Weekly Technical Market Outlook 2/2/2015

I was gone last week at the TD Ameritrade National Conference in San Diego but looks like it turned out to be an interesting week for the financial markets. While Volatility ($VIX) has expanded, I’m not seeing the same signs I normally do at past buy-able dips. For instance the number of stocks at new 52-week lows on the NYSE at the last S&P 500 October low was 617 and at the December low it hit 434, but this most recent dip has only seen 150 NYSE stocks hit annual lows.

January closed down by a little over 3%, making it the second consecutive monthly close lower since May 2012. Meanwhile, the 10-year Treasury Yield appears to be quickly approaching the 2012 low as January’s move nearly finishes erasing the rise in yield during 2013.

Trend
The trend of the S&P 500 ($SPX) is currently in a short-term period of consolidation while still maintaining its long-term up trend. Equities have retreated back to October ’14 levels while putting in a series of short-term lows near 2000 and a double top at 2060.

trend

Breadth
A few weeks ago we had, what turned into, a false break in the Common Stock Only NYSE Advance-Decline Line. Since then, stocks have been trying to find support near 2000 in the S&P 500 while the A-D Line has been able to create a slight series of higher lows over the last month. While the Percentage of Stocks Above Their 200-Day Moving Average is in a defined down turn, it too has put in a set of higher lows in January. Is this hinting at the direction equities will head in the coming weeks? We’ll see.

breadth

A Negative January
While many traders will likely look to January as an indicator for how the full year will turn out, I’ve already discussed the method that I prefer two weeks ago. Nautilus Research tweeted out the following chart which I found interesting. It shows previous periods where January has been negative following three positive years. As the table below the chart shows, of the seven prior occurrences only one follow year was able to squeak out a gain, which was still less than 1% at that.

Down January

Momentum
Coming into 2015 we had a bearish divergence in momentum which was followed by a false breakout in the S&P with stocks struggling ever since. However, like Breadth the Relative Strength Index has created a slight positive bias while the S&P continues to test 2000.

momentum

Financial Stress
Cris Sheridan at Financial Sense recently wrote an article showing the current bear case for equities. One of the charts Cris shows a compilation of the Federal Reserve Financial Stress Indices. You’ll see in the chart below that the indices have begun to rise after falling for the last several years. Three of the four Stress Indices are still below zero, while all four broke above the zero-line at the prior major market high in 2007. I’ll be keeping an eye on these sets of data and will be watching if they all continue to advance in the coming months.

financial stress

China
Like the U.S. equities did at the start of the year, Chinese stocks have created a potential false breakout on the weekly chart of the iShares China ETF ($FXI). This occurs after the Relative Strength Index (RSI) failed to confirm the breakout and put in a lower high, creating a bearish divergence. Volume also did not confirm the breakout with fewer shares being trading on positive days over down days as measured by the On Balance Volume indicator. Prior dips in $FXI have found support at the 50-week Moving Average. Will $FXI also end up declining back to its 50-week MA?

ChinaLast Week’s Sector Performance
Last week we saw the Materials ($XLB) sector as the best relative performer followed by Consumer Discretionary ($XLY) and Energy ($XLE). Technology ($XLK) and Consumer Staples ($XLP) were the worst relative performers for the week.

last week sector

Year-to-Date Sector Performance
While the S&P 500 finished in the red for January, Utilities ($XLU) and Health Care ($XLV) were able to pull out a gain for the month. While they had a rough last week of the month, Consumer Staples were still able to outpace the major index. Financials ($XLF) and Energy are the worst performers YTD.

YTD sector
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 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.