weakest sectors for last week.

Last weeks perfYear-to-Date Sector Performance

While we haven’t had very much data to look at for our YTD performance, I think it’s still important to see which sectors are leading as we get into 2014. Like last year, health care ($XLV) continues to be the strongest sector for this year with utilities ($XLV) coming in a close second. Like in the weekly data discussed above, materials ($XLB) are the laggard for 2014 so far.

YTD performanceMajor Events This Week

These are the economic reports I think traders will be watching this week. The bulk of the news coverage will likely be around the FOMC announcement on Wednesday as well as the GDP data on Thursday.

Monday: New Home Sales
Tuesday: Durable Good Orders and Case-Shiller Home Price Index
Wednesday: FOMC Announcement
Thursday: GDP and Jobless Claims
Friday: None

Don’t forget to vote daily for my blog for the TraderPlanet Star Award – Click here to vote!

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.

Fear by Large Institutions Hits Historic Levels

Many of you are familiar with the event that took place in 1987, now known as Black Monday, when stock markets across the globe crashed. The CBOE credits the 1987 drop with waking investors up to the idea of market crashes and how we view ‘tail risk’ within the options market. The most common tool used to measure fear in the options market is the Volatility Index ($VIX). The $VIX measures the implied volatility of the S&P 500 over the next 30-days. When the $VIX is low, it’s perceived that traders have become complacent, meaning they are not fearful of a market correction over the next 30-days.

While the $VIX measures ‘likely’ moves within one standard deviation for the S&P, it does not capture what traders are pricing in for ‘tail risk’ or 2 to 3 standard deviation returns below the mean. This is where the Skew Index comes in. Skew measures pricing activity for out-of-the-money options. A trader who expects an abnormally large swing in the equity market could use these out-of-the-money option contracts to hedge or profit from the move. Large institutions make up the bulk of the options market, which can imply that the Skew Index is a way to measure institutional fear of tail risk.

If this is true, then it appears institutions have begun growing increasingly fearful of a subnormal swing in the market.  Below is a chart of the Skew Index, with the S&P 500 ($SPX) on the top panel and the Volatility Index ($VIX) on the bottom panel.  I’ve put a dotted blue line on the Skew chart to show the current level, as you can see over the last 15 years we’ve only had investors this fearful of tail risk one previous time – March of last year.

It’s interesting to note that while the Vix has fallen to a historically low-level, indicating the market has become somewhat complacent, large investors are showing an increase in the fear of tail risk within the S&P 500.

skew

If you spend time looking more closely at the above chart and the previous high levels in the Skew Index, you’ll notice they often come during short-term market peaks. What’s interesting to note however is that the 2000 and 2007 highs both were put in with low levels in Skew and the Vix. As I’ve stated in previous posts, seasonality right now is bullish, but this large move in institutional fear is interesting and something I’ll be watching in concert with other market internals going forward.

You can learn more about the Skew here: Introduction to CBOE SKEW Index (CBOE)

Don’t forget to vote for my blog for the TraderPlanet Star Award – Click here to vote!

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.