It looks to me like the charts of major U.S. indexes are in the clear for the moment. I still believe we are in the final inning(s) of a major top and macro-economic and socio-political warning signs seem to be flashing everywhere, but based on my read of the major U.S. index charts, it seems like markets may grind higher into the end of 2014. Most resistance was taken out two weeks ago. Last week, markets nudged higher. Here is a chart of the S&P futures, on a weekly basis. While it is not facing resistance at the moment, it’s worth noting the divergence of rising prices alongside weakening moneyflow over the last two years.
The Nasdaq is similarly comfortable, having broken through the bottom trendline(s). It doesn’t appear to be facing resistance at the moment.
Stepping back from the relative peace of the broad U.S. indexes, it’s worth noting that Russell small caps have reached the underside resistance of a multi-year rising wedge that recently broke. This is a significant test, and may foreshadow weakness in the broader indexes should small cups struggle here (as shorts might expect).
Another source of potential risk worth keeping an eye on is the broader context of global equities. VEU, the Vanguard Global Equity fund, continues to show weakness.
One final note is on QCOM. I pointed out a massive 20 year pattern in QCOM a few weeks ago, suggesting that it looked awfully bearish. Late last week, QCOM dropped 10% after rallying to the underside of its broken long-term (20 year) support. It’s a large Nasdaq leader that is worth keeping a continuing eye on.
We saw another week of wild volatility in the U.S. markets. The S&P has rallied more than 5% in the last week and a half. The big daily and weekly wicks that formed the week before last has seen significant upside follow-through. The markets have bounced all the way back to an area that could present serious resistance. Both the 50 and 100 day simple moving averages are around S&P 1960, as is the underside of the broken multi-year rising wedge resistance.
Looking at a weekly chart of the full rally from 2009 through present, the rising wedge is pretty clearly evident. However, where one draws the lower support line is debatable. You can cut out minor breaks in 2011 and 2012 and hug the 2013 bottoms to get a line fairly close to where I’ve drawn it. You could liberally include all intra-day bottoms and have the support below 1900 (where I’ve made a dashed gray line). Or you could draw that support line any number of places in between.
It seems to me that there are dueling reads in play. Last week’s large bullish wick on the weekly chart, coming at the 50 week moving average, would seem pretty bullish. Sentiment readings got quite bearish (which is bullish) as well during the big fall earlier this month. My view is that in the larger picture, the rising wedge is broken and I am viewing this rally as a Bull trap. I have not sold all of the long positions I opened last week, but I have started to add shorts. Unfortunately for me, I don’t have a clear sense for how much upside I would need to see before reversing my bearish view. Another very strong bullish week would surprise me, as would a rally to new highs. A marginally bullish week or two here would not surprise me. But first lets see how this resistance area plays out in the coming week…
The last few days witnessed small caps outperform the larger market, a signal that has foreshadowed rallies all year. We got a large reversal on Wednesday, another very nice reversal on Thursday and big upside follow-through (so far) on Friday. Over the last few days I have covered my shorts and gone long. Given that I am very bearish mid/long term and believe “the top is in” so to speak, this strikes me as slightly crazy behavior on my own part, but I do love gambling and so far it has worked out okay.
On to the charts. Here is the short term S&P Futures chart. I have spot-shadowed three targets that strike me as likely areas of future resistance: (1) the 200 day simple moving average (red dashed line), (2) a continuation of the steep downtrend that preceded the sell-off (black solid line), and (3) the 50 day simple moving average (blue dashed line). I would note that I think (4 – not highlighted) the underside of the broken long term resistance is a possibility is a possibility given how beautifully the reversal pattern is shaping up in the weekly chart. That scenario would have the S&P push past (3) and re-test old highs late in the year, hitting the underside of the old support trendline.
When we pull back to a weekly perspective, we can see a “doji star” with a large bullish wick created this week by the S&P. It did so right at the 50 week simple moving average. On a weekly basis, we’d want to see positive follow-through next week to confirm the reversal.
In keeping with the idea that stocks may rally from here, the 30 year Treasuries ETF (TLT) looks like it topped this week. This week’s reversal put a huge bearish wick on TLT’s weekly chart, and the ETF will likely close the week just under trendline resistance. It is a very bearish configuration for TLT in my opinion. That said, the support trendline isn’t far off, so we’ll see how those elements interact. Maybe it will fall to where both the 50 and 200 SMA’a are dancing, about 8% lower.
I will note one other asset that looks interesting: gold. It has broken long term support and may be forming a (bearish) descending triangle pattern, but for now a multi-year support level is holding, and that level is also a 50% retracement of the 2005-2011 bull market.
Good luck trading in these volatile waters!
**UPDATE : Small caps notably under-performed the broader market Friday. Also VIX rallied a bit, suggesting that despite the big jump in the broad market, risk appetite remains muted. The big question for Monday and Tuesday will be: was this rally just a short squeeze?
A mea culpa may be in order. I may have been too hasty or at least too enthusiastic in my belief that a rally was at hand. Years of BTFD conditioning will do that, I suppose. Last week’s beautiful reversal hammer has not seen the necessary follow-through thus far this week. [I have updated these charts to reflect Friday’s action] Given this week’s action, the S&P has broken its long term support trendline. As was the case last week, watching follow-through action will be critical. This week has seen the kind of manic activity common to bear markets. But with the late week selloff, the major longer term supporting trendline was cleanly broken. The S&P is still sitting around the 200 day moving average, and should have some support, but I will be viewing a bounce back above 1950 from here as a selling/shorting opportunity.
The break looks cleaner on the long-term weekly chart. I have spotlighted the severe intraweek break that occurred in 2011. But the market ralled by week’s end, creating a large bullish wick that proved to portend the gains that followed. The bullish wick from last week has not been followed by supporting action though, and this week’s breakdown may portend significant downside.
Support for the idea of a significant breakdown can be found in the price action of commodities and other equity markets around the world. Vanguard’s All-World equity index (VEU) has very clearly topped and remains in full retreat (this chart is actually a bit old and VEU is at 47 as I write).
Crude oil may now be breaking support as well. The IMF has cut the global growth forecast. These news bits just add to a picture of expectations that have been steadily raised over the last five years with both bulls and bears growing increasingly bullish. If they are indeed disappointed, the fall could be pretty swift. If the fall is swift, selling could be dramatically exacerbated by the collective leverage in play. The current negative credit balance exceeds that of both the 2000 and 2007 stock market bubbles.
So, it looks like the first top I called was the right one, and the reversal pattern last week may have been a head fake. If this breakdown holds, a significant pullback could finally be at hand.
**UPDATE: S&P closed Friday down 20 or so. That breakdown is in play for the weekly chart. I see this is very bearish for the mid/long term. The next breakdown to watch for is the “death cross” of the 50 day MA crossing under the 200 day. That would be few weeks off, and the S&P may bounce around her for a little while first. It is sitting near the 200 day moving average, so I might expect a bounce early next week, but would imagine it as a selling/shorting opportunity, rather than a bullish bounce. I would probably need to see an engulfing candle or something like that for me to view this week’s action as bullish in any way for the longer term.
Many months ago I noted a very long term rising wedge in QCOM. A pattern as old as any I ever remember noticing. I didn’t bother posting it (or trading it), because it’s seemed so unlikely to me that QCOM would seriously break down. However, I see it’s down 3% today… down to $70. I don’t know what follows for it and don’t have a position, but I thought I should at least post these charts so you can see the pattern in play. Here is the short term look.
Here is the remarkable (to me, at least) long term perspective:
I remain strongly biased towards believing that the S&P has formed a 5 year rising wedge that will result in a serious correction. However, the market’s behavior this past Thursday and Friday leads me to believe that we will rally from here. I don’t know if it’s days or weeks or months, but I imagine we will likely hit new highs. If we don’t, that would confirm to me that a major breakdown is likely at hand soon.
As with the shallow bottoms of both April and August, small caps and volatility turned more bullish before the larger indexes, leading the way higher. Thursday’s reversal and Friday’s rally put a bullish candlestick on the weekly chart (and daily chart, Thursday). If a rally is to follow, we should see upside follow through by Wednesday or Thursday of this coming week. Here is the weekly chart of S&P Futures:
Here is the doji star reversal pattern we find in the IWM small cap ETF. We saw similar bullish reversal candlesticks in both February and April.
Despite my view that we will turn lower in the mid/long-term, I am now positioned bullishly for the short term. We’ll see how that goes…
***UPDATE 10/7 – So far, some pretty serious selling pushing S&P to retest lows. No upside follow through so far. Chris Kimble pointed out breakdowns in other global markets. U.S. may finally be following suit, which would mean more downside is likely to follow. I have closed long positions and am back to being short – though nowhere near as short as I would like to be if there is a confirmed breakdown in SPY.
Wow. That was fast. Now the rubber REALLY meets the road. Big test at hand for the S&P.
**Update 10/2: It’s worth noting that Small caps (IWM) and VIX inverse (XIV) are significantly outperforming S&P today – the same action that has occurred at recent bottoms. They have led the way both up and down in each of the last 4-5 short term changes in market direction. End-of-week and early-next-week should provide confirmation of (short term, at least) bottom, if that’s what is forming here.
I recently wrote that I felt the timing was right to get short. Since then, we have seen a bit of a sell-off. Nothing severe in the U.S. markets, but enough to have those shorts in the green. If you are squeamish, I think now is the time to take profits or at least get even. The S&P has pulled back to the shallow support line that has held since early 2013.
The Russell 2000 (IWM) is near the bottom of channel support. You can read it as having broken the tight support or still having some room before it hits looser support. Either way, it’s near support.
Both of those charts would suggest it’s a good time to cover shorts and go flat.
However, there remain good reasons to stay short. In addition to the long term rising wedge that still lurks as the ultimate challenge for the S&P, there is also the matter of weakening peripherals. XIV, an inverse VIX fund that has served as a decent indicator, may be starting a more serious breakdown.
More more disturbing is the Vanguard All-World Equity fund, VEU, which has clearly been rejected at resistance and meaningfully declined in recent weeks.
Emerging markets have been crushed in the last week, as has much of Europe, not to mention commodities (have a look at DBC!). With Nasdaq still hovering near all-time highs, one has to wonder how long the U.S. can hold out as global markets weaken?
I’m on my invisible soapbox. And I’m short. Everything (not really, but maybe rhetorically). I meant to post this little note on Friday, and then over the weekend, and now I’ve missed the top on my little blog. Fortunately, my positions are in place. I will bail if this moment proves wrong (the S&P pattern can continue the uptrend into 2015), but it seems like so many parts are in place.
The Alibaba IPO, the largest in history, seems almost comically ordered for the explicit purpose of a providing a market top. We have small caps diverging from larger caps for months, a sign of weakening risk appetite. Europe is ready to fall apart again and world leaders are playing Warmonger again. We had our seasonal turn date on 9/22. Major indexes are pushing technical resistance. Anyway, it adds up to enough that I’m happy to take my short shot here.
Now to the charts (these are all from last Friday or something, when I intended to post).
First the S&P. Yep, still hugging resistance.
Short term maybe you can see that bearish candle from Friday. It has played out as bearish indeed in the two days since.
Small caps (IWM) continue to show relative weakness. Since capturing this chart, IWM has pushed towards support.
The U.S. markets have rallied with the S&P topping 2000 as I suggested may happen a few weeks ago. The S&P has been trading within the rising wedge that we’ve been following here for quite a while. The end of the pattern is near… by early 2015 at the latest, it would seem. I would be surprised to see such a long-standing, well-defined pattern fizzle into nothing. But we shall see.
One note is that I am waiting until at least the middle of next week to add to short positions. There has been a trend of equity inflows on the first of the month (next Tuesday will be the first trading day of September) and we may see a pop that day. Many major market turns have come near seasonal dates in March and September, so it may be worth waiting until later in the month to short.
Here is how I see the S&P pattern (actually S&P futures, which has a slightly cleaner pattern than SPY):
We are back to the top of the range.
The last couple of pivot points have been led by VIX (XIV, the inverse of VIX, is actually what I have traded with) and small caps (IWM/RWM) diverging from the S&P. Once again those two have recently started diverging from the S&P, in this case, by underperforming.
First, small caps (IWM):
Then, XIV (inverse of VIX) has also under-performed lately:
Some of the securities that i have bullish on appear to be hitting resistance.
Brazil (EWZ), which I think still looks to be in a healthy bullish channel longer term, may be due for a pullback or some consolidation after the run-up of recent weeks. Given the pullback that I expect to see in U.S. markets, I am taking profits in EWZ at this time with the thought that I will buy back if its works its way back to the bottom of the channel.
30 year Treasuries (TLT) have rallied in the last week and are hitting significant resistance. Like EWZ, TLT appears to be in a longer term bullish channel, so the rally may not be finished, but it seems likely to pause here.
I may have saved the best, or at least most telling, for last. VEU, which is the Vanguard international equity ETF, has a multi-year ascending triangle in place. That is a bullish pattern, and we are at the top of it, ready to break out.
In the shorter term, however, there is a 2-3 year bearish rising wedge in place… and there may be the beginning of a breakdown / downtrend in place there.
It will be very interesting to see how this resolves.
Hold loosely to your beliefs, and good luck trading!