S&P 500 daily chart
Not much happened between last weeks tactical view and now. As suspected in last weeks view, the high volume during the FED announcement and after the FED announcement has contained a lot of selling, causing a strong resistance. There was no confirmation last week, and there is none this week that the reversal has started already.
However, the signs of weakness are increasing and unless we start to make upwards progress soon, even more indicators will cross into bearish territory. This should then bring a correction, which most likely will be contained without damaging the longer uptrend significantly.
This would be a potential buying opportunity. However, as we move closer toward the end of the year, the headwinds of the fiscal cliff and the volatility caused by the election should present more challenges. A conservative allocation would thus be more prudent, especially considering the gains the markets have enjoyed this year so far, as we will most likely give some of those gains back at some point.
The McClellan Oscillator has reached the zero line, causing the Summation Index to flatten out. The Summation Index was however able to erase its near term negative divergence. Unless the Market starts moving up again, turning the McClellan Oscillator up, we will ost likely turn down on the Summation index. Breaking the near term support line would be bearish for the overall markets.
SPY daily chart
We also had some unusual option volume on Thursday, which could be another sign of an impending reversal. However, since Friday was a so called Triple Witching day, we can’t rely on this signal. Please keep in mind that the SPY ETF had its ex-dividend date last Friday, causing a small offset between it and the S&P 500 it tracks.
We are still in the stair step pattern I drew. The last two times we broke up, we had the ECB announcement and the FED announcement. I am not sure what could cause us to go up even more from this overbought condition, but we still don’t have strong confirmation of a correction.
We broke the steepest of the trendlines (hourly chart) and backtested it on Friday, but it is not enough to turn outright bearish yet. Let’s review the other indicators.
Equity to Treasury Indicator
The Equity to Treasury ratio chart hit the top falling trendline, that defines the bearish trend. We are still above the short term green bullish trendline and we have more time to correct before attempting to break out.
I can count 3 waves up, which would further support a pullback, before we can get another attempt.
US Dollar – no divergence yet, but support
The US Dollar has hit support last week, and as expected rallied a bit. However, we still haven’t made significant progress to the upside and we could therefore consider the current pattern a bear flag. Breaking the 78.7 level would call for a 78 next, where the dollar should find more support. This move lower would also allow us to form a positive divergence in the momentum indicators and build a base for a move up. Since neither of those have happened yet, I expect another small push lower first.
US vs. World – outperformance trend broken
The chart above compares the US markets to the world. Although I had hoped we could reclaim the broken trendline, it turns out we only did a backtest of the line and moved lower. This is bearish action, which usually foreshadows that the trend is over.
This does not mean that we will get a bearish move in the markets, but rather that the outperformance of the US markets has run its course and that the rest of the world will catch up, or that the fiscal cliff will suppress the strong performance of the domestic markets.
Utilities in support zone
Defensives are in an area of strong support and are extremely oversold. Not all indicators show a positive divergence yet, but some do (MACD). This could mean we still need to test the horizontal trendline before we get a bounce.
REIT crashing after FED
This weeks losers were real estate investment trusts (REITs). After enjoying an amazing performance in anticipation of FED action, the actual announcement brought a steep selloff, despite the FEDs promise to buy unlimited amounts of MBS. Although I can count 5 waves down and we are in oversold territory, there is no way to know where 5 will end. Wave 3 is not going to be shortest wave (Elliott Wave rule), no matter how extended Wave 5 becomes, thus allowing further underperformance of REIT. Bounces should be a decent selling opportunity, as 5 waves usually indicate the start of a new trend.
As I had suspected during last weeks tactical view, the Technology sector relative performance did firm up this week. Now we need to see if we can get a higher high, which would be bullish for technology and the broad markets.
Semiconductors backed of the resistance set by the most recent high. This could indicate a potential double top. In that case we would count the right arrow as a 5th wave (it broke marginally above wave 3).
The more bullish alternative shown on the chart implies that we are in an extended flat correction for wave 4, which would also most likely break support in a shakeout before moving higher.
Small Caps at crucial decision point
The relative performance of the Small Caps is on the razors edge. We are wedged between the green uptrend line, and the blue downtrend line. A decisive break of the green line would be a bad omen for the broad market.
Germany vs. Europe, can we get a higher high?
The chart of Germany vs. Europe still shows an astounding performance. We need to break the last high in order to confirm the bullish trend with another higher high. Please notice that breaking the bottom trendline will most likely cause us to miss the upper trendline with this top. We can already see a small divergence developing, which could bring a short term top.
The markets are still in an uptrend. We have signs of weakness and the market looks tired. A pullback would be healthy and seems to be almost unavoidable. We could get another small pop, maybe if China goes all in. The Bank of Japan’s action last week was of little consequence though.