S&P 500 trendlines
As predicted in last weeks tactical view, the rally failed and the markets headed down in a new wave of selling. I also called for a re-test of the lows to set up a divergence in my indicators that would signify an intermediate term bottom.
Although last weeks price action does satisfy this requirement, and some indicators do show a divergence, I believe that the market is vulnerable to further sell off. However, there is a good chance that the selloff will be limited in scope and will not be able to erase the divergence is my indicators.
Lets review the evidence:
No panic selling
No fear, no panic, just selloff
The picture above and below show volume, RSI, selling and buying pressure (3 separate indicators). The picture above is useful to gauge the scope of these indicators compared to previous bottoms.
SPY closeup, selling pressure, volume, McClellan
We can see that the volume increased on the decline without becoming climactic. Combined with Friday’s close at the bottom of the bar, that is a good indication the we haven’t reached the bottom yet (buying hasn’t started). The Arms index and the advance / decline issues and volume bars all confirm that there was no panic in this sell-off (only moderate selling pressure).
RSI and McClellan oscillator do still show a divergence (green line), but unless we hit bottom soon we could once more erase the divergence. The S&P500 is still sitting in an area of strong support with further trend line support just below. I will be looking for a bounce in that area and hopefully we will get the divergence and a confirmation in my buying and selling pressure indicators.
I would like to see either:
- High volume down bar with no significant price advance
- High volume bar (down or up) with long lower wick
- Bottom reversal bar (long white bar next to red bar, hopefully engulfing red bar)
while maintaining the positive divergence in oscillators.
Weekly Demark on bar 8
SPY Weekly Demark Perfect Buy next week?
On the weekly chart the SPY (S&P500 ETF) needs one more close in this general are to generate a weekly buy setup. The Demark sequential indicator tries to estimate exhaustion. Furthermore we can see the weekly volume on this decline was already less, which could be a good sign for us to approach an intermediate term bottom. The timing on the Demark indicators is rarely perfect, but they do suggest a possible low next week.
SPY vs TLT
SPY vs TLT leading down
SPY vs. TLT is already intruding into the space of last December’s low with positive divergence in the oscillators.
US vs. World
US Market still outperforms World Index
The US markets are still outperforming the world markets. However, we hit the top channel line of the ratio chart on negative divergence. We should soon see a mean reversion in this indicator, which is a warning flag that any bottom should be treated as an intermediate term bottom only.
Treasuries headed for a blow off
US 30-year treasury futures heading for blow-off top?
This weeks action in US treasuries was simply stunning. This is also the reason why SPY vs. TLT was already so low.
The lack of panic in the US stock market is in strong contrast to outright fear in the US treasuries. Panic buyers drove the 30 year treasuries to an all-time new high and the interest rate to a new ALL TIME low. It appears that capital flight from weaker geographic regions is keeping our markets afloat.
The behavior of the treasury market is climactic. Huge volume and large up bars cannot persist, especially in treasuries where the interest rate provides a ceiling to the price advance. If the LT US interest rate approaches the LT interest rate of Japan, a country in a decline for well over a decade, the 30-year treasuries could theoretically spike to 170-180. I find that highly unlikely, considering the amount of money we printed since 2008 that should drive inflation sooner or later. I thus view the treasury market as the best indicator of an impending bottom in the stock market and as an opportunity for the short of a lifetime. I wouldn’t go against the trend and wait for confirmation first !
The conundrum is the difference of the Treasury market screaming for mean reversion and a bull market in equities and the massive divergence of the US markets already outperforming the world index.
Dollar hit resistance and second target, climactic volume
Dollar hit a longer term resistance and also reached my second breakout goal (shown with the rectangles). It already started to pull back on climactic volume, which COULD precede a reversal in US equities next week.
Commodities heading for 2010 then 2009 lows?
Commodites are in about to hit the lows of 2010.
Commodities becoming deeply oversold
Volume and price action look climactic. Last friday we gapped down on lower volume. The daily Demark indicator should fire on Monday. Look at the graph how precise it was during the last two occurrences! Commodities could lead the markets again. If we get a bounce, it could be on renewed QE3 speculation.
Technology continues underperformance
Update to last weeks call on underperforming tech sector.
Real estate sector
REIT set to outperform
Real estate had a better relative performance. The ratio chart backtested the breakout and should continue to outperform the broad market.
Energy Sector vs. SPY broke channel support and now resting on long term support w/ divergence in indicators
The relative performance of the energy sector broke its channel and is now sitting on a long term support line while forming positive divergence. If we get the bounce in commodities (see above), we could also recover in this sector. However, we have to wait for confirmation as this sector looks extremely weak.
Germany broke short term support and now heading for channel support
Germany started to underperform the combined European indices, which is not surprising, considering the new anti austerity currents sweeping through Europe. We shall see if the channel support holds or if we completed this corrective wave.