June 2014 – Andrew Thrasher

Weekly Technical Market Outlook 6/30/2014

Posted on June 30, 2014 by Andrew Thrasher, CMT

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.

Is The Energy Sector Due For a Pull Back?

Posted on June 24, 2014 by Andrew Thrasher, CMT

The Energy Sector has been one of the best performing sectors in 2014, with the Energy Select Sector SPDR ETF ($XLE) up over 15%. The turmoil in Iraq has helped add fuel to the fire for the bullish case for this sector. However, with this large move in price, it appears the proverbial rubber band has become overextended.

Below is a chart of $XLE going back to 1999, when the ETF began trading. In the top panel we have the daily Relative Strength Index (RSI), which is a momentum indicator. The energy ETF has never had RSI hit this high of a reading. While ‘overbought’ readings are themselves a sign of strong bullishness, when they get to these extreme levels I begin to grow a little concerned.

In the bottom panel of the chart we have the MACD indicator, but I’ve set the parameters for us to be able to see how far price has gotten from its 200-day Moving Average. As of the time of this writing, $XLE is 13% above its 200-MA, which has only occurred two previous times: 2008 and 2011 – right before we saw weakness enter this sector.

I’ve also drawn a trend line connecting the 2000 and 2011 peaks. Price is just a few hairs under this line, which may act as resistance if the bulls try to push things further. Finally, based on data from the Stock Trader’s Almanac, the bullish period of seasonality for crude oil ends at the start of July. So as of next week, crude oil, which has helped drive $XLE higher, will no longer be in a favorable period of seasonality.

With all of these factors, it seems we may see a period of mean-reversion for the Energy Sector as price consolidates or weakens. Looking at the two prior instances were $XLE had gotten this far above its 200-day MA, price eventually corrected back to the long-term Moving Average and exceeded it before finding an eventual low point. We can’t know if that’s what will happen here, but I’ll be watching to see if we at least get a test of the 200-day in the coming weeks/months. We’ll see where price takes us.

This post originally appeared at See It Market.
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 6/23/2014

Posted on June 23, 2014 by Andrew Thrasher, CMT

I don’t have a full Technical Market Outlook post today because not much has changed in the current market environment. The trend is still positive, momentum is still bullish (although slightly overbought on the daily, weekly, and monthly charts), and breadth continues to confirm the new highs put in for the equity market.

I remain bullish on stocks for the next couple of weeks until about Mid-July when some important cycles begin to peak. At that point I’ll start looking to see if there are other signs that are showing a bearish bias, but until then it’s hard to get overly negative at these levels based on market internals. There of course is still the concern of the conflict in Iraq and between Russia and Ukraine, but luckily that’s not really on my radar as a technical trader.

We’ll be getting margin debt data for May this week, so I’ll be watching to see if debt continues to weaken and diverge from the advance in equities. If we do get a third print lower for May it wouldn’t be surprising to see traders shed some risk based on the historical trend of a weakening margin debt figure in the face of an up trend in stocks pulling prices lower.

I’ll probably have some other posts up later in the week so be sure to check back then.

Emerging vs. Domestic Markets

Posted on June 20, 2014 by Andrew Thrasher, CMT

The ratio between the iShares Emerging Market ETF ($EEM) and the SPDRs S&P 500 ($SPY) has produced some interesting setups this year. While $EEM hasn’t been the strongest performer YTD, by applying some methods of technical analysis we are able to get an idea of where strength may or may not show up.

From the peak in relative performance against $SPY last October, Emerging Markets underperformed for the next five and half months. During that time we saw the Relative Strength Index stuck in a bearish range, which supported the down trend in the ratio between $EEM and $SPY. While a positive divergence in RSI began to develop in January, the momentum indicator was unable to break above overhead resistance until late March. The break in momentum resistance also coincided with the break in trend line resistance for the price ratio. $EEM was able to then outpace the S&P 500 for the following month.

Starting in April we can see in the chart below that the ratio between emerging and domestic markets began making lower highs and higher lows. This creates a symmetrical triangle pattern. Oftentimes we see the resolution of this type of pattern to favor the previous trend. But what’s interesting about this particular triangle pattern is that it was formed after a ‘trend’ (if you want to call it that) that lasted just one month. is that really enough time to obtain the overall bias?

I’ll be watching to see which direction this period of consolidation breaks and whether Emerging Markets or Domestic markets are able to win out in the end.

Weekly Technical Market Outlook 6/16/2014

Posted on June 16, 2014 by Andrew Thrasher, CMT

I hope everyone had a good weekend. We’ve been having great weather here in Indianapolis, which has been nice after the awful winter we went through. It’s great to enjoy the summer before it gets too hot.

Last week I mentioned that my mean-reversion indicator had 75% of its components flip negative. While we didn’t see aggressive selling, the S&P 500 ($SPX) finished the week down 0.68%, the Dow ($INDU) was off by 0.88%, and the Nasdaq ($QQQ) fell just 0.54% last week. Normally this bearish of a reading on this indicator is followed by larger drops in the equity market, so while this doesn’t dictate a larger move, I’ll be watching to see if selling pressure increases this week or if the bulls are able to regain control.

Trend

While we saw a small period of selling last week, it was less than 1% and the equity market’s up trend is still intact. I’ve added a short-term trend line to our chart below that connects the April and May lows. This could act as potential support if selling continues this week.

Breadth

Like trend, the selling last week did not do much damage to the internals of the major indices. Both of our breadth measures are still well off their lows and continue to be in long-term and short-term up trends.

Volatility

The extremely low-level in the Volatility Index ($VIX) has garnered a great deal of attention lately and probably rightfully so. Tom McClellan wrote an interesting piece last week looking at prior market highs and the corresponding level of the $VIX. Tom states, “A low VIX is a sign of option trader complacency, and complacency is a problematic sign for the market which can lead to a price decline. But when the VIX gets really REALLY low, the message changes. Sure, it is a sign of an absence of worry, and a correction is possible. But the really big price tops do not appear when the VIX is this low.”

Tom continues to discuss how in 2000 and 2007 the Volatility Index climbed from extremely low levels to an area closer to 16 when the equity market peaked. I’d also point out that while not an ‘official’ bear market, the intermediate top in 2011 was also accompanied by a $VIX reading of around 16, not an extreme low like we are seeing now.

So while yes we’ll most likely see a rise in volatility eventually, history has shown that this low of a reading in the $VIX has not marked recent significant market highs.

Momentum

Last week I wrote about the ‘overbought’ reading in the Relative Strength Index, this has now been worked off as price has weakened slightly. While ‘overbought’ readings can bring short-term weakness, it also tells us that there is a healthy amount of buying taking place in a market as momentum gets pushed up to these historically high levels – a bullish long-term sign. The MACD indicator hit its prior high and bounced lower and the Money Flow Index, like the RSI, worked off its ‘overbought’ status last week.

June Options Expiration Seasonality

I’m a big fan of the Stock Trader’s Almanac as a great resource of historical market data. Recently Christopher Mistal wrote on the Stock Trader’s Almanac Blog about the bearish seasonality that occurs around June options expiration week. The one portion of his post that really stood out to me was: “The weeks after Triple-Witching Day are horrendous. This week has experienced DJIA losses in 21 of the last 24 years with average losses of 1.1%. S&P 500 and NASDAQ have fared slightly better during the week after over the same 24 year span, declining 0.8% and 0.2% respectively on average.”

87.5% of the last 24 years have seen down week’s following June expiration week! That was pretty surprising to me. The table below shows you each year’s performance surrounding this specific time period going back to 1982.

60-Minute S&P 500

Not much to discuss on the intraday chart for the S&P 500. We had the RSI kiss the ‘oversold’ 30 level, giving bulls an excuse to step in and start buying again. We finished out trading on Friday just under the 50-1hr Moving Average, I’ll be watching to see if this short-term MA can be cleared to the upside or if it acts as resistance.

Rydex Money Flows

I found this pretty interesting. While we didn’t see massive selling last week, we did see the indices close in the red. But this didn’t prevent investors for pushing more money into the bullish Rydex funds, as shown by the red circle on the chart below. We can see that during the most recent drops in the S&P the percentage of assets in bullish funds had weakened each time. However, last week I guess was different. The small drop didn’t scare away the buyers and the ratio of bullish funds to Rydex assets advanced higher as it approaches its previous high set in May.

Last Week’s Sector Performance

No surprise Energy ($XLE) was the best performing sector last week with Technology ($XLK) being the only other sector to outperform the S&P 500. Consumer Discretionary ($XLY), Industrials ($XLI) and Utilities ($XLU) were the worst performers for the week.

Year-to-Date Sector Performance

Utilities continue to be the pest performer YTD. However, Energy is quickly approaching the leader, with Health Care ($XLV) sitting in a distant third. Consumer Discretionary remains the worst performer this year with Consumer Staples ($XLP) joining the ranks of under-performers, along with Industrials and Financials ($XLF)