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

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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.