Saturday May 7, 2016
- All Indexes except the DJIA average acquired their downside H&S targets
- Market setup for an oversold bounce in the days ahead, but looks vulnerable over the longer term.
Starting with the S&P, let’s begin our weekend review.
In last weeks report I said “An up move on Monday for the May fund flows will be viewed as a gift from the Market Gods in my mind”.
Gift given, gift accepted. As described in Monday’s nightly report, it was only a neckline retest and we were very likely to fail there.
Using the SPY here is what that looked like. Clearly the risk was well defined and rom there, the market sold off with a gap down Tuesday, and spent the rest of the week grinding into the 204.16 Target. 2043.99 on the SPX
Now that targets have been acquired (except in the DJIA) what do we watch for next? It looks to me like we are positioned for at least an oversold bounce after the completion of a 5 wave corrective type move. (see below)
That being said, Monday’s and oversold bounces can be two of the harder things to predict. The buying interest into the close on Friday, has me thinking that we will see follow through and a gap and go Monday causing over aggressive shorts to chase and cover. This could setup a fill of the first down gap above. However, it is also very possible we see a reverse Friday’s bounce off the targets and a dip down dip down towards Thursday’s lows at 2044 (shown in green below). However, that would be about as buy-able dip, as last Monday was a sell-able rip. We would use Friday’s low to buy against and personally, that kind of dip, I will envision as another gift from the Market gods. This kind of dip would also be healthier for the market overall, the ole bigger the base, higher the space theory.
That being said, I do not believe this is a higher the space market, and despite an oversold bounce setup which I will “trade” because that is what I do, I believe the top of this Rally since Feb is in and that the bounce will just construct a larger right shoulder for the next bearish pattern.
Here is an idea of what I am anticipating at the moment. I expect a move back above Monday’s highs, as this will allow the algos to take out all the shorts who have stops up there, and that’s how the game is played. However, if we get there, I expect the market to be closer to overbought than oversold and the price action to start looking bearish again for us to roll back over.
To give you more of an idea what this might look like on the daily charts with Fib levels see below. I don’t want to get too far ahead of myself here, but this is what I am anticipating until we see evidence that I may be wrong.
I will use that upper trend-line as my line in the sand and am looking to short strength into it. However, if it can become support, which it failed to do in April, then we will turn more bullish.
As always we must remain flexible in our views, but I also try to stay one step ahead of the market, as it allows us to get the bigger risk reward plays.
Long Term Investors:
Even if you have the view that this is only a trading range
1) we came to within 30 points from the top of the range
2) We have currently made a lower high here in April after making a lower low in Feb
3) Have a very similar topping candle to the one we saw in Early November
4) Have price action setting up for at the very least a 4% move lower
Is this the place you want to be pressing longs?
a. The 12 Month moving Avg : Holding above it by a thread. But it is still declining. Also note the sharp decline in monthly momentum. Doesn’t look like a 300 point Range breakout to the upside is in order. Does it?
b. The 10/20 Month Moving Average Crossover :
Ignoring price for a minute put this in perspective using these long term moving averages.
Notice how at the Feb Low in the S&P, the % of Stocks Above their 40 day MA set a higher low. This told us less stocks were showing weekness.
Now we have the reverse. When the S&P was making it’s new highs in April, the breadth was making a lower high, telling us that less stocks were participating. We want to see breadth expanding at highs, not contracting.
Now things are looking setup very similar to December. Although is is more of an oscillator, it has formed and completed patterns in the past, much like we see in the inverse H&S in Feb.
The Other Indexes:
As for the other indexes Nasdaq, Russell and Dow, all except the DJIA completed their bearish patterns last week.
The Russel Has dipped back below the descending trend line. It is important for it to hold above Friday’s low and get above the prior swing high, as a move below would kill off the bullish cup/handle.
This was the bull market leader and is now an unmitigated disaster. Yes, it’s oversold and I expect a bounce here too, but this one could not even get back to the descending trend line.
For those arguing for a breakout to new highs, you might want to pick up the phone and invite the Nasdaq to join the party, because this market is going nowhere without it.
DJIA – Certainly best in breed. Still above the decending trendline, but under the surface, looks just like the s&p. No surprise that the large cap index is holding up best in what look like the late stages of a bull market.
The Bottom Line:
In my mind this bear market rally has run it’s course. We have a failed breakout above the trend-line and a lower high seems to have been set. We are setup for an oversold bounce in the immediate term but then thing look set to unravel. When they do, they tend to go quickly so be prepared. As I stated above, if we can get back above the declining trendline and take out the 4/20 high, my tune will likely change, but that is not the price action I anticipate as detailed above.
This Week’s Chart’s in Focus:
Let’s review a few charts that I consider worthy of your attention:
Transports (IYT): Nice double top formation with a H&S which completed in the 2nd top. A breakdown below Friday’s low, will not be good for the markets overall.
Yen: After acquiring it’s inverse H&S target at 92.88, it retreated and has now formed and triggered a Cup/Handle setup targeting 106.31. A move towards that target would not be bullish for Equities. Keep an eye on it.
Gold (GLD) Seems to have a bit more upside in it. Be careful chasing it as the target is at 127.75, usually things consolidate after major targets are acquired.
SLV -> If long silver, keep an eye on the target that lies just ahead.