Weekly Technical Market Outlook 12/29/2014

Welcome back. I hope everyone had an enjoyable Christmas and was able to spend time with family and friends. While trading was a shortened week, the major indices were able to continue their drift higher.

Trend

Of course with the march higher in the S&P 500 ($SPX), the trend remains positive. While we often draw trend lines connecting lows, the chart below shows a trend line connecting the highs over the last year. You’ll notice we are bumping up against this level of potential resistance. We’ll see if traders deem this important based on the price action we see this week.

trend

Breadth
One of the biggest developments that took place last week was the final confirmation in the Common Stock-Only Advance-Decline Line. I had been discussing the divergence in this measure of breadth for the last several months. I’ve noted that the bulk of the other large-cap Advance-Decline Lines had already confirmed. We also saw the small-cap and mid-cap A-D Lines hit new highs as well. The Percentage of Stocks Above Their 200-day Moving Average while making improvement, remains in an established down trend.

breadth

Santa Claus Rally
Many traders have been tweet, writing, and discussing the historical seasonal advance in stocks, dubbed the “Santa Claus Rally.” Ari Wald, who serves as the Head of Technical Analysis at Oppenheimer wrote an article on the subject for The Technical Analyst. Ari turned his focus away from the crowd’s focus of how great Santa is for stocks and looked at what if Santa doesn’t show up. He writes, “However, performance in the next 1 to 2 quarters has tended to be below average when the S&P 500 closes lower during the SCR. For instance, the S&P 500 has averaged a 1.4% loss and a 0.6% loss in the subsequent 3 and 6 months, respectively, following a negative SCR, versus an average 2.8% gain and 5.3% gain, respectively, following a positive SCR.”

So while traders will be disappointed if they don’t get the juiced up gains many are expecting this week. It seems they take out their frustration on stocks during the following couple of months.

santa clauss

Momentum
While breadth has now confirmed the rally in stocks, momentum continues to show a bearish divergence. The Relative Strength Index ans the MACD indicators remain below their prior highs. This isn’t that surprising since the bulk of the bounce off the December low spanned just a couple of days. It’s tough for indicators like the RSI and MACD to snap back as fast as price as, which is why this current divergence is not a huge concern to me at the moment. However, as I wrote about on Dec. 18th, the longer-term view of momentum still favors the bulls.

momentum

Is January Dangerous? 
Dana Lyons, who I’ve mentioned a couple of times on the blog, has continued to produce some great charts and tables. Recently Dana showed this table that goes back to 1900 and marks the number of highs and tops seen in the Dow. You’ll notice that December has seen the fewest short-term (3 month) peaks while January has seen the most short-term and longer-term (12 month) highs going back to 1900. We often hear that October is one of the most ‘dangerous’ months for stocks but Dana’s data shows that it’s actually January that’s seen the most bearish turning points for stocks.

January Dana

Last Week’s Sector Performance
While a shortened week, Utilities ($XLU) remained the best performing sector relative to the S&P 500. Consumer Discretionary ($XLY) which has not had a great year was the second best performing sector followed by Technology ($XLK). Health Care ($XLV), likely lead by biotech, had the worst week, giving reprieve to the Energy Sector ($XLE) for once, which was the second worst performer.

sector week

Year-to-Date Sector Performance
Utilities, Health Care, and Technology remain the best performing sectors relative to the S&P YTD. As oil prices have continued to decline the Energy Sector remains the worst performer.

Sector YTD
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.

Which Sectors Are Leading the Market?

With the increase in volatility over the last several weeks, I think it’s time to check back in on sector relative performance. While the U.S. equity market as a whole has gotten rocked since it’s August/September high, understanding what the underlying sectors are doing and what’s leading can be a great tool to stay in control. Over the last 30 days, the S&P 500 has lost 3.5% of its value, Utilities ($XLU) and Consumer Staples ($XLP) are actually positive and the Energy sector ($XLE) is down over 10%. While the S&P 500 ($SPY) often garners the most attention, we can’t lose focus of the nine S&P sectors that make up the index.

Health Care ($XLV) has been a consistent leader this year, spending the bulk of the last 30 weeks in the ‘Leading’ category of the Relative Rotation Graph (shown below). The Relative Rotation Graph (RRG) plots the sectors using their the trend of their relative performance against the S&P 500 as well as the momentum of that trend. Historically the sectors have moved in a clockwise fashion as they go in and out of favor relative to the index and as the momentum of their relative performance rises and falls as well.

About three weeks ago we saw that the Technology sector ($XLK) began to turn lower but remained in the ‘Leading’ category. Since then, and over the last several weeks, this once leading area of the market has shifted into the ‘Weakening’ category throttled by the decline in the momentum of its relative performance.

It’s also important to note the strength out of Financials ($XLF), and Consumer Staples. In a post on September 29th I highlighted the ratio between $XLP and the S&P 500, which was seeing a bullish divergence in momentum and ultimately led to the defensive sector outpacing the market for the last several weeks. Energy ($XLE) has continued to sink deeper into the depths of the ‘Lagging’ category with the momentum of its under-performance intensifying.

RRG chart

2014 has seen the theme of defensive strength with Utilities, Health Care, and Consumer Staples, leading the way for the bulk of the year. This likely worries equity bulls as traders steer away from the higher beta components in favor of the perceived safer sectors.

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 2/17/2014

I hope everyone had a good weekend. With today being President’s Day, we have a shorted trading week with U.S. markets being closed today. It was nice to see the equities move back to the green last week, with the S&P 500 ($SPX) finishing up a little over 2% and small caps ($IWM) up nearly 3%. I’ve decided to add a new ‘section’ to this weekly post, focusing on one specific sector. This week I’ll be taking a look at the tech sector and digging into its daily chart.

Equity Trend

You’ll notice I’ve re-drawn the trend line that we’ve been monitoring since I started writing the Weekly Technical Market Outlook. Previously we had been using a trend line that began at the start of 2013. However, with the bout of weakness we had to kick off 2014 I feel an adjustment needed to be made to better reflect recent price action; so I’ve redrawn the green dotted trend line to connect the June ’13, October ’13, and February ’14 lows.

Last week’s strength pushed the S&P 500 back above its 100-day and 20-day moving averages and got within spitting distance of a new all-time high.

Equity TrendEquity Breadth

During the recent dip in equity markets I noted that the Advance-Decline Line was not reflecting the selling pressure that had taken over the airwaves of major financial networks. This was one of the first potential clues we got that the it may just be a short-lived drop and not the beginning of something more protracted. Well with stocks rallying back near new highs, the Advance-Decline Line has already broken above its January high – a positive sign for equity bulls.

Turning the focus to the Percentage of Stocks Trading Above Their 200-day Moving Averages, this measure of market breadth has broken out of the triangle we’ve previously discussed; and as of Friday is now in a range between 72.5% and 55%. If buyers remain in control, then we’ll likely break out to the upside as more stocks retake their 200-day moving averages. While this measure is still not confirming the price action in the S&P, at this point, breadth continues to favor the bulls.

Equity MomentumEquity Momentum

This chart of momentum for the S&P 500 ($SPX) is what worries me most about the current up trend. In August and November of last year many technicians, myself included, showed concern for the divergences in the Relative Strength Index (RSI) as price headed higher and this measure of momentum refused to confirm. After both instances we saw price continue higher, as trader’s appetite for stocks refused to shown concern for weakening momentum.

Well now once again as the S&P approaches new highs, we will likely have another negative divergence in the RSI indicator. The one note to make here is that this divergence is more pronounced on the daily chart than the previously mentioned ones last year.

If we were to zoom out and look at the weekly chart (not shown), we can see a negative divergence is also developing within momentum there as well. During the current bull market, we’ve seen this lead to varying lengths and severity of corrections – the 2011 drop, as well as the two corrections in 2012. We’ll see if traders continue to beat the drum to the 2013 theme song or if we see a repeat of 2011 and 2012 with prices confirming the bearish tone in the Relative Strength Index. Equity MomentumSector Spotlight – Technology

As I mentioned in earlier, I’m adding a new ‘section’ of the Technical Market Outlook to focus on a specific S&P sector. This week I want to discuss the Technology sector ($XLK). The chart setup may look a little different from what I normally discuss on the blog, so bear with me as I discuss whats being shown. In her book, Technical Analysis for the Trading Professional, Constance Brown discusses using Bollinger Bands around the RSI indicator as another layer of momentum analysis. Brown talks about when the RSI line spends a protracted period outside of the bands and how this can lead to bounces (when under the lower band) if the RSI line comes back within the bands and tests the previous low or sets a new low while still inside the bands. I’ve put a red circle around this happening for $XLK at the end of January and lead to a strong move to a new high.

As I noted for the S&P 500, we are not seeing confirmation in momentum (via the RSI indicator) of the new high in tech, which can be resolved as a matter of price change or time if buyers continue to push this ETF higher, or we could see price turn lower and put in a false break. We’ll see what happens.

In the panel directly under the price chart I’ve included the Advance-Decline Volume line for $XLK. We can see confirmation in this measure of breadth (which takes into account volume compared to the Advance-Decline Line I use in the ‘Breadth’ Section above that just looks at price).

Finally, in the bottom panel we have the relative performance of $XLK compared to the SPY 500 ($SPY). I use a 50-day Moving Average with this ratio to get a better idea of the trend in relative performance. After being in a period of consolidation where $XLK moved with the overall equity market from August until December, for the last two and half months it has shown signs of strength as traders have begun to once again show favor for the technology sector.

XLK

60-minute S&P 500

The positive divergence in the MACD and RSI indicators I discussed last week were confirmed as price headed higher and began making higher highs. This week we’ll be watching to see if the previous high at 1850 can be taken out. The Relative Strength Index once again finished the week in ‘overbought’ territory, a sign of strong appetite for stocks. Outside of a major news event I would be surprised if we didn’t at least test 1850 this week. If price consolidates or weakens I’ll be watching the recent low in the RSI as shown by the solid blue line on the chart below.

60 min SP500Last Week’s Sector Performance

The energy sector ($XLE) was able to dethrone utilities ($XLU) as the leader in weekly relative performance last week. Financials, which had previously been showing strength, finished out last week as the worst performing sector.

Weekly SectorYear-to-Date Sector Performance

Taking a look at how the nine S&P sectors have done YTD, utilities ($XLU) continue to lead the pack, followed by health care ($XLV) and technology ($XLK). While energy ($XLE) was the leader for the last five days, its performance was not strong enough to take it out of last place year-to-date.

YTD SectorMajor Events This Week

While this is a shortened trading week, the theme will likely be inflation as we get two major measures on Wednesday and Thursday with PPI and CPI data.

Monday: U.S. Markets Closed
Tuesday: Housing Market Index
Wednesday: Housing Starts and Producer Price Index (PPI)
Thursday: Jobless Claims and Consumer Price Index (CPI)
Friday: Existing 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.