S&P 500 still below major resistance
In last weeks tactical view I expected a pullback due to the overbought condition and negative momentum divergence, after which I expected more upside. The market however chose to hold on and burn off some of that excess in a sideways movement. We are still below a strong support zone on the S&P 500, unable to make much progress to the upside.
Meanwhile the DAX (Deutscher Aktien IndeX – German Index) managed to set a new bull market high, suggesting that the massive under-performance of the US markets (see relative performance charts below) is mainly due to to concerns over politics. Either the DAX will come down hard or the US market will have to catch up. I am going to suggest the latter in this posting. However, I believe that we should experience some sort of pullback soon, possibly after testing the 1430 level on the S&P 500.
Lets review the evidence.
SPY daily volume analysis
The volume analysis still shows that the bottom on 11/16 was signficant. Option volume gave an early warning (peak on 11/15 vs. opex day 11/16 could have some impact) and the wave volume is still looking healthy, showing a lot of accumulation.
Spy hourly volume shows still buying
The hourly chart is even more revealing. Upon close inspection (see arrows with S), we can conclude that the buying near support still exceeds the selling at the tops (arrows with R).
Small Caps relative performance good
Small caps often lead recoveries. We therefore compare them to the broad market by inspecting the ratio of the small cap ETF (IWM) price to the broad market ETF (SPY) price. We can see that the small caps are still leading.
Small Caps look exhausted
However, examining the fractal energy chart, we can also see that the small caps are getting very tired.
The fractal energy study is a brilliant way of examining the amount of energy left in a move. Doc Severson introduced me to this method. You can check out his youtube channel here: http://www.youtube.com/user/OptionsMD.
Doc is a brilliant analyst.
You can see that the energy on the daily chart has reached levels of exhaustion, whereas the 78minute chart (please see his videos for the reasoning), shows that we have gathered enough energy on that timeframe for an explosion up or down. The daily energy however would limit the upside quickly.
US still underperforms
The relative performance of the US vs. the world has accelerated to the downside, mainly because most regions are showing strong data and strong recovery. Europe looks very strong and the data coming from China is very encouraging. I therefore view this as a long term buying opportunity. So far, the correction doesn’t show signs of finishing.
SPY vs TLT looks bullish
SPY vs. TLT has reclaimed the area above the falling trendline. It is still in an uptrend, suggesting the risk on rally could continue. However, just like the SPY ETF itself, this indicator is struggling with overhead resistance. This means we need to be cautious of a quick washout.
Technology is weak
Technology has failed my expectation and is breaking down. Apple has set up a very bearish pattern and if it plays out, we could see a lot more weakness here. This would most likely start the pullback I mentioned in my introduction.
The poor performance of this sector is a clear warning sign. We could just have back-tested the lows at this point, but further weakness would be bearish.
Financials near resistance again
The relative performance of the financial sector is quite the opposite. We are back near resistance and could have gathered enough momentum for a breakout.
The stark difference between the tech sector and financial sector suggests that it could be time for a significant rotation away from tech.
Materials still in trading range
Materials pulled back very strongly, shying away from the long term downsloping trendline again.
SOX strong again
Semiconductors often lead recoveries and announce declines. The strong under-performance of this sector has loudly broadcasted that the next two declines were about to start (see chart). At this point the SOX still looks strong. SOX is a sub-sector of technology, which makes this performance even more remarkable. Semiconductor manufacturers are very far up in the supply chain and are thus the among the first companies to see advances and declines.