I have been quite quiet of late, largely because there has been little activity of note in my opinion.
In general, I see U.S. markets near the end of their multi-year rally (I am currently positioned pretty heavily short, though I wouldn’t be altogether surprised if this slow creep higher continues into 2015), and I see signs of similar exhaustion in the European indexes. I see emerging markets as demonstrating relative strength, with precious metals serving as a wild card with significant potential upside. However, I would be mildly surprised to see precious metals move higher alongside an equity breakdown.
So let’s look at some charts. First the U.S. big boys. The S&P (SPY), though this is actually the e-mini Futures chart, remains in the final stages of a rising wedge that has been over five years in the making.
Nasdaq (QQQ) is near resistance of a multi-year rising channel. it could rally a bit before hitting the resistance of a decade+ rising wedge.
Junk bonds (JNK) have flashed weakness of late. They are frequently an early harbinger of equity breakdowns. Even more telling than the action in junk bonds is the pronounced weakness from small caps (IWM). Ace technical analyst Chris Kimble recently noted that small caps have broken support relative to the S&P for the first time in over a decade. Small caps broke support of a multi-year rising wedge earlier this year. They have since rallied back to the underside resistance where they were recently rejected, forming a double-top to boot. Shorting small caps (via the inverse ETF, RWM) is my largest position at the moment so I feel pretty strongly about this particular play at the moment.
That summarizes my caution regarding the U.S. markets, though I see very similar patterns in Europe.
Switzerland hit a resistance trendline over 15 years in the making, and looks to be breaking down from a recent multi-year rising wedge.
But the national ETF that I am most interested in shorting is Spain. It broke down from a rising wedge at a 50% retracement of the 2007-high to 2012-low. It rallied last week and is approaching an underside test of the trendline it broke. I will be looking to short there.
On to bullish charts!
Since the spring I have been keying on emerging markets. EEM continues upward since breaking above resistance a few months ago.
The same positive behavior is also visible in the Brazil ETF, EWZ.
Perhaps most surprising to me is the bullish action from China (FXI) last week. A very strong break above resistance would seem to bode well for China, and perhaps copper (JJC) and the global economy as well.
We are moving into a time of the year that has historically been quite volatile. Time will tell if that trend shows itself this year.
Whatever the case, I will try to hold my beliefs loosely.
Most of the bearish chart configurations that appeared in the spring have flittered away harmlessly. The breakdowns that were teased never came to fruition. There is one major index that remains in the long term pattern that (still) portends trouble: the S&P. SPY has formed a clear rising wedge from the 2009 bottom. SPY is currently testing the upper bound of that pattern.
The SPDR Financials ETF (XLF) remains an interesting short candidate to me. I was duped into declaring early victory a month ago and XLF has since rallied. But it continues to contend with 50% retracement Fibonacci resistance from its 2007-2009 decline. It is also at the very end of a multi-year rising wedge pattern.
Another interesting short candidate to me is LLL. It has been in a steep rising channel for over a year. A rising channel is typically a bullish pattern, so I am not overly bearish… but flat revenue and profit growth for years, and a double in price over the last 12 months. It seemed tempting. The doji top a couple weeks ago looks like (at least a temporary) top.
I posted a bullish note about JCP a few days ago on Stocktwits, but forget to put it elsewhere! Drat. Anyway, it’s a pretty nice inverse Head-and-Shoulders that would seem to portend the prospect of much greater upside in the longer term, even with today’s earnings jump. It’s interesting that the after-hours rally hits $10.62, which is awfully close to the that upper line of resistance in the chart below. If we hit that price today, I will sell and look to buy back. Once that trend line is broken, I think JCP can probably run a good bit higher.
**UPDATE: So far, JCP has sold off and sold off some more. it is re-testing the support trend line and 50 day moving average. It has since now held and rallied from those levels. Another stock I’ve been following, ACI, has broken the various support trend lines that I drew. It is retesting its lows of 2014. GDXJ has also broken down.
Signs are aplenty that the market is flirting with a major breakdown. The next couple of days should be telling. QQQ was rejected at resistance in the form of both trendline and 50 day MA. QQQ has now completed the right shoulder of a pretty textbook Head and Shoulders pattern.
Small caps (IWM) are threatening to break support. Here is the IWM chart:
Perhaps more telling is the action in Treasuries, where TLT is breaking above resistance.
And finally, Financials may finally be breaking. Both a rising wedge and a Head and Shoulders top are in place as bearish harbingers for XLF. A test of 200 MA (the dashed blue line) should be a pretty big deal as there is a good bit of support around there.
While the U.S. markets continue to churn sideways, flirting with the possibility of a major top, international markets are showing much greater cause for bullishness. Of this group, India is probably still my favorite, though it has already made significant gains since I first mentioned it a couple of months ago. The India ETF I’ve been tracking, EPI, is only now breaking above its 200 day moving average. This, after forming a pretty textbook inverse Head and Shoulders pattern. Given some consolidation, I imagine there’s plenty of upside left in the longer term.
The iShares Emerging Markets ETF (EEM) is also breaking above trendline and 200 day moving average resistance, and perhaps resolving a multi-year pennant pattern to the upside.
Brazil (EWZ) has been downtrending for years, and appears to have solidly broken above its trendline resistance. It has a little ways to go before reclaiming its 200 day moving average.
Broadening the picture to include the entire ex-US world, a representative ETF, CWI, shows a multi-year ascending triangle and appears to be attempting to break out.
The Switzerland ETF (EWL) presents us with an unusual picture: it is the only security I have noticed that has a beautiful trend line running from the 2000 market top, to the 2007 top, and now in play for a possible 2014 top. Here is decade-plus chart of EWL.
It is worth noting that EWL has not broken down, nor shown any particular weakness at present. However, it has formed a textbook rising wedge over the last couple of years as it now hits the decade-plus trend line of major tops.
It adds up to an interesting situation that bears close watching, imho.
As an interesting aside, have you noticed the action in SPY? Despite all the grief about crushed small caps and technology darlings, SPY is actually working on a fourth straight up-week! It is coasting squarely in the middle of its ever narrowing (rising wedge) range. Interesting.
Conversely, small caps are testing the support at what may be the neckline of a Head and Shoulders pattern.
It’s been another interesting week. It feels like this major cross-roads has been happening in slow motion for months now. Only time will tell if this is the formation of a major top, or the base before one final push higher. In my view, either way, the end of this bubble is in sight. Only time will tell what shape it takes.
Devon (DVN) reported good earning and is being rewarded. On the chart, this isn’t just any old good day though. It looks like DVN is attempting to break out of a pennant pattern that dates back to 2008. I noted the technical support in a post last year, and the upside may prove to be higher than originally imagined.
The chart I posted last year shows that the support line actually dates back to the early 90′s.
***UPDATE: Upon looking more closely at these charts, I noticed that my trendline changed bewteen 2012 and 2014! Notice that the 2009 bottom hits support in the 2012 chart, but does not hit support in the 2014 chart. So I went back and redrew the lines. In this chart, the 2014 line is red-dashed. The original 2012 line is black solid. In this picture, DVN is not a breakout candidate yet.
In the past, I have posted about the correlation between Sotheby’s and the broader equity indexes. Sotheby’s (BID) has proven to be a pretty decent bubble indicator, dating back to the late 80′s, as marked by this chart originally posted (in 2011) on Zero Hedge.
BID may be flashing a warning sign once again. In 2011, it broke down from the mid-40′s and dropped over 40% before finding a bottom in the 20′s. It has broken down again, from the same level as in 2011. In the below chart, 2011 is the middle breakdown.
Below is a closer look at the current breakdown. In fact, my chart from 2011 looks almost identical the one below. Last time, the price fell a good bit further. We’ll see how it shakes out this time.
We can see how a breakdown in BID might correlate to other markets, like Nasdaq (QQQ). It looks like QQQ may be putting the finishing touches on the right shoulder of a large head and shoulders pattern. That pattern sure is conducive to a major market top.
Only time will tell if it was a useful warning or a false alarm this time around.
A couple days ago, I bought some call options on SLV (well in the money and a couple months out, as I generally prefer). SLV was testing a level that had provided support twice in the last year. So far support has held for a third time. Previous to that, 18-ish had been resistance. With today’s rally, a noticeable (but not entirely convincing) bullish wick is in place on the weekly chart.
It feels like 18-ish could be retested next week, but this is an interesting place to take a flier. What makes the situation even more interesting is the bigger picture cross-current configurations in the metal markets.
On one hand, I have been open in my bearish view of copper. And Silver and copper have very similar-looking bearish multi-year descending triangle chart patterns! So why am I bearish on copper and bullish on silver? Good question, and part of the answer is simply: as a hedge. But the more nuanced answer is that copper has already badly broken support. Silver has not. Copper is testing to confirm the breakdown. Silver is still testing (and holding at) support. My interest in silver is also tied to my bullish read on the inverse head-and-shoulder patterns in GDXJ and GDX. With silver and gold so beaten down, yet holding above support, and with miners flashing a very bullish chart configuration, it seems like a decent time to gamble on a rally.
I thought I’d provide an update on how I currently read some charts that I have noted as bullish configurations in recent months. First TLT, the 30 year Treasury ETF. It has rallied off its base and will soon arrive at resistance. With the broad domestic and international markets also near inflection points (see CWI below), I imagine the story will play out in correlative fashion. So far, no clear signals, though junk bonds (JNK) continue to hold up as though there isn’t a care in the world. Anyway, here is the TLT chart as I see it:
It’s worth noting that one of my favorite bloggers, Chris Kimble, posted a pretty decent contrarian case for TLT’s upside.
AAPL formed a very pretty cup and handle over the last 18 months and has clearly broken to the upside.
The question is whether a cup and handle is a valid read after a 10 year rally? It is more commonly seen as a basing formation. I guess only time will tell.
Speaking of basing, ACI has dropped over 90% in recent years. Coal is widely despised or ignored. Sounds like basing to me, so I am very interested. Despite bad earnings last week and a sharp drop, ACI has held at support and remains bullishly configured in my opinion.
Gold continues to behave weakly, albeit erratically. Ukraine presents a wild card. All the wild, gold miners (both GDX and GDXJ) have formed beautiful inverse Head-and-Shoulder patterns. The GDXJ pattern looks like a textbook beauty to me.
And last but not least, look at the big picture, I offer up CWI. It one of many all-world ex-US ETF’s (and they all have roughly the same chart formation). What I see is a clear ascending triangle; a pattern that is typically bullish. All it needs is a breakout.
Good luck in these turbulent markets!