Weekly Technical Market Outlook 5/19/2014

The S&P 500 finished the week essentially flat, down just 0.03% while the Dow was off by 0.55% and the Nasdaq was able to pull off an almost half a percent gain for the week. Just two sectors closed under their 50-day Moving Average: Financials ($XLF) and Consumer Discretionary ($XLY).

While the equities market started to weaken after hitting new highs, we did not see the Volatility Index ($VIX) futures curve switch from contango to backwardation. Meaning, traders were not showing an increase in fear by creating a premium in front-month $VIX contracts compared to longer-dated contracts. For example, we saw the $VIX enter backwardation at the April ’14, January ’14, October ’13 lows. On Weds. I tweeted and on Thursday morning I wrote a post that we may see a spike in Volatility. During trading on Thursday we saw the Volatility Index advance by 12%, only to givemost of it back on Friday. I’m curious if we see more volatility enter the market and if the $VIX repeats its pattern of backwardation before stocks rally, or if that tiny dip was the extent of the selling. We’ll see.

Equity Trend

With last Friday’s strong bounce we finished the week relatively flat, which has kept us in this period of consolidation for the S&P 500 ($SPX). The January high of 1885 is still above us and needs to get taken out for the bulls to keep the train chugging back up to 1900. However, with the lack of lower lows we are still in an up trend.

Trend

Equity Breadth

Last Monday I discussed the double top we were seeing in the Advance-Decline Line (common stock only) as the S&P hit a new high. While the A-D Line retreated, it did not make a lower low, keeping the up trend in breadth intact. Although, when we look at the Percentage of Stocks Trading Above Their 200-day Moving Average, we did see it drop below the April low for a day before trying to reclaim the level on Friday.

breadth

Equity Momentum

Not much has changed in momentum for the S&P. The negative divergence in the Relative Strength Index is still with us, as is the divergence in the MACD.

Momentum

Bonds

I can’t do a post without including a chart of the 10-year Treasury Yield ($TNX) after its strong move recently. As stocks weakened last week we saw bonds have a fairly a nice rally. The 10-year Yield broke under a support level many traders had been watching and tested the October ’13 low. While many traders were positioned and calling for higher yields, the market rarely gives them what they want and last week was a great example of this. It’ll be interesting to see if yields rebound and get back above 2.6% or if bond bulls maintain control and push them back through the prior low.

10yr yield

Gold

While gold ($GC_F) had a great start to 2014, it’s begun to consolidate over the last couple of weeks. The 50-day Moving Average has been acting as resistance while the trend line off the 2014 previous lows has helped provide support. As we approach the apex of the two blue trend lines we will see a break, it’s just a matter of in which direction. Looking at the Relative Strength Index for a clue, the level of resistance (shown by the red box) that plagued gold for nearly all of 2013 appears to be back in play.

When looking at the seasonal trends in gold, we historically have seen a period of weakness begin in the latter-half of May. So if the bulls are not able to regroup soon, they will be facing a tough period of seasonality along with the above mentioned levels of resistance in price and momentum.

Gold

60-Minute S&P 500

As the S&P hit a new high two weeks ago we saw the negative divergence in the Relative Strength Index break as the momentum indicator kissed the 70 level. However, the divergence is still present in the MACD indicator. With Friday’s rally we can begin to draw a trend line off the higher low, which could act as potential support on any future short-term drops. As I mentioned on the Equity Trend section, 1885 is still a critical level for the index to contend with. With each attempt to break higher, including the momentary new high, we are able to work off more supply at 1885, which is bullish for stocks.

60min

Last Week’s Sector Performance

For the third week in a row we saw the Utilities ($XLU) sector under-perform the S&P 500. While it started off the year as a leader, we are beginning to see some deterioration in the relative performance for this defensive sector. Technology ($XLK) was the best performer last week, followed by Health Care ($XLV) and Materials ($XLB). The worst performers were Financials ($XLF) and Consumer Staples ($XLP).

Week Sector

Year-to-Date Sector Performance

While Utilities weakened in relative performance last week, it still remains the best performer YTD. Followed by Energy ($XLE) and Health Care. Consumer Discretionary ($XLY) and Financials still remain the only two sectors to be under-performing so far for 2014.

YTD Sector

Major Events This Week

This is a pretty light week for economic releases. We get the FOMC minutes on Wednesday and a couple pieces of housing data later in the week. With a lack of economic data to move the market we’ll get a better idea of the risk appetite for stocks as traders are allowed to focus more on the price action and internals and less on gov’t reports.

Monday: None
Tuesday: None
Wednesday: FOMC Minutes
Thursday: Jobless Claims and Existing Home Sales
Friday: New Home Sales

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.

Preparing For A Potential Spike in Volatility

Yesterday I tweeted that I thought we were getting ready for a fairly decent size move in the Volatility Index ($VIX). As we turn into the bearish six months of the year based on the seasonality studies done by the Stock Trader’s Almanac and with the $VIX sitting near $12 it’s not hard to imagine that we may be “due” for some volatility in the equity market. But there is one chart that is making me think this possibility seems more likely based on past instances.

Below is a chart that will take some explaining. If you’ve been reading my blog or following me on twitter for very long you likely know that I’m constantly looking at relationships between varies markets. Whether it’s different sectors, asset classes, commodities, or bond duration, I’m always looking to see how markets are interacting with one another.

The chart I want to discuss today is the relationship between the Volatility Index ($VIX) and the 10-year Treasury Yield ($TNX). I’m not concerned with the absolute level of this ratio but its respective width of the Bollinger Bands. Bollinger Bands show the standard deviation of a stock’s (or in our case a ratio) price movement. John Bollinger, the creator of the Bollinger Bands, has found that low periods of volatility are often followed by high periods of volatility. This can be shown by the width of the Bands as they widen and contract, which is what’s shown in the top panel of the chart.

Currently the Bollinger Bands for the ratio between the $VIX and the 10-year Yield has fallen to previously historic lows. I’ve marked dotted blue lines to show past instances where the width of the bands has been near the current level. On the bottom panel of the chart we have the price movement of the $VIX itself. As you can see, when the Bands width for the ratio has been this tight, its lead to quick moves to protracted long advances in volatility. For example, we saw the Bands contract in late January of this year before the $VIX spiked nearly 40%.

Like most forms of intermarket analysis, we can use this relationship and the chart below to begin looking for setups in the $VIX; however, this alone does not necessarily pinpoint a low in the Volatility Index. We may still see some downside or choppy action before a potential large move in Volatility takes place. But if history does in fact repeat, or as Mark Twain once said, “history does not repeat itself but it often rhymes” then we may be in for a bout of volatility in the coming days or weeks.

VIX TNX

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 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.