In last weeks tactical view I made the case for more upside, which is exactly what we got this weak. Although I had favored a shakeout first, the market had little interest in my preference. A quick review of the TRIN indicator reveals, that the 1430 level saw enough panic selling to qualify as a shakeout already, which supports the idea of more upside ahead.
We can also observe a slowdown in the momentum indicators (see below), which usually happens before every significant top. Since we haven’t seen a typical topping formation yet, we might still see some upside action. However, we may experience increased choppiness and selectivity.
As long as we haven’t broken the 1430 level on the S&P 500, the index remains in an uptrend. We haven’t seen typical signs of a topping formation (classic distribution pattern) either, but the momentum indicators are showing deceleration, which is a clear warning that we might approach such a top, unless we get a stronger move to the upside.
It is hard to imagine what could be a possible catalyst for such a move though, which is a good reason to be cautious in the weeks ahead. The looming deficit problems and the volatility the election can bring could aid in the topping process. However, traditionally the fourth quarter of an election year is bullish and since the uptrend is still intact, we should not start to build bearish positions, until we get confirmation.
The hourly chart showed quite a bit of selling on Friday. However, the activity of the last hour on Friday (high volume, lower wick) has usually brought more buying the next day, except for Friday last week. We might get another quick push down on Monday, but as long as 1430 holds all is well.
One of the most promising indicators is SPY/TLT, which has held inside its bullish uptrend channel. If it can take out the blue falling resistance line, it will confirm the uptrend again, which will be good for equities.
The small cap stocks have broken their steep uptrend line, but may be in the process of forming an inverted Head and Shoulders pattern. As long as the most recent low holds, this will be a bullish pattern.
The relative performance of the financial sector has made a higher low, which is very positive. Assuming we can make a higher high as well, the uptrend is healthy.
The tech sector looks weak once gain. It sold off quite rapidly, mostly due to Apple. However, a very small bullish divergence is already visible in the momentum indicators, which could foreshadow that we are simply retesting the trendline. If we bounce, this could represent a good buying opportunity for the tech sector. Breaking the most recent low would be very bearish though. Manage risk accordingly if you chose to play this sector.
Silver to Gold ratio is still in “risk-on” mode (uptrend). Lets watch what happens if at resistance (recent high to the left).
The onslaught in the real estate sector continued. There is no significant divergence (a small divergence is present). Since we are coming into a strong area of support, i would expect a decent bounce, possibly a reversal.
The relative performance of Germany to Europe is showing some divergence. This usually foreshadows a pullback. However, during the last top forming process it took several months to play out. It would therefore be too early to become bearish at this point, but it is a warning sign against becoming too bullish here.