Written by Jim Welsh
Macro Tides Weekly Technical Review 04 January 2021
After the stock market opened with a rally today, it was as if a light went on and a switched was flipped from Buy, Buy, Buy, to Sell, Sell, Sell. The S&P 500 jumped to 3770 in the first 3 minutes of trading and 150 minutes later the S&P 500 was down to 3663, after peeling off a quick 107 points. The S&P 500 made a new high and the low at 3663 was the lowest intra-day low since December 21, so today was a key reversal day.
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As noted in last week’s WTR entitled All The Good News Has Arrived, the expectation was that with nothing to look forward to investors might actually notice that there is actually stuff to worry about:
“If a Perfect COVID-19 Storm develops in early 2021, there is nothing investors can anticipate to address the problem. If the pace of vaccinations can’t slow the spread now, there is nothing else that can be done to mitigate the harsh reality that could last beyond January. The CDC expected to have 20 million vaccinations done by the end of December. As of December 26 less than 3 million have been administered, and that’s just the first injection. No doubt the pace will quicken in January, but the risk that vaccinations will trail the rate of the spread is high.”
As discussed in the January Macro Tides:
“The stock market ignored the mounting stress on hospitals in December, prospects for a crippling of the medical system in a large part of the country coming in January, weaker economic data as consumers hunkered down and states implemented more stringent rules to slow the spread.”
As mentioned above, Monday 04 January was a key reversal day. If the S&P 500 closes January 8 below the close of December 31 (3756), the S&P 500 would record a weekly key reversal.
The key reversal day pattern was repeated for every major average adding weight to the reversal in the S&P 500. The Russell 2000 failed to make a new high this morning and traded below its December 21 intra-day low, as did the DJ Transportations which actually closed below the December 21 low.
In the December 21 WTR I noted that the Transportation average was often a leading indicator for the market as a whole:
“The DJ Transportation average is often a leading indicator for the stock market. On December 9 the Transports made a new all time high but its RSI failed to confirm and was also under 70. Momentum divergences that occur when a market average makes a new price high when the RSI is below 70 are usually significant. This negative divergence suggests the Transports are setting up for a correction, with a drop to 12,000 at a minimum. A close below 12,000 could lead to a quick drop to 11,000 which is where the Transports bottomed in last September and October.”
The DJ Transports were down -2.21% on January 4 and was the weakest of the major market averages. The DJ Transports closed at 12,230 so it could test 12,000 soon. Although the DJ Transports may bounce off the support at 12,000, it is expected to eventually close below 12,000. The weakness in the Russell 2000 and DJ Transports is noteworthy, since the stocks in those averages benefit most from a strong economy. The sudden weakness is a warning that the economy may prove weaker than market participants expected in coming weeks.
The market was beginning to show signs that a correction was coming as noted in last week’s WTR.
“The upward momentum in market breadth for the NYSE and Nasdaq, as measured by the 21 day Advances-Declines Oscillator, are beginning to diverge by posting lower highs as the market averages make new highs. This is usually an advance warning of an impending correction.”
Even as the S&P 500 and Nasdaq 100 recorded new closing highs on December 31, the 21 day Advances minus Declines Oscillator on the NYSE and Nasdaq continued to weaken.
Coincident to the September 24 low and October 30 low, the 21 day Advances minus Declines Oscillators on the NYSE and Nasdaq fell to near the green horizontal line. The green horizontal line identifies when the market has become modestly oversold. The expectation is that this correction will bring the Oscillators down to the green horizontal line before a low is established. Additional confirmation of a top will come when the 5 day moving average (red) crosses below the 13 day moving average (green) on the S&P 500 and Nasdaq 100.
On November 11 the S&P 500 had an intra-day low of 3633 and the intra-day low on December 21 was 3636. The Buy the Dip mentality isn’t going to evaporate just because of one bad day. If the S&P 500 trades under 3640, it would be surprising if the S&P 500 didn’t bounce, and telling if it doesn’t. The more weakness displayed at this point the more likely the market will be hit with more selling.
The expectation has been that the S&P 500 will close below 3630, which should lead to an additional drop to 3500-3550 (Blue trend line S&P 500 chart above). A close below 3500 would open the door for a drop to near the late October low of 3300. (Green trend line S&P 500 chart above) A close below 12,474 on the Nasdaq 100, which is the December 21 low, would be negative and could precede a decline to 11,500.
Dollar
Not much has changed as sentiment and positioning are supportive of a bottom forming in the Dollar in the first quarter of 2021. Bearish bets against the Dollar are the highest since 2011, just as the Dollar was forming a major trading low. The lows in 2011, 2014, and in the first quarter of 2018 took several months to complete. Ironically, sentiment is so negative it may take some time to turn it around, unless an event triggers a flight to quality and into the Dollar.
The price pattern in the Dollar suggests it is near an important low as it has either completed 5 waves down from the high in March, or will after a larger bounce and subsequent drop to a lower low. Wave 5 began after the Dollar traded up to 94.30 in late September to complete Wave 4 from March. Wave 3 of wave 5 made a low on December 17, which was followed by a bounce into December 21. The Dollar fell to a new low today and reversed, so it’s possible it completed at least Wave 3.
As noted last week, “Any new price low is likely to be accompanied by a positive divergence on the Dollar’s RSI“, which is exactly what occurred on January 4. The positive RSI divergence increases the odds that at least a decent bounce is coming soon. The quality and strength of any rally will clarify whether the ‘low’ is in, or whether the Dollar will drop to a lower low in the first quarter to complete Wave 5 from the high on March 23.
Gold
Gold rallied more than expected as it pushed up to $1942. Whether this is the beginning of the rally to a new high, or merely a pop on the first day of trading in a new year will be determined in the next couple of days. Irrespective of this move, Gold is still expected to fall below $1766 and could trade down to $1730 before a trading low is established.
Silver
Silver rallied more than expected but is up to an area of resistance that was formed in August after topping. Silver is expected to drop below $21.78 and may test its 200 day average, or briefly modestly drop below it.
Gold Stocks
The Gold stocks (GDX) broke out above the green declining trend line. This was not expected but it may resolve itself as it did in late October. After breaking out above the green declining trend line, GDX reversed lower quickly and then fell to a lower low. The next few days will provide clarity but in the meantime, GDX is expected to fall below $33.25. Traders can establish a 33% position if GDX drops below $32.00.
Treasury yields
In the last two WTR’s I noted that the 10-year Treasury yield was reaching a point of decision as it moved into the apex of a triangle:
“My guess is the 10-year Treasury yield will fall in the next few weeks and close below the rising trend line.”
After trying for weeks and failing to breakout above the black horizontal trend line, the 10-year Treasury yield did close below the rising trend line on January 4. This suggests that Treasury yields are likely to fall further in coming days, which may coincide with more weakness in the stock market.
If the 30-year Treasury yield closes below its rising trend line, it will confirm the message from the 10-year Treasury yield chart, and be followed by an additional decline in the 30-year Treasury yield.
If the Treasury market behaves as expected, TLT should close above its declining trend line and rally up to $160.50 to $161.50. A move to $165.00 is possible if the Pandemic overwhelms hospital resources in many cities across the country
Tactical U.S. Sector Rotation Model Portfolio: Relative Strength Ranking
The MTI generated a Bear Market Rally (BMR) buy signal when it crossed above the red moving average on April 16 when the S&P 500 closed at 2800. A new bull market was confirmed on June 4 when the WTI rose above the green horizontal line.
Although the MTI has confirmed the probability of a bull market, it doesn’t preclude a correction.
The S&P 500 is expected to fall to 3550 and potentially as low as 3350 if the Pandemic overwhelms hospitals and more restrictions are enacted in January and possibly into February. Once this correction is complete the S&P 500 is expected to rally to 4000 and potentially higher in the first half of 2021.
The primary 10 sectors for the S&P 500 with the Russell 2000 and Midcap included.
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