In last weeks tactical update I warned of a correction. After one final push, we started the correction as expected. With Fridays strong bounce, the question is if this correction is over already and if we continue to melt up slowly.
I believe not.
Reviewing the charts, I think this correction is not over yet. Even though the daily chart looks bullish, the weekly chart is showing a bearish candle pattern and thus indicates that we have to expect more volatility within the next couple of weeks.
This doesn’t necessarily mean that we go straight down from here. We could still bounce a little higher first, but we should expect to burn off some of the overbought conditions first before heading higher. The preferred scenario would be a pullback to the 1365 area, but a prolonged choppy sideways move above this level would be another scenario that sounds logical.
To be clear, my long term proprietary indicator (see above) is still in bullish mode, but it is showing some signs of flattening. Until this indicator flips to red, we cannot confirm a change in long term trend. As with all indicators, it lags a bit and thus we must use our head to observe price and volume performance. A good warning sign will be the wave volume indicator.
The hourly chart also looks rather bearish to me, as we hit heavy selling during the last moments on Friday. Monday will set the tone, considering that the selling happened during the last minutes of the week, which may be distorted somewhat.
We can draw a channel on the E-mini futures that looks bearish. After a quick fakeout top, we declined and appear to be backtesting the channel now. In case of a decline, the first area of support will be the most recent high, which also coincides with the start of the channel (about 1388 on E-mini).
In last weeks post, I speculated about the strong possibility that the SPY/TLT indicator will be rejected at its first attempt to break the downtrend. This rejection happened even before we reached the trendline, which is a sign of weakness. Nevertheless, considering the oversold condition of bonds last week, this does not yet endager the uptrend. A pullback was expected after all.
The sell-off in defensive sectors is healthy for the overall markets. It is indicative of sector rotation into more aggressive sectors like technology (see below), which I attribute to increased risk appetite.
The technology sector relative performance has been phenomenal during the past couple of weeks. It has reached an overbought condition, which should correct or work itself out over time through a slowing rate of ascend.
The US markets have slightly underperformed the world markets, but have now reached the support line. The momentum indicator shows positive divergence, similar to March last year. Maybe the euphoria in Europe is a bout to subside?
The Silver / Gold ratio, a risk-on indicator has finally bounced. Lets hope we can make a higher low next !
Semiconductors are thus far on track with the prediction from last week. The support at 390 is important to sustain the uptrend.