Weekly Technical Market Outlook 12/23/13

So we got the Taper. Many traders believe that’s the only sentence we would need in evaluating the market right now. All that’s apparently mattered has been the Fed and they have finally begun to ease off the gas pedal. Many expected, myself included, that equities would sell-off on the news of the Fed tapering their bond buying program. This acts as a great example of when the consensus is this strong, the market moves the other way. In this case we saw equities head higher. With that, lets dig into this week’s Technical Market Outlook.

Equity Trend

The S&P 500 ($SPX) continues to look good with the up trend still intact. We hit a new 52-week high on Friday with traders reacting favorably to the Fed’s taper announcement. The major indices (Russell 2000, Dow Jones Industrial, Dow Jones Transport, Nasdaq, S&P 500, and EAFE) all finished the week above their short-term (20-day), intermediate (50-day), and long-term (200-day) moving averages.

TrendEmerging Markets

While the above mentioned indices look favorable, emerging markets have been struggling. Below is a weekly chart of the iShares MSCI Emerging Market ETF ($EEM). I last discussed this chart in October and mentioned the levels of resistance that emerging market bulls needed to break. Since then we have tested both resistance levels, both of which failed. $EEM is now back at its 200-week moving average with Friday’s close resting a few cents under the level of support. The previous low was at $40 and we’ll see if trading this week takes us back to this level and if buyers are able to step back in to stop the bleeding.

Emerging MarketsEquity Breadth

In a previous Weekly Technical Market Outlook I noted I was watching the 60% level for the percentage of stocks above their 200-day moving average (bottom panel of the chart). Last week we saw a test and slight break of 60%, however we closed the week back above and finished at 63.7%.

In both breadth metrics, the Advance-Decline line and the percentage of stocks above their 200-MA, a short-term divergence is taking place as the equity market hits new highs and breadth has been unable to confirm. I’ve put a red dotted line to show the divergences on the chart below. I’m more concerned with what’s taking place in the Advance-Decline line since it’s helped confirm the up trend for the better part of 2013 while the % above 200-MA has diverged since May. If we see the S&P 500 ($SPX) continue to rise this week then I’ll be watching to see if the advance-decline line can at least takeout its November high to show some level of positive equity participation.

breadthMomentum

It seems the theme for the last several months has been for the equity market to hit a new high and momentum to diverge. This theme continued to play out last week as well. We saw the S&P hit a new high and the Relative Strength Index (RSI) make another lower high. Divergences are also taking place in our two other momentum indicators – MACD and Money Flow Index.

momentumS&P 500 60-Minute

Wednesday’s Fed taper announcement pushed the equity market above our short-term resistance level. While price action was strong, the MACD histogram (bottom panel of the chart) began to make lower highs as it diverged from price. Although this is slightly concerning on the short-term chart, we did see confirmation in RSI (top panel of the chart) as traders pushed the momentum indicator above 70 – showing a strong sign of bullishness. If the divergence in the MACD histogram does in fact win out I’ll be watching the previous resistance level of 1810 and see if it can hold up as potential support.

60min

Last Week’s Sector Performance

Industrials moved into the top spot last week as traders continued the ‘risk on’ rally. Materials also put in a good week after being the second strongest sector two weeks ago. Utilities continued to lag.

weekly performanceYear-to-Date Sector Performance

No change to YTD sector leadership last week, consumer discretionary (cyclicals), health care, and industrials continue to lead the pack. While utilities, materials, and technology are still the weakest performers for 2013.

YTD performanceSentiment

My friend Ryan Detrick, who I mentioned last week on the blog as well, is the Senior Technical Strategist at Schaeffer’s Investment Research and put up an interesting chart of short interest on his Tumbr page. The folks at Schaeffer’s spend a lot of time looking through a contrarian lens when doing their analysis of the stock market. Signs of large short interest is viewed positively since this is essentially built-in buyers for a market or individual stock. Last week Ryan discussed two charts of Total Short Interest, one of those charts is below (the other was for QQQ and can be found here). What’s surprising is the fact that while the S&P has been rising, so has the level of short interest. Ryan notes that normally we don’t see short interest this high except at market bottoms – not new 52-week highs! As the chart shows, the two previous times we saw short interest this high was at the 2011 and 2012 S&P 500 lows. Ryan makes the argument that the potential short-squeeze  could provide the fuel to send equity prices higher.

short interestMajor Events This Week

Not a lot of news coming out this week and it’s to be expected that volume will be relatively low as traders take time off for the Christmas holiday.

Monday: Chicago Fed National Activity
Tuesday: Durable Goods Orders and New Home Sales
Wednesday: Christmas (U.S. markets closed)
Thursday: Jobless Claims
Friday: None

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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.

About Andrew Thrasher, CMT

Andrew Thrasher, CMT is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.