Written by Jim Welsh
Macro Tides Weekly Technical Review 04 March 2019
The stock market has reached a point where the recent “freight train rally” should be expected to meet some resistance. And that expectation has come to pass. The S&P 500 has followed the script laid out in the last two WTR’s. In the February 18 WTR I discussed the resistance levels the S&P 500 was approaching:
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“The 78.6% retracement of the 593 point decline from 2940 to 2347 is 2813 which is also near the highs on October 17 (2817), November 7 (2815), and December 3 (2800). This suggests that the over head supply should slow what has been a freight train even though momentum has remained strong.”
In last week’s WTR I noted that it would likely take more than one try for the S&P 500 to surmount the resistance between 2800 and 2820:
“The S&P 500 traded up to 2813 today February 25 so it is chewing away at this resistance level. Although the rally has been a freight train it would be unusual to blow through this significant resistant zone under 2820 on the first try. Normally, the market pulls back a bit and then tries again.”
After reaching 2813 the S&P 500 pulled back to 2775 on February 27. The S&P jumped to 2816 on the opening today March 4 after news the U.S. and China are moving closer to a trade deal. After reaching 2816 in the first 30 minutes of trading, a wave of selling on the news quickly dropped the S&P 500 to an intra-day low of 2767.
The S&P 500 has made a series of higher lows and higher highs since the low on December 26. This is why I noted last week that a break below the low at 2764 on February 21 would provide an early warning signal that a period of weakness was commencing. With today’s low of 2767 this area of support has become even more important on a short term basis.
As long as the S&P 500 holds above 2738 (green horizontal line) , the high on February 5, and the 38.2% retracement level from the low of 2613 on January 21 and 2813, a move above 2820 is still expected before a larger correction takes hold.
Click on any chart below for large image.
For the first time since the December low, momentum as measured by the Advance – Decline Line (ADL), has begun to trend sideways.
The 21 day average percent of Advances minus Declines is running out of steam and with today’s trading is close to dropping below +10.0% for the first time since January 7. If breadth is negative on March 5, it will fall below +10.0% and likely signal at least a short term high.
The behavior of the A/D line and the 21 day percent is consistent with the market absorbing some selling pressure at the obvious level of resistance on the S&P 500 at 2800 – 2820. It is constructive that the market has been able to absorb the selling without giving up much price erosion in the S&P 500.
The rally since the December low has lifted sentiment from the depths of despair to a level of optimism that is at least a warning. The percent of Bulls in the weekly American Association of Individual Investors (AAII) survey jumped to 41.6% compared to just 20.0% Bears. The spread of 21.6% is the highest since mid September just before the S&P 500 topped and June of last year which was followed by a dip.
Although the Fear and Greed Index failed to reach its high in September, it got close and more importantly turned lower. Reversals in sentiment often precede reversals in price, so this is another warning of at least a short term high.
If the S&P 500 does mange to push above 2820 and rise to 2850 or above, it’s possible it is completing the Wave (B) rally from the December low. Momentum and sentiment suggests selling into that strength may be a good idea, especially if the rally to 2850 is in response to the culmination of a trade deal between the U.S. and China. Yes the market has discounted much of the positive effect of a deal, but a trade deal with China is important enough for the global economy and U.S. growth to allow the S&P 500 to rally to 2850. Besides, days like today (March 04) indicate that the stock market has already been absorbing selling pressure since it reached 2813 on February 25.
After a trade deal is achieved the market may run out of good news to rally on and the absence of good news, more than anything, could lead to a pullback. The wild card as discussed in the March Macro Tides is the potential of an escalation of trade tensions with the European Union:
“The Commerce Department provided its recommendations to President Trump on February 17 and he has 90 days to make his decision. The U.S. has long wanted the E.U. to open up its agricultural markets to U.S. farmers and has consistently been rebuffed. If the U.S. and China trade negotiations are resolved before May 17, an emboldened President Trump may threaten playing hard ball with the E.U. If the S&P 500 is above 2800 or at new highs, the President may feel he would be playing with house money and be further inclined to pressure the E.U. The global economy has slowed so it is more vulnerable to unexpected shocks than when synchronized growth was in high gear. This risk may not register with President Trump, who is far more focused on Making America Great Again.”
The S&P 500 has closed below the rising green trend line which indicates, if it closes below 2764, that the S&P 500 is vulnerable to a decline to 2685. The 38.2% retracement of the rally from 2347 to 2813 is 2636 which is where the S&P 500 found support in late October and November. Given the steepness of the rally since the December low, a quick sharp news inspired decline is certainly possible.
Treasury Yields
Last week I noted that on February 22, the 10-year German Bund traded down to 0.093%. It then ‘soared’ to 0.206% on March 1. In an effort to get core inflation to average 2.0% over a complete business cycle, the Fed is floating the idea allowing core inflation to move a bit higher above 2.0% during the expansion phase of the business cycle so when it falls below 2.0% when the economy is in recession, the average for the entire business cycle will be 2.0%. Whether the increase in the 10-year Bund or the prospect that the Fed would be more tolerant of higher core PCE inflation, Treasury yields jumped last week. The 10- year yield rose from 2.632% to 2.759% on March 1 before dipping to 2.725% on March 4. As noted last week, the expectation is that the next move in the 10-Treasury yield will be higher, with 10-Treasury yield reaching the underside of the red trend line at 2.85%.
The 30-year Treasury yield rose to 3.129% before falling to 3.09% on March 4. A test of the red trend line from the 2016 low near 3.15% has been expected and still seems likely.
Gold
In recent weeks Gold has followed the script and traded down to $1283 today (March 4).
“The expectation in recent weeks was that Gold would rally above the high of $1326 on January 31 to complete the move up from the mid November and August low. Gold rallied to $1346 on February 20 and then quickly reversed and fell to $1322. The pattern from the November and August low appears complete as a three wave up rally to late October for wave a, a 3 wave decline for wave b that ended in mid November, and a 5 wave advance for wave c. As long as Gold does not close above $1366 (January 2018 high), the triangle pattern I’ve discussed will remain the preferred pattern. A decline below $1280 seems likely in coming weeks at a minimum.”
Gold is near support just above $1275 so a short term 6 bounce is likely. Gold has peeled off a quick $63 so the rebound could test $1310 or so. An equal decline of $63 would then allow Gold to test or slightly fall below $1350 which is my expectation.
The rally to $1346 appears to have completed wave d of the triangle that began in July 2016 as discussed previously:
“The rally from the low in August 2018 is in the context of a large triangle pattern that began in July 2016 after Gold topped at $1375 (A). The decline from July 2016 high at $1375 to $1122 was wave a and retraced 76.8% of the prior Wave (A). Wave c of the triangle (1365 – 1160) retraced 84.4% of wave b (1122 – 1365) The current rally from the low in August at $1160 would be wave d of the triangle and would have covered $186 from the August low of $1160. If wave e retraces 76.8% of wave d, it targets $1293 as the low and $1189 if wave e retraces 84.4% of the $186 rally for wave d. A decline representing wave e would finish Wave (B). If Gold completes the triangle in coming months, the next move should carry Gold up more than $300 in Wave (C) from the low of wave e (B).”
Gold Stocks
When Gold rallied to $1346 on February 20, the Gold stock ETF (GDX) spiked up to $23.70 before reversing lower. GDX traded down -9.70% from that high to $21.40 on March 4, before rebounding. GDX could bounce back to $21.50 after closing at $21.85 on March 4. If Gold trades down to $1250 or lower, GDX has the potential to trade under $20.50 in coming weeks (blue and black trend lines).
Euro – Dollar
Sentiment and positioning suggest the Euro has the potential to rally above 1.17 but it needs a close above 1.1419 last week’s high to confirm that outlook. Until it does, the Euro could trade under the low of 1.1234 on February 15.
Dollar
The Dollar Index has been trading in a 1% range above and below 96.00 since mid October. After the Dollar experienced a key reversal lower on February 19, the expectation was that the Dollar would drop to 95.00 quickly, but there was no follow through. After the peak in August the Dollar fell in 3 waves, experienced a choppy rally into mid December, before dropping in another 3 wave decline into early January. The rebound off the January low is clearly a 3 wave move up which was followed by another small 3 wave decline. A cluster of 3 wave moves up and down while a security trends sideways, usually turns out to be a triangle.
If the Dollar closes above 97.38 a rally above 100.00 would like follow quickly. A decline below the lower trend line would negate the triangle pattern and likely lead to a drop to 94.00, which has been the expectation. For now one can only wait for the pattern to resolve itself.
Tactical U.S. Sector Rotation Model Portfolio: Relative Strength Ranking
The MTI generated a Bear Market Rally (BMR) buy signal on January 16, 2019 (green arrow) and climbed above the green horizontal trend line last week, as it did on March 30, 2016. This increases the probability that a bull market has been confirmed. This does not negate the potential of a pullback to below 2680 in coming weeks. Corrections of 4% to 7% are common in a bull market, which would allow the S&P 500 to fall to 2600.
If the S&P 500 does manage to rally to 2850 and does potentially complete the Wave (B) rally from the December low, the nature of the subsequent decline will help verify this pattern interpretation. A 5 wave decline from the high would increase the odds that the Wave (C) decline to below the December low is developing. Market breadth needs to be quite negative during that initial drop, and the number of new 52 week lows would be expected to expand dramatically.
My guess is that the S&P may experience a correction (2680 – 2630) and then a subsequent rally to a higher high before the market becomes more vulnerable to a large decline.
If the S&P 500 is going to fall below the December low, it will be spurred by negative turn in the economic fundamentals that convince long only money managers that it is in their best interest to sell. As discussed in the March Macro Tides, China is providing tentative signs that the easing by China’s central bank is beginning to help China’s economy. If this improvement gains additional traction, it will alleviate concerns about the global economy.
Additional rate increases by the Federal Reserve are not likely until mid-year or the third quarter, so it is difficult seeing that prospect providing a reason to sell. The only candidate is the auto and auto parts tariffs on imports from the E.U. and that is not likely until after a trade deal is struck with China. President Trump has until May 17 to decide so the technical strength of the market in the second half of April may provide some insight.
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. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The Nasdaq 100 is composed of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. All indices, S&P 500, Russell 2000, and Nasdaq 100, are unmanaged and investors cannot invest directly into an index.
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