I seriously hate trying to pick tops and bottoms. The old saying goes, ‘that it can be the most expensive job on wall street’. So I would much rather spend my days looking for entry points in already trending markets.
But we have to keep a close eye on the S&P500. We trade equities for a living, so how can we not? The question I want to ask is, “Alright, so where are we?”. And the answer isn’t easy. The first thing we want to look at is the successful completion of the five-wave decline from the early April highs. We mentioned this possibility in our June 5th post and so far it’s held. But bottoms are not events, they are usually a process. And since that early June bottom, the S&P500 has been forming the second half of a Head & Shoulders looking pattern. Here is an intraday look using 30-minute timeframes:
The neckline is right at 1335 and represents the most important resistance on the table right now. The left shoulder, head, and potential right shoulders are nice and symmetrical and this looks like the real deal. A breakout above this neckline and the price target would be about 1400. We arrive at this number by taking the distance from the bottom of the head to the neckline and add it to this potential breakout level.
Getting back to why I hate picking tops and bottoms: just because a possible head & shoulders bottom exists, doesn’t mean that it will pan out exactly as we expect. Go back to 2008 and look at all of the intraday head & shoulders patterns that rolled over and failed.
But the good news is that we have a fixed level of resistance here. It’s taken about a month to form and any breakout above 1335 will give us a pivot point to trade off of. This neckline resistance would become support in the future if this pattern actually is what it appears to be.
It’s been a while since we discussed financials. This space has just been a mess so I’ve shied away for most of the year. But after looking through some charts this week, I think they’re finally set up for a nice move higher. And I don’t know many market participants that have anything good to say about these banks, so we’ll take a contrarian approach here and look a little closer.
The first chart shows the Financial Select Sector SPDR ($XLF) in a standard 5-wave decline from the March highs. We noticed a similar pattern in the S&P500 on June 5th and the market has stabilized since then. We also have a bullish divergence in the Relative Strength Index where we saw lower lows in the price of $XLF but higher lows in RSI. The price we’re watching is $14.33, which was the June 11th highs. We want to see higher highs beyond that level to confirm that a change in trend has taken place:
This is pretty standard stuff up above and I don’t think that we need to complicate things. But it’s the false breakdown below that 200 day moving average that gets my mojo risin’. Those 3 days that $XLF traded below the smoothing mechanism could catch the shorts off guard. This is where I see a key pivot point to trade off of. If we rollover back under the 200-day, then all bets are off. If we’re right, I’d expect a big and quick move back to the March highs and perhaps above and beyond.
Now from a more risk-on/risk-off perspective, let’s compare the performance of $XLF to the ultra-conservative US Treasury Bonds. We’ll use the 7-10-year $IEF to represent the middle of the yield curve. The first chart shows two years of this XLF:IEF ratio. Right off the bat we notice that where this ratio peaked in March was exactly the 61.8% Fibonacci retracement from the 2011 decline. This wasn’t a coincidence. Also look at all of the divergences in RSI. Whenever momentum did not confirm price action, this market reversed:
Now let’s look at this ratio off the October lows. This thing went up 50% during the 5-month period that the S&P500 rallied just 30%. So this particular Financials vs US Treasuries comparison tells us a lot. Well late last month we saw price attempt to break down below the 61.8% Fibonacci retracement of that monster move, but could not. In fact, it is now trying to get back above that 200 day moving average. This leaves that failed breakdown as an “Island Reversal” pattern that could be the catalyst to reverse this trend.
Confirmation with this ratio back above the 200-day moving average and we could be off to the races. Call me crazy, but I’m seeing a lot of reasons why we could see a move higher in financials. And not just on an absolute basis, but relative to US Treasuries as well. If we’re right, this bodes well for risk assets in general. So we’ll be watching this one closely.
Tags: $XLF $IEF $KRE $IAI $TLT
If the stock market seems extra frustrating these days, you’re not alone. Market participants across the board don’t have much conviction in either direction. Both the bulls and the bears are frustrated and the Investor Intelligence newsletter polls confirm that.
Arthur Hill over at StockCharts.com has the perfect chart up today showing the S&P500 stuck between a “Rock and a Hard Place”:
We put up a post on May 25th showing how this potential rangebound market was setting up. And I wouldn’t expect a major breakout in either direction any time soon. I think a sideways market, at least for now, is OK. Remember, S&Ps are still working off a 30% move in 5 months (40% for the Russell2000). So yea, a sideways market, at least temporarily, is fine. It’s normal.
When we see price back above the 50 day moving average (or “rock” in this chart) then we can have more conviction to the upside. But I’d like to see the slope of the smoothing mechanism to be up, and that won’t happen over night. Meanwhile, the upward-sloping 200 day moving average (or “hard place” in this chart) should continue to act as support. New lows below that key level and we’ll have to reevaluate our bullish stance as a result.
The S&P500 is in a frustrating place right now. We have to deal with it.
Tags: $SPY $SPX $IWM
The name ‘Volatility Index’ gets thrown around a lot. Where is the VIX? What did the VIX do today? The market doesn’t bottom until the VIX does _____. We see a lot of numbers mentioned around The Street, but I haven’t seen any evidence that these VIX targets mean anything at all over the long-term.
So the way we use the Volatility Index is as a negatively correlated asset to US Equities. It’s really simple: VIX goes up, Stocks go down. VIX goes down, Stocks go up. Here is the chart showing the strong negative correlation over the last year:
So if we can get clues about the direction of the VIX, we can then use that information to help make stock market decisions. This chart below gives us a much closer look at the volatility index with a few annotations. The first is the downward-sloping 200 day moving moving average that the VIX couldn’t stay above last week. That higher high and false breakout that could not hold after those horrible June 1 job numbers stalled at a key Fibonacci level. The black dotted line represents the 38.2% retracement from the early August high of $48 down to the mid-March low in the $13’s. Look at the intraday breakout attempt and failure on Monday, June 4th.
To make things worse for the VIX, as it tried to breakout putting in that higher high, the Relative Strength Index was already rolling over. This lower high and bearish divergence in RSI makes the VIX even more vulnerable at these levels.
With the strong negative correlation that the VIX has with US Stocks, we’ll chalk this one up as more bullish action for the stock market. This is also a positive for risk assets in general.
So we’ll watch these key levels and make sure that the price of the VIX remains below it. As long as that’s the case, we want to stick with a risk-on mentality.
Tags: $VIX $SPY $VXX $SPX
I don’t think that watching just the S&P500 and/or Dow Jones Industrial Average is enough to really understand how the “market” is behaving. What are some of the key components doing compared to one another? How are certain risk assets behaving relative to some more conservative investment vehicles? These are questions that we ask ourselves every day.
On Friday, we discussed several intermarket relationships that tell an important story about what’s going on behind the scenes. We mentioned in this post that the Aussie Dollar did NOT make a new low relative to the Japanese Yen as the S&P500 rolled over in early June. We also noted that Consumer Discretionaries put in a higher low relative to Consumer Staples while the S&Ps were making fresh lows. And in the Bond market, although Junk bonds made new lows relative to US Treasuries, RSI was putting in a higher low showing a bullish divergence in the bond market. We took all of this intermarket behavior as a positive.
Today we’re looking at two more pairs telling us that, at least for now, we should be looking to put risk on, not taking it off. The first one is the Russell2000 vs the Dow Jones Industrial Average. The Russell is a popular measure of small-cap stocks while the Dow Industrials represent 30 humongous US companies:
Notice how the S&P500 made new lows, but the Small-cap/Large-cap ratio did not. This is one positive development that we just can’t ignore. If the stock market was as vulnerable as one might believe based on those new lows, then small caps should not be outperforming large caps, they should be confirming those new lows with new lows of their own.
Meanwhile, Emerging markets are also showing relative strength compared to domestic names. When we see the more speculative emerging stocks outperforming the theoretically more conservative domestic names, that tells us that market participants are more willing to put risk on.
Again, like we mentioned last week, if these pairs roll over to new lows, they would be suggesting that things are bad out there and we should be getting defensive. It’s not just about, “Where did the Dow close today?”. We want to see what’s happening underneath the hood. And for now, things look OK.
Tags: $IWM $RUTX $RUT $DIA $DJIA $EEM $SPY $TLT $HYG $FXA $FXY $AUDUSD $XLY $XLP
Mark Arbeter is the Chief Technical Strategist for Standard & Poors. He’s an excellent technical analyst and I really value his opinions. Arbeter earned his Chartered Market Technician designation and is an active member of the Market Technicians Association. We’re fortunate enough to have him share his thoughts with us on Stocktwits every day, but this week he sat down with Equities.com for a full interview. Where are the S&Ps are headed, Gold, the Dollar, and how will sentiment and rotation affect them?
I really enjoyed this one-on-one. Here is a brief excerpt:
EQ: The S&P 500 popped back above 1300 this week after breaking below 1280. Could this be the start of a bullish reversal pattern for the market?
Arbeter: Yes, because I think the S&P 500 and the other major indices are in the process of either tracing out double bottoms or potentially inverse head-and-shoulder bottoms. The key to completing these bullish formations will be for the markets or indices to rally above the late May-highs, and for the S&P 500 that is at around 1335. So in other words, to complete these bullish formations and turn the intermediate-term trends back to the bullish side, we would need a strong breakout over the 1335 level.
EQ: Last Friday saw a major sell-off in the market. Is this the capitulation that the market needs to form a bottom for at least the intermediate term?
Arbeter: I think we saw a mini capitulation with the strong down day last Friday. We were already oversold, and it appeared that, from a technical standpoint, we did have a capitulation. Normally, what you see with mini capitulations is a day where the breadth of the market is very weak and everything is thrown out of everyone’s portfolio. We saw that certainly on Friday. The 10 sectors of the S&P 500, especially the cyclical sectors, were extremely weak and moved very closely together. That correlation suggests that we had a mini capitulation. In addition, what you want to see during capitulation-type activity is extreme bearishness with a lot of the sentiment indicators that I follow.
We certainly saw that with option put-call ratios spiking to fairly high levels. We have also seen some recent weakness in other sentiment indicators. For instance, Wall Street strategists are now recommending their lowest allocation towards stocks going back to the bottom in 2009. I think that’s pretty telling considering the fact that the S&P 500 has only dropped about 10 percent during this recent decline. Back in 2008-2009, the market fell over 50 percent. So even though it wasn’t a total wipeout, I think we did already see the capitulation. Since the size of the top that we recently put in was only a couple months in duration, I was not expecting a major blow off to the downside. I think the sell-off on last Friday sets us up for some gains going forward.
EQ: You’ve been pretty bullish on gold recently. Why do you believe gold is positioned to rally?
Arbeter: Gold prices, as well as gold stocks, seem like they were bottoming just before the equity markets. We had a breakout from a reversal formation on June 1 for gold prices and gold stocks, which have actually put in an almost V-shaped bottom with the low coming in at the middle of May. So I do think gold stocks will outperform here going forward because they were the first to bottom, and I think gold prices and gold stocks are sniffing out more quantitative easing. It’s important to remember that this bottom in gold prices and gold stocks started to occur weeks before the weak nonfarm payroll report, which came out last Friday. So gold activity is suggesting there is more easing coming on a global basis.
The other reasons why I like gold is because I think the U.S. dollar is putting in a top. Sentiment for the U.S. dollar is extremely bullish, which many times marks a peak from an intermediate-term perspective.
In addition, the U.S. dollar has gotten extremely overbought on a technical basis, while at the same time gold prices are extremely oversold. Therefore I think gold leads financial assets here for the rest of the year.
Tags: $GLD $GC_F $GDX $GDXJ $SPY $SPX $UUP $USDX
SFO Magazine: Intermarket Analysis Offers Clues – Risk On!
Friday, June 8, 2012
By J.C. Parets
Today we’re looking at some intermarket relationships that represent risk appetite throughout the global markets. Usually, when someone asks, “So how did the market do this week?” they usually mean the Dow Jones Industrial Average or S&P500. The results in these averages are what you normally see in the headlines.
But to really get an understanding as to whats happening in this market, and how market participants are behaving, we need to look elsewhere. First, I like to start out in the currency world.
How are risk-on currencies like the Aussie dollar doing relative to more risk-off areas like the Japanese yen? If the Dow and S&P are making fresh lows here in the states, these currency crosses should confirm the pessimism. When they don’t, we’re getting hints that things aren’t as scary as they may appear on the surface. And sure enough, with the S&P 500 and Dow Industrials hitting new 5-month lows, the $FXA:$FXY pair held its own and put in a higher low. These ETFs that represent the Currency Shares Australian Dollar Trust and Currency Shares Japanese Yen Trust are telling us not to panic.
Moving over to the bond market, a reliable gauge for risk appetite is the relative performance of High Yield (or Junk) bonds compared to the guaranteed return of the U.S. Treasury bonds. This particular ratio ($HYG:$TLT) also made new lows in early June as U.S. stocks rolled over, but momentum (RSI) in this pair has already turned up. The bullish divergence in momentum for this risk-on gauge is definitely a positive in the face of a potentially bearish confirmation in price.
Now in the stock market, fresh lows for the major averages should be confirmed with new lows in the Consumer Discretionary vs. Consumer Staples ratio. If market participants are truly as bearish as 5-month lows in the Dow & S&P may show on paper, then the internals of the market should confirm that.
But while fresh lows were made in the averages, the $XLY:$XLP ratio also held its own and put in a higher low. The Consumer Discretionary SPDR is loaded with retailers like $AMZN $SBUX $TGT and other areas where consumers spend their discretionary income like $F $DIS $MCD and $NKE. If the major averages make new lows, then these discretionary areas should also underperform the more defensive Consumer Staples SPDR which is filled up with cigarettes ($MO), Coca-Cola ($KO), Procter & Gamble ($PG) and other areas where consumers will spend money regardless of poor economic conditions.
These new lows in price for the Dow Industrials & S&P500 were not confirmed with new lows in the $XLY:$XLP ratio showing yet another bullish divergence. You see by looking at multiple asset classes like currencies, bonds, and specific sector rotations in the stock market, we can get a better idea as to what’s really happening out there. All of these measures of risk appetite are telling us that things are not so bad and that we should be looking to put risk on, not off.
Now keep in mind that new lows in these pairs would argue differently, so stay tuned.