posted on 17 October 2016
Written by Jim Welsh
Macro Tides Technical Review 17 October 2016
In the last two weeks, I’ve discussed the large wedge triangle that has been developing in the S&P, formed by the high in May 2015 and the low in February. The lower band of this triangle is defined by the blue rising trend line under the S&P, which comes in around 2130. If it does break down, a decline to 2050 - 2070 should follow quickly.
In an interview on CNBC today, Jeff Gundlach noted the importance of 2130 and said 2 closes under 2130 would turn him bearish. Last week I expected the S&P to break below the trend line and September 12 low at 2119. The S&P traded down to 2115 on Thursday before closing on the trend line at 2132. Today it closed slightly below it, so tomorrow’s trading could prove definitive.
Click on any chart for larger image.
A bounce in the very short term is possible as the market is slightly oversold, continues to hold above the September low of 2119, and the call/put ratio has dropped below 1.0.
However, it isn’t close to low levels (green arrows) that accompanied the intermediate lows in September 2015 and February of this year. In addition, other measures of sentiment are not yet bullish. The net bulls in the weekly Investors Intelligence survey registered at 20.0% last week and assets in the Rydex short funds are quite low. From an intermediate perspective, sentiment is not bearish enough to support a trading rally that would power the S&P above 2210. Furthermore, the Option Premium ratio is nowhere near the levels that would be supportive of a multi-month rally that was launched after the Option Premium ratio spiked above the green horizontal line in September 2015 and February this year.
This suggests any short term rally is likely to run into heavy resistance at 2150 -2170.
Although the 21 day average of advances minus declines is modestly oversold, it isn’t under the green horizontal line that has normally preceded solid rallies.
Technology, led by semiconductor stocks, and small-cap stocks have been the leaders since early July. Last week the Semiconductor index (SOX), Nasdaq Composite, and Nasdaq 100 all recorded negative key weekly reversals. A negative weekly key reversal occurs when an index posts both a higher high and lower low than the prior week, and closes down for the week. Weekly reversals are more important than daily reversals, and a 2- or3-weekk reversal is more important than a 1-week reversal. The SOX posted a 2-week reversal, while the Nasdaq 100 and Nasdaq Composite registered 3-week key reversals. All three averages closed below the blue rising trend line connecting the June 24 Brexit low with the mid September low. The market has been trading sideways, but with the leading groups beginning to deteriorate, the probability of a close below 2120 and drop to 2050 - 2070 has increased.
As the NYSE has been chopping sideways since early July, the market’s internal strength has been getting weaker. The percent of stocks above their 200 days average has been drifting lower, which suggests the market has been absorbing some selling pressure. More importantly, the NYSE, which is comprised of 1,700 stocks, has closed below the trend line connecting the February low and the June 24 Brexit low. Today it closed just 5 points above the September closing low.
Last month OPEC production was 33.4 million barrels a days, the highest ever. Few believe OPEC has the integrity to implement the announced cuts at the November meeting. That’s why the positioning in the futures market shows trend following large specs and managed money (dumb money) very long, while producers and commercials (smart money) are short more contracts now than they were at the high in June and August. After bottoming in early August just below $40.77 a barrel, oil rallied to $50.00, a gain of $9.23. From the recent low at $43.06, an equal rally of $9.23 would end just above $52.00. Although oil may briefly pop above $52.00, the next big move is likely down to $43.00 a barrel.
The recent decline has caused the trend following large speculators and managed money to cut back on their long positions. The commercials and producers have reduced their short positions and are now less short than they were at the low in early June. This positioning suggests that gold has either established a trading low or will do so on one more decline below the recent low at 1243.
Although it is possible that gold has bottomed, I don’t think so. My guess is that gold may bounce up to $1280, but then decline below last week’s low before a low is formed. After the low is in place, a rally to $1300 is likely at a minimum, with a decent chance that gold will rally in coming months above $1380, the August high.
In the September 1 Macro Tides I wrote,
Today the dollar rallied up to 98.15. Although there may be a little more upside left, my guess is that the dollar is nearing at least a short term peak.
In the September 19 Weekly Technical Review, I assessed the potential for the 10-year Treasury yield to increase in coming weeks.
On Wednesday, the 10-year yield traded up to 1.801%. Although a move up to 1.85% - 1.90% is still possible, most of the expected move has already occurred. In addition, the Rate of Change indicator (ROC) has touched the green horizontal line, which has more often than not signaled that a move up in the 10-year yield was ending. Longer term, a test of the 2.0% level is coming.
Tactical S&P Sector Rotation Portfolio Model: Relative Strength Ranking
The Sector Relative Strength Ranking is based on weekly data and used in conjunction with the Major Trend Indicator. As long as the MTI indicates a bull market is in force, the Tactical Sector Rotation program is 100% invested, with 25% in the top four sectors. When a bear market signal is generated, the Tactical Sector Rotation program is either 100% in cash or 100% short the S&P 500.
The Major Trend Indicator generated a bear market signal on January 6, when the S&P closed below 1993, and was confirmed on January 14. The Tactical Sector Rotation program went 100% short when the S&P closed at 1990.26 on January 6. The short position was reduced to 50% on February 8 when the S&P closed at 1853, further lowered to 25% early on February 24 as the S&P traded under 1895, and closed on February 25 when the S&P was 1942. The S&P’s average ‘cover’ price on the short trade was 1885.75. The short trade earned 5.2%. Past performance is no guarantee of future results. The MTI crossed above its moving average on February 25, generating a bear market rally buy signal. The MTI confirmed a new bull market on March 30.
The Major Trend Indicator has continued to weaken which supports the potential of a decline in the S&P to 2050 - 2070. As discussed in recent weeks, a decline to 1200 on the Russell 2000 seems likely.
There is a smaller chance that the S&P could experience a deeper decline, based on the price pattern. As discussed previously, the February low probably is wave 4 from the March 2009 low. This suggests the S&P has the potential to rally to 2360 or so in coming months before the bull market ends. It’s possible that the rally from the Brexit low was wave B of a larger A-B-C correction, which would end after the S&P had finished wave C below the Brexit low at 1991 on the S&P. All of this is a moot point until the S&P closes under 2119 and the rising blue trend line.
The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices, S&P 500, Russell 2000, and Nasdaq 100, are unmanaged and investors cannot invest directly into an index.
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