econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 31 August 2016

Technical Nuggets: Wall Street's Twilight Zone May Be About To Change

by Investing Daily, Investing Daily

-- this post authored by Joe Duarte

Investing Daily Article of the Week

It's not Halloween yet, but Wall Street feels a lot like a mix of the Twilight Zone, Lucy in the Sky with Diamonds, and Strawberry Fields, as the big brokerage houses and their talking heads float in a central bank easy-money fueled boat on a mythical river where nothing is real and they fantasize about meeting a girl with kaleidoscope eyes.

I can't remember a market that's been stuck in a more frustrating and dangerous trading range since 1994 when the S&P 500 (SPX) started the year at 481 and closed at 470 at the end of January 1995 during a period of time when the Federal Reserve raised the Fed Funds rate, which is the overnight rate used by banks to balance their books, from 3% to 6%. The difference this time is that the weird trading range that started on July 14 is only six weeks old, and that 2016 is not 1994. So the possibility that this could go on longer is certainly there.

Yet, there are other significant distinctions to note between 1994 and 2016 which can all have a major influence on the way things play out. For one, the election is fostering a sense of insanity and the country is different demographically, technologically and philosophically in many tangible ways. Economically, there are some stark contrasts as well. For example, in 1994 U.S. GDP was growing at a robust 3% annual rate compared to the meager and questionable (due to seasonal adjustments) 1.1% annual rate recently reported. The Consumer Price Index grew at a 2.7% rate in 1994, vs. the current annualized (2015) rate of 0.7%. And there were around 66 million Americans out of work in 1994 compared to some 94 million out of work in July 2016. Altogether, the U.S. economy could withstand a doubling of interest rates back then.

Signs of Stress in Stock Market Appear

Call me crazy from the heat. After all, it's been a hot summer in Texas. But when the usually wishy-washy Fed Chair Janet Yellen says,

"I believe the case for an increase in the federal funds rate has strengthened in recent months"

and when the next speaker, Fed Vice Chair Stanley Fischer, at the same Jackson Hole meeting (8/26/16) almost announces that the rate hike may come as early as September, it may be time to pay attention. Some traders were paying attention as the S&P 500 reversed its intra-day gains following Fischer's remarks. And as I will show during my chart review, things have quietly but noticeably changed on the charts over the last two weeks.

In my August 15 Technical Nuggets column, referring to the market's complacency as highlighted by very low volatility, I noted:

"Something has to give, and when investors decide that economic fundamentals do count, we could see a significant decline in stocks. That said, we may not be anywhere near that point yet."

Well, maybe we are getting closer to the point where what didn't matter last week suddenly matters.

Sellers Gain Some Ground

First, I want to concentrate on the S&P 500 (SPX), which continues range-bound and whose low volatility I will discuss in the next section. Look at the two lower panels on the chart, Accumulation-Distribution (Accum/Dist) and On Balance Volume (OBV). Both have topped out and are heading lower. This suggests that sellers are starting to gain the upper hand. Note also that two weeks ago the grey volume bars (signifying buyers were in charge) were larger than the pink volume bars (indicating sellers are rising), which have risen over the past three trading days.

SPX 2016 08 26

Meanwhile, SPX not only failed to extend its recent breakout to new highs, but has also failed to hold at its first support line, the 20-day moving average (dotted line), and is now just above the lower Bollinger Band (solid green line). At this point, the index could well rally again to the upper Bollinger Band, or start to slowly decline. More important for the longer term is what happens if the index falls to 2144 or so, where the 50-day moving average closed on August 25th.

Bollinger bands, (solid green lines above and below prices) are built on the premise that prices can't deviate from the mean (moving average) forever and that when prices move too far in one direction, up or down, they will reverse direction. For this example I will use the 20 day moving average (green dotted line).

The salient point about the bands this week is that they are starting to widen a bit. When this happens, it's a sign that volatility is about to increase, which means that traders are starting to review their current positions and that there may be some meaningful changes in asset allocation.

Beyond the Bands

Another useful way to look at the market is to review the number of stocks that are advancing versus those that are declining. And the New York Stock Exchange Advance Decline Line (NYAD, upper panel) is the best way to analyze this dynamic also known as market breadth. Under normal circumstances:

  • The NYAD rises along with the indexes

  • When the NYAD rolls over it's often a sign that a meaningful correction may have started

  • It is most useful to look at the NYAD at the same time as exploring several market indexes and comparing their overall trend to the NYAD

NYAD 2016 08 26

In this snapshot it's clear that the NYAD is rolling over. At the same time, we see the S&P 500 (first lower panel) also showing some weakness. Even more pronounced is the weakness in the Dow Jones Industrial Average (INDU, middle lower panel) which has started to make a string of lower highs and lower lows, and seems to be in a short term down trend. The Nasdaq 100 Index (NDX, bottom lower panel) has also flattened out. These three indexes, when viewed in conjunction with the NYAD, are suggesting that the market is starting to weaken.

Conclusion

We may be nearing a period of increased volatility. There are several momentum, money flow, and price indicators that suggest that the market is starting to weaken. And the Federal Reserve has made it clear that it is interested in raising interest rates, and that perhaps it may do so in September, which is traditionally the most dangerous month of the trading year.

I may be wrong and this may all blow over. Similar indicator clusters over the last few months and years have been proven to be of little use through the past eight years of zero interest rates and central bank manipulated markets. It is also true that the high frequency algorithm traders are well-known to jack prices up and down for no good reason just to take a few pennies away from the rest of us. But, if this is the time when reason and traditional analysis replaces the Twilight Zone, Lucy in the sky with diamonds and Strawberry Fields machine market, the next few months could be tough for investors who are not cautious and fail to consider the protection of their portfolios.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Investing


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
The Theory of the Monetary Circuit: A Critique
The Expected Effects of Petitions to Improve the Monetary System
News Blog
This Mushroom Starts Killing You Before You Even Realize It
August 2016 Median Household Income Has Declined From The Beginning Of The Year
August 2016 Pending Home Sales Index Declines?
24 September 2016 Initial Unemployment Claims: Rolling Averages Continue to Improve.
Third Estimate 2Q2016 GDP Revised Upward. Corporate Profits Down.
The Terrorist Networks At Our Fingertips
Infographic Of The Day: Dubai Interesting Statistics And Facts
Early Headlines: Asia Stocks Up, Oil Surges, OPEC Cuts Production, Student Loan Woes Mount, Trump Still Close, Aleppo Hospitals Bombed, Huge Wind Storm In Oz And More
The World's Most Sustainable Cities
Big Sam In Bad Company
Other Ways To Spend Your AirPod Budget
Crashing Space Station Shows Why China Must Start To Collaborate In Orbit
NFL Edges Towards A Full House In London
Investing Blog
Will Deutsche Bank Survive?
Banks Of Absurdity
Opinion Blog
The Federal Reserve Note
Trump, Trade And Taxes
Precious Metals Blog
War On Cash Turns To $20, $50, And $100 Bills
Live Markets
29Sep2016 Market Update: WTI Crude Rises Into 48 Handle, Goldman Sticks To Lower Crude Prices In The Future, US Dollar Volatile Reflecting On Future Market Movements, Gold Moving Higher Signaling Weakening US Market
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved