In last weeks tactical view, I highlighted the nature of the sell-off as corrective and noted the significant readings in the Advance/Decline ratios, Advance/Decline Volume and TRIN indicators. I also noted that we still lacked a divergence in the Advance/Decline indicator and thus favored one more push to the downside, which is exactly what we got this week.
Thus far, the markets have failed to rally, but we have gotten our divergence in the Advance/Decline MACD filtered indicator and one more higher spike in the fear indicators, signaling a potential short term bottom.
On the flip side, the markets have failed to rally of the extreme readings, but seem to be narrowing in a wedge pattern, that is bound to break out (or has already broken on Friday, depending on your analysis). Recently we have seen more false breaks in the markets, so yet another washout wouldn’t surprise me at this point, especially since the market was reluctant to rally last week, on the back of extremely oversold indicators.
Nevertheless, I believe we should get a decent bounce some time next week, maybe even a backtest of the broken red trend line. The pattern indicated on the first chart is by no means a forecast, but an ideal trajectory taking support/resistance and fib ratios into account. Markets rarely obey all rules.
Bearish sentiment has gripped most investors, despite the relatively shallow sell-off.
From a volume analysis, we can see that this bear has gained momentum, but also that the bears are running into strong stealth buying. The red volume bar shows no progress was made to the downside, despite heavy volume after the gap down. Since this also coincides with the fear spike in the indicators, I believe this was a washout (Tuesday), followed by stealth buying for the remainder of the weak. Options volume shows more activity as well.
The crossover of the moving averages is about to happen on Monday, and should cause more people to sell, a blessing for those buying on the cheap.
Due to the surprising strength of this bear move and the breaking of important trendlines, I do expect the high of 9/16 to hold and the rally to fail eventually.
Watch the 50-61.8% retracement levels.
The QQQ (technology) showed unusual volume for a Friday, most of it pushing prices up. It seems like this bear is running into heavy buying. The grey area marks a strong support area from several peaks to the left.
The SPY/TLT indicator has a hard time moving up and seems ready to roll over again. We are sitting on support for the 4th time and seem to be ready to break down. So far we can still assume a backtest of the first blue falling trendline, but we need to overcome the second trendline soon for the bullish case to remain a good probability.
It appears that the relative strength of financials has seen some slowing near resistance. The financial sector has carried the S&P 500 during the technology sell-off. Is the excitement over the FEDs appetite for MBS fading already?
I believe that Financials need to take a breather soon, which could spell trouble for the broader market.
The fiscal cliff roll that I highlighted in last weeks post continues with US equities underperforming the combined world markets. We are now near a support zone from previous peaks and from the descending channel lines. Together with the oversold indicators, this should provide sufficient energy for a bounce.
As suspected in last weeks post, the relative performance of the Technology sector did indeed bounce on the long term channel line. So far the bounce has been very weak though and we couldn’t get much of a rally. Indicators are still oversold, which should give us plenty of room for a larger move up. If it doesn’t, it would also be bad for the health of the broad market.
The real estate bounce was muted as well. The relative strength indicator failed at the down sloping trendline again, which is not a good sign. We need to turn up from here, if we want to preserve the higher low in price. Otherwise we could see another down leg in REIT.
Emerging markets sill look good. We are approaching the down sloping trendline of a large descending wedge. We may pull back, before rising again, which would be even more bullish, as this could set up an Inverted Head and Shoulders pattern with enough oomph to carry us above the strong overhead resistance. Ideally we should see a pullback, wedge break, backtest, run toward resistance, pullback, break. But that is is still highly speculative, until we can see further signs of strength.
The bears have been able to cause some serious damage since this rally began in early June. However, I think it has cost a lot of bearish energy and turned too many people bearish too soon to continue declining. Major market tops are made of euphoria.
A look at the seasonality chart above shows a deep pullback into late October. This year does seem to follow the script so far, which is yet another reason not to get overly bearish on this decline just yet. The chart also shows that most of the gains for the year are already behind us.