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 17 October 2016

Stocks On The Edge

Written by

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.

welsh.triangle.caption

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.

welsh.tech.2016.oct.17.fig.1

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.

welsh.tech.2016.oct.17.fig.2

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.

welsh.tech.2016.oct.17.fig.3

welsh.tech.2016.oct.17.fig.4

welsh.tech.2016.oct.17.fig.5

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.

welsh.tech.2016.oct.17.fig.6

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.

welsh.tech.2016.oct.17.fig.7

welsh.tech.2016.oct.17.fig.8

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.

welsh.tech.2016.oct.17.fig.9

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.

welsh.tech.2016.oct.17.fig.10.1

welsh.tech.2016.oct.17.fig.10.2

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.

welsh.tech.2016.oct.17.fig.11.1​​welsh.tech.2016.oct.17.fig.11.2

In the September 1 Macro Tides I wrote,

“The long-term chart pattern in the dollar index suggests that the bull market is still intact. The correction which began in March 2015 is wave 4 of a 5 wave advance from the 2008 low. If correct, wave 5 of the advance is likely to lift the Dollar to 106.00 - 110.00 sometime in 2017. On January 26, I thought the Dollar would decline. In early May, I thought the Dollar was poised for a rally, and it moved up from 91.88 on May 3 to 97.50. At a minimum, I expect the Dollar to push above the high at 97.50 and potentially reach 98.50."

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.

welsh.tech.2016.oct.17.fig.12

In the September 19 Weekly Technical Review, I assessed the potential for the 10-year Treasury yield to increase in coming weeks.

“The yield on the 10-year Treasury bond appears poised for a breakout above the blue horizontal line, although there is a gap at 1.635% that might get filled first. Either way, I think the 10-year yield is headed for 1.85% - 1.90%. Longer term, a test of the long-term green down trend line, which connects the highs in 2007, 2013, and 2015 near 2.0%, is coming. As you can see, the 10-year yield has already broken out of the downtrend on the Major Trend Indicator, which suggests the path of least resistance is up. That said, the increase in the 10-year Treasury yield will resemble a tortoise."

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.

welsh.tech.2016.oct.17.fig.13

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.

welsh.tech.2016.oct.17.fig.14

tactical.table


Disclosure

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.


>>>>> 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 Truth About Trade Agreements - and Why We Need Them
Big Mess in Italy
News Blog
October 2016 JOLTS Job Openings Rate Shows Insignificant Year-over-Year Growth
Do Rises In Oil Prices Mean Rises In Food Prices?
Are Mobile Phone Payments Secure?
Infographic Of The Day: 12 Reasons To Let Your Employees Play Games
Early Headlines: Asia Stocks Up, Oil Down, House Has Stopgap $ Bill, Trump Sold All Stock, Euro Holding On, May Doubles Down, India Economy Struggles, Oz GDP Contraction And More
President Trump Must Be One-Term, Voluntarily!
Documentary Of The Week: Untold History Of The United States, 1890s To 1920
Where MPs Stood On Brexit
How Accurate Are Final US Election Polls
Brexit In The Supreme Court - Here's What It All Means
The States Where It's Legal To Smoke Marijuana
What We Read Today 06 December 2016
This Truck's Barrier Expands Out Of The Back For A Quarter Mile
Investing Blog
Exuberance Returns
Investing.com Technical Summary 07 December 2016
Opinion Blog
Trump And Modi: Birds Of The Same Feather, But With Different World Views
Oil Deal Won't Last Long
Precious Metals Blog
Silver Prices Rebounded Today: Where They Are Headed
Live Markets
07Dec2016 Pre-Market Commentary: Wall Street Takes A Breather, Crude Prices Slipping, Investors On Full Bull Run Despite Indicators In Extreme Greed Range
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