WEEKEND JOURNAL NOTES
Sunday April 24, 2016
It has been a couple of week since I have posted as I have been away on vacation. Yes, I have had a few tweets here and there, but for the most part I had been taking a much needed break. I am now back in the saddle and plan to be more active this week.
My last market overview I also posted on IBankCoin.com which is a great site if you are looking for more reading.
So let’s get back up to speed with this market and try to see where we are now.
As a quick summary, this is much more of a multi-year trading range formation now than a bearish H&S top which it appeared to be back in December. With help from the fed, neutral is much more my thought process than bearish. The way I see it is it is the break and follow through (i.e range high or low becoming support or resistance) that will prove the overall direction. It is a 300 point range, so we are likely to see 2400 or 1500 depending on the break. Until that occurs, which may not happen for a very long time, it is just a day to day week to week and month to month thing. As always, I will post what I see intraday and end of day via more detailed blog posts. So stay tuned.
Starting with the S&P, let’s begin our weekend review.
On Thursday, 4/14/2016 the S&P 500 acquired it’s double bottom cup/handle price target (seen below), and we have since been in nothing more than consolidation mode ahead of next weeks Fed meeting. We can see last week that we did form, fire and complete our first bearish pattern in a very long time. We have seen bearish patterns along the way since that Feb low, but many have turned into massive bear traps with the continued dovish talk from the central planners. Lucky for us, it doesn’t really matter, as we focus on the patterns and the price action only. We remain aware of events that may alter a thesis and watch for the market reaction and the patterns that form from it. Nothing else matters.
That leaves us to ask, what is next? We have the Fed on the tape this week (Wednesday) we must prepare ourselves for the action afterwards.
From a Bullish Perspective:
1) Currently the S&P is trying to break above this down trend line from last July 2015. This area will be very interesting to watch as it is right at 2100 which has been a very controversial price area for almost 2 years. But Friday, the bulls defended that level successfully.
2) Breadth continues to be strong.
Down trend line from July 2015.
Breadth using the % of stocks above 40DMA is at levels not seen since FEB 2012.
From a Bullish Perspective:
1) I think the real wild card is the NASDAQ, which still is lagging big time. It still looks like a bearish H&S top. Much more so than does the S&P and Dow. It is hard to believe that we are going much higher without participation here, so I think it is worth watching very closely. Now that being said, the Biotech indexes look poised for more bubbly strength into their own 200DMA. That would likely take the Nasdaq higher.
2) The Momentum divergence. – To me this it the biggest bear argument. If we can start to see more bearish patterns form, and complete their overall price objectives, this divergence will be proven correct.
3) 2100 area resistance has been a battle ground for almost 2 years. Respect it, until the bulls win. (i.e you don’t need to panic out until we see technical deterioration, but is this the place you want to be getting aggressively long? For me, I want to see 2135 become support. That would give me confidence that we are going to 2300+ Right here we are just as likely to go nowhere to lower.
IMMEDIATE TERM :
This is all we need to watch right now for signs of further weakness or continued strength. We have a about a 2 week H&S topping formation, with a mini inverse H&S in the incomplete right shoulder. Even if that bullish pattern would complete to 2103, it would still be a lower high and could keep this larger pattern in play. The larger pattern has a target of 2015.33 if we were to break Friday’s low.
Long Term Investors:
At this point, the main indicators we were using based on the last 2 major market tops, have been disrupted. With the fed put in place, we are now in unchartered waters. So, I think of it this way. If you have a macro view that is negative, this is probably an ok place to take some off. Particularly if we have a close back below that descending trend I mentioned above, as that could be a failed breakout. If you are bullish, then stay put. There is a bullish and bearish case to be made right now so for me, I would not be looking to put on more risk into resistance, but until we see much more technical destruction, I would not be looking to dump everything either. I have outlined things I am watching for, and I update virtually daily on the blog.
The Bottom Line:
REMAIN FLEXIBLE HERE: As we head into a seasonally bearish time, the momentum divergence suggest potential vulnerability. However there are mixed signals all over the place. As always we must remain nimble and flexible until clarity comes. We could be looking at another year of choppy sideways action up here as the sector rotation from week to week continues. No reason to be super bullish or super bearish at this point. Just flexible, I can’t re-iterate that enough. Do I think this is a bubble, absolutely. Can it go much higher? Absolutely. Will it? No price action to suggest either way yet. Remain Flexible.
This Week’s Chart’s in Focus:
Let’s review a few charts that I consider worthy of your attention:
$XLE has clearly broken not only it’s down trend but the 61.8 fib. It is also back above its 200DMA. The 200 DMA is still down trending, so expect consolidation and flattening before a major move higher, but we could see one later this year. So keep an eye on this. This is a feather in the bull hat.
Industrials (XLI): This has been on of the most bearish looking charts in the bear camp. Well it has now turned into a possible large bull flag in a long term up trend. As long as XLI is above that upper down trend line, do you really want to be short this market? Not me.
Homebuilders (XHB). Opposite of XLI. This sector still looks horrible and could be a fantastic short.