Weekly Technical Market Outlook 6/30/2014

I hope everyone enjoyed their weekend. I had another BBQ competition while we didn’t score as well as I would have thought, we still had fun and it was great spending time with friends and family and making some (what I thought!) great BBQ.

We finished up trading last week pretty much flat, with the S&P 500 ($SPX) down just 0.10%, the Dow off 0.56%, and the Nasdaq up 0.68%. All nine S&P sectors are also above their respective 50-day Moving Average as of the close on Friday.

I found it interesting that on Tuesday we saw the TRIN Index get up over 2 after just a single day of in the red. TRIN is a short-term breadth indicator that divides the Advance-Decline Ratio by the Volume Advance-Decline Ratio, a push to over 2 like we saw on Tuesday is often caused by a large move in selling volume as measured by the Volume Advance-Decline Ratio, this often equates to the market being short-term ‘oversold’ and followed by a bounce.

Equity Trend

During the one day-sell off we saw the S&P 500 test its 20-day Moving Average as it bounced and finished the week essentially where it started. The equity market remains in a clear up trend.

Volatility

Ryan Detrick, a great trader, a friend, and a must-follow on Twitter/StockTwits posted this interesting chart of the performance for the Volatility Index ($VIX) going back to 1990. Ryan noted that July has produced the largest percentage change in the VIX, with an average move of nearly 9%. This is interesting since it occurs after June has produced a negative average change. After July we see that the Volatility Index historically remained…volatile, with August and September also showing high levels of movement. Does this mean we see a spike in the VIX off its current low-level? Maybe, maybe not. But I do find this study interesting and worth noting. Ryan is always posting interesting stats like this, so make sure to give him a follow.

Equity Breadth

Last week saw some nice confirmation in the Common Stock-Only Advance-Decline Line as it neared another new high. The Percentage of Stocks Above Their 200-day Moving Average made an attempt to break above its April high but was unsuccessful.  At this point, breadth still looks bullish.

Equity Momentum

Momentum produced some interesting action last week. If you’ve been reading my blog for very long you know I often look at the Relative Strength Index (RSI), primarily looking for divergences. Last week I saw a couple of people posting a chart of the S&P 500 and highlighting the lower high in the RSI indicator. While it did in fact make a lower high as the S&P made a higher high, the lower high in the RSI was still above 70 and indicating strong momentum. This isn’t the type of divergence that I believe can lead to lower prices. In my opinion, if the RSI is able to get above the ‘overbought’ 70 level, it still remains bullish. This doesn’t mean that a lower high in the RSI indicator while over the 70 level can’t be followed by a drop in price, it’s just not the method I chose to follow.

It’s when price action advances and momentum is unable to regain the ‘overbought’ status after a previous occurrence that I begin to grow concerned. This doesn’t mean the way I view the RSI indicator is the right way, there are plenty of ways to skin a cat, but I wanted to share my viewpoint on this topic.

So with that, I still view momentum for the equity market as favoring the bulls. The MACD indicator saw a hit of its previous high and as I stated above, the RSI was able to kiss the 70 level before dropping back down, showing that buyers are still giving favor to higher prices in the S&P 500.

U.S. Treasury’s

U.S. 10-year Treasury’s rose 0.56% last week, pushing the yield on the 10-year down to 2.53%. I’ve written before that I believe the Treasury yield ($TNX) is currently in a bearish range for momentum, and last week’s movement helped confirm that. In the top panel of the chart below we have the Relative Strength Index (RSI) and a blue trend line highlighting resistance.

We can see that after the 10-year Treasury yield’s RSI broke 30 back in January, momentum has been unable to get back above 60. Constance Brown wrote in her book, Technical Analysis for the Trading Professional, that the RSI tends to trade in an either a bullish or bearish range, with the bearish range being between 65 and 20.

The 10-year Treasury yield remains in a down trend as it creates a series of lower highs and is approaching previous support at 2.45%. Many traders continue to watch the 2.45% and 2.40% as critical support for bond yield and if broken, could take yields much lower. Of course, we’ll let the price action lead the way and we’ll see how far things can go if they do in fact break lower. However, based on momentum it appears the bulls remain in control when it comes to Treasury bonds.

60-Minute S&P 500

The trend on this short-term chart of the S&P 500 ($SPX) remains positive, while we are getting some conflicting information from our two momentum indicators. We closed out trading with price breaking back above the 50-1hr Moving Average. The RSI is not showing signs of a divergence while the MACD is. I’ll be watching the blue trend line on the price chart below and see if the negative divergence in the MACD is confirmed or if price continues higher and makes a new high.

Brazil

The iShares Brazil ETF ($EWZ) has had a great run off its February low, gaining 30% in just a couple months.  However, with its attempt at a new high in June some storm clouds have begun to gather over the host of the World Cup.

In April we saw the RSI momentum indicator break above, and stay above, the ‘overbought’ level of 70 and we also saw a kiss of 70 in May. But with this latest advance momentum has begun to weaken – creating a negative divergence with price.

When we look at the relative performance against global equities (excluding U.S.) and against the S&P 500, Brazil has created lower highs in both relative performance charts. This is a sign that things may not be as on fire as they were in the massive jump that’s took place earlier this year.

If $EWZ is unable to break its current double top at $49 then I’ll be watching to see if price is able to hold its rising trend line right around $47. We can also use the previous low in the RSI indicator as a potential sign of support on any future weakness. If the momentum indicator drops down to 39 I’ll be looking to see if this level can act as support.

Last Week’s Sector Performance

For a change in pace last week we saw the Consumer Discretionary ($XLY) sector take the spotlight as the best performing sector. Utilities ($XLU) were closer behind in second, and Technology ($XLK) and Health Care ($XLV) rounded out the top four. Industrials ($XLI) and Consumer Staples ($XLP) were the worst relative performers last week.

Year-to-Date Sector Performance

Not much as changed on the YTD performance chart. Utilities remain the best-performer followed by Energy ($XLE) and Health Care. While they had a good week last week, Consumer Discretionary are still the worst performing sector year-to-date followed by Financials ($XLF).

Last Tuesday I wrote a post called Is The Energy Sector Due For a Pull Back?, while $XLE is down from when I published the post, I’ll be watching to see if this sector continues to weaken or if the energy sector can keep the party going.

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.