July 2014 – Andrew Thrasher

Financial Sector Continues to Weaken

Posted on July 31, 2014 by Andrew Thrasher, CMT

For the bulk of 2014 the Financials Sector ($XLF) has been one of the worst performers. There have been some interesting developments on the chart for this sector, and that’s what I want to take a look at today.

First up is a chart of $XLF, its Volume Advance-Decline Line and the Percentage of Financial Stocks Above Their 50-Day Moving Average. These two breadth indicators can help us understand the ‘health’ of the financial sector by seeing how the underlying stocks of the sector are performing.

As we can see with the Volume Advance-Decline Line, while price has been going higher, this breadth indicator has been essentially flat as it hasn’t made a fresh high since March. As price keeps running into resistance at $23 the A-D line has begun to slightly weaken but has yet to make a lower low.

Meanwhile, the number of Financial Sector stocks that are above their respective 50-EMA has been dropping over the last couple of weeks, creating a negative divergence with price. This is a sign that each time $XLF has hit $23, fewer stocks in this sector have been able to stay above their intermediate-term Moving Average.

Based on these two breadth indicators, it does not appear things look overly bullish based on the internals of the Financial Sector.

Next lets take a look at momentum and the relative performance of $XLF vs. the S&P 500 ($SPY). On the top panel of the chart below we have the Relative Strength Index (RSI). Since June the RSI indicator has been making a series of lower highs as it creates a negative divergence. Even though price has been rising/consolidating, momentum has been weakening. Currently RSI is at the 50 level which has acted as support during previous declines. If momentum weakens and creates another lower low then we may begin seeing $XLF decline as well.

Looking at the ratio between $XLF and $SPY in the bottom panel of the chart we can see the strong under-performance out of the financial sector so far this year. However, things have begun to flatten as the sector starts to perform more in-line with the overall equity market. I’ll be watching to see if the ratio between these two can hold above support or if Financials continue to decline relative to the S&P.

Looking at the latest Relative Rotation Graph (shown below) we can see that $XLF has been attempting to strengthen as it moves from “Lagging” to “Improving”. The RRG acts as another way to look at sectors, assets, etc. in their relative performance with an Index.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Weekly Technical Market Outlook 7/28/2014

Posted on July 28, 2014 by Andrew Thrasher, CMT

Something just don’t feel right about the current rally to new highs. We are beginning to see signs of deterioration while at the same time not the same characteristics that have been present at previous bull market peaks.

For instance, momentum is creating a negative divergence on the daily chart but not the weekly. The Advance-Decline Line didn’t confirm the most recent high but the divergence is minor and not as large as in 2000 or 2007. Margin debt has begun to turn lower over the last several months, but we have continued to see the Dow Industrial and Transport Indices confirm the new highs each have been making. If we do begin to correct, which I think is possible (anything is possible!). I would be surprised if it turned into a bear market. Corrections are healthy and part of an up trend. We’ll see what price brings us.

Trend

As I wrote last Wednesday, Trend matters and isn’t something we should forget about. The S&P 500 ($SPX) continues to be in an up trend as price remains above the 100-day Moving Average, 20-day Moving Average and both the short-term and long-term trend lines.

Breadth

While the S&P 500 ($SPY) may have made a new high last week, breadth did not confirm. Both the Advance-Decline Line and the Percentage of Stocks Above Their 200-Day MA were off their respective highs as the equity index broke to a fresh level. The A-D Line finished out last week at its short-term up trend line, which keeps breadth in the bulls favor but just barely.

Nasdaq Participation

This next chart comes from Dana Lyons which is a must follow on Twitter. This chart looks at the Nasdaq 100 index ($QQQ) going back to 1998 while also showing the percentage of Nasdaq stocks making new highs at the same time of the underlying index. As Dana points out, last week’s new high saw the fewest new highs in the stocks that make up the index. This is not what bulls want to see.

Based on Dana’s calculations, even in 200 when breadth was awful and there was very little participation in the up trend by individual equities, there were more than there is today. That’s pitiful.

Momentum

Like Breadth, we have a negative divergence in the Relative Strength Index as this momentum indicator made a series of lower highs going into last week’s new high for the S&P. We also have a divergence in the MACD and Money Flow Index indicators.

Semiconductors

In the webcast I did with MarketWatch in early June I said that one of my favorite indicators to watch was the Semiconductor sector ($SMH). I like to see semi’s confirm the price action that takes place in U.S. equities. While 2014 has been the year of “new highs in stocks” we’ve seen the semiconductor sector market right along hitting new highs as well. Until last week.

Last week I tweeted out a similar chart to the one below, showing that semi’s were not confirming the new high. As of the close on Friday, $SMH has wiped out all of its July gains. We don’t normally see this type of behavior and this kind of divergence unless stock prices are preparing to head lower. Do semiconductors always foreshadow corrections in stocks? No, nothing is perfect. But based on the small bit of weakness we saw in the S&P on Friday, I think it’s possible we start seeing equities chase after semi’s.

60 Minute S&P 500

On the intraday chart of the S&P 500 we can see negative divergences was created as the RSI and MACD indicators made lower highs as the S&P made a new high. This was then followed by price dropping back below the prior high.

Last Week’s Sector Performance

Once again the Energy Sector ($XLE) led in relative performance for the week. Followed closely by Technology ($XLK) and Health Care ($XLV). The Consumer space got hit with Consumer Staples ($XLP) and Discretionary ($XLY) the two worst performing sectors last week.

Year-to-Date Sector Performance

Utilities ($XLU) and Energy are still the two leading sectors for 2014. Tech, Health Care, and Materials ($XLB) round out the group of sectors that are still outperforming the S&P 500. Consumer Discretionary and Industrials ($XLI) are the worst performing sectors YTD.

Why The 10-Year Treasury Yield Could Drop Under 2.4%

Posted on July 24, 2014 by Andrew Thrasher, CMT

With each passing day it seems the bearishness towards bonds refuses to ease. The survey’s of economists still show a heightened distrust for the Treasury market, even though prices have marched higher for the bulk of 2014. When we look at the weekly chart of the 10-year Treasury Yield ($TNX) we can see that support may be under 2.4%, and if prices do in fact break 2.4% that may open the next wave of shorts to get squeezed.

Below is a weekly chart of $TNX going back to 2008. I’ve included the 200-week Moving Average as it has been an important level of support and resistance for the 10-year Yield. In 2010 and 2011 we saw the 200-week MA act as resistance when bond prices were falling prior to the corrections in equities that took place each of those years. In 2013 we saw this long-term Moving Average act as support when yield was falling in October. And once again this MA acted as support in late May of this year when $TNX last approached the 2.4% level.

Once again we see yield approaching this critical level of support that currently sits at 2.38%. A break under 2.4% would shock a lot of traders. If we look at momentum, using the Relative Strength Index (RSI) we aren’t even close to seeing oversold conditions. During past bottoms in yield the 14 week RSI dropped to under 30. Of course it’s not a requirement for momentum to become ‘oversold’ on this weekly chart for yield to rise, but that’s been the case during previous intermediate-term bottoms.

When we look at the latest batch of Commitment of Traders (COT) data in a chart from SentimenTrader we can see a lack of concern for Treasury yields continuing to fall, with over 3,000 contacts net-long. While the previous three bounces in yield have occurred when traders lessened their bets in favor of a higher yield down to under 200,000 contracts. There appears to still be too much optimism for yields to rise for them to actually do so.

Going forward I’ll be watching to see how the $TNX reacts if it makes it back to 2.4% and the prior May low. If we do break under 2.4% then the 200-week Moving Average may come into play as the next possible level of support.

We Can’t Forget That Trend Matters

Posted on July 23, 2014 by Andrew Thrasher, CMT

I often write about mean-reversion and look for different charts that show where the proverbial rubber-band appears to be overextended and ripe for a correction back to the mean. These types of setups have shown themselves in several markets and lead to shifts in short and intermediate trends.

However, we can’t forget that the trend is still important. The overarching direction of a market matters and is not something I ignore when reviewing a chart. That’s why the trend of the S&P ($SPY) is always the first chart I show in my Weekly Technical Market Outlook. It’s rarely changes and I often just attach a sentence or two to it. But before we can dig into the internals of an asset class or look at other interesting charts I believe it’s critical to acknowledge the prevailing trend. Those higher highs and higher lows matter!

Today we are seeing new intraday highs in the S&P and the Nasdaq 100 ($QQQ). The trend in the ‘big 3’ indices is firmly positive. While part of my analysis includes looking for turning points, we must still respect the trend itself and is something that can be extremely difficult to do at certain points.

Will the current up trend end? Of course it will! Will we be able to foretell its demise? Studies have shown that it’s unlikely. Will we continue to watch the internals of a market by charting things like breadth and momentum to understand its ‘health’? Absolutely. But we must allow the current up trend to be innocent until proven guilty and at this point the judge has yet to slam his hammer down convicting this bull market to death.

Compilation of New Yahoo! Finance Contributors

Posted on July 23, 2014 by Andrew Thrasher, CMT

Phil Pearlman, who has helped take Yahoo! Finance to the next level during his time at Yahoo! has compiled a group of financial writers as Yahoo! Finance Contributors.

The bloggers will be producing content on their respective Tumblr pages which will filter over to Yahoo! Finance. I’m honored to be included on this list among these great traders and writers as well as the opportunity to have my musings shared on one of the largest and most trafficked sites in the world.

I look forward to reading what each of these contributors share. Here’s the list:

A Wealth of Common Sense (Ben Carlson)
Jon Markman
What Works on Wall Street (Jim O’Shaughnessy)
Kimble Charting (Chris Kimble)
Charlie Bilello
Ryan Detrick
Carl Icahn
Ralph Acampora
Greg Harmon
Linda Descano
Gregor Macdonald
James Altucher
Jeffrey Kleintop
Vitaliy Katsenelson
The Kindergarten (Josh Brown)
Najarian Brothers (Jon & Pete)
Ivaylo Ivanov
JC Parets
Andrew Thrasher
Erik Swarts
Almanac Trader (Jeff Hirsch)
Dan Nathan
The Irrelevant Investor (Michael Batnick)
Blue Phoenix (John Licata)
Patrick O’Shaughnessy
Blaine Rollins
Jamie Lissette
Joe Mansueto
Andrew Nyquist
Estimize
Scott Krisiloff
Jeremy Hill
Dana Lyons
Market Anthropology (Eric Swarts)
The Whipping Post (Justin Frankel)
Phil Pearlman
Barry Ritholtz
Chris Ciovacco

Make sure you bookmark these links as each will undoubtedly bring must read commentary. As far as my YF Tumblr page goes, I will be sharing the same content there as I do on the blog.

More: Dr. Pearlman’s Opus (The Reformed Broker)