Weekly Market Technical Outlook

This week I am starting something new with the blog. Each Monday morning I’ll be posting a series of charts that look at the big picture of major markets. Something I’ve personally been working on lately has been stepping back and not getting lost in the flood of information. These are also some of the charts I use in my firm’s weekly investment committee meeting and show a weekly market technical outlook. Hopefully this post each week helps you get a better idea of where the markets stand from a technical perspective and makes you better prepared for the week ahead.

Equity Trend

First up is the overall trend on a daily chart of the equity market via the S&P 500 ($SPX). For 2013 the trend has been positive with a few bouts of volatility along the way. The green dotted line on the chart below connects this year’s lows and helps identify the overall trend. I’ve also included the 20-day and 100-day moving averages. Depending on time horizon, these two MA’s have acted as support during recent down swings.

Equity Breadth

Think of equity breadth as a measure of health for the up or down trend. As the S&P 500 ($SPX) rises we want to see strong participation. With that, there are multiple ways for us to measure participation or the health of the trend. First we’ll look at the cumulative number of advancing issues minus declining issues on the NYSE. When there are more stocks rising than falling this line will climb higher. Up until recently we had been seeing confirmation from the advance-decline line for the up trend in the S&P. The current slight divergence isn’t a red flag yet as it can be easily corrected. If the advance-decline line weakens further and begins making lower highs, then I’ll begin to grow more concerned.

On the bottom panel of the chart below we have the percentage of stocks above their 200-day moving average. It’s often thought that a stock is in an up trend when it’s above its 200-MA. We can use the percentage of stocks above their long-term moving average as another way to gauge market participation. This measure of market breadth has caused many traders to grow concerned about the strength of the currently rally, myself included, due to it’s deepening negative divergence from the equity market. While stocks make new highs, we aren’t seeing the same action in stocks above their 200-MA. However, the percentage has been making higher lows, which is constructive for the current rally. Currently I view market breadth as neutral with a slight positive bias.

Equity Momentum

There are three tools for measuring momentum that I like to use on a daily chart. The first is one I often use on the blog, the Relative Strength Index (RSI) which is in the top panel of the chart below. While we are seeing a slight negative divergence in the RSI, it is still firmly in a bullish range as previous periods of weakness in price have been unable to push the indicator into ‘oversold’ territory (below 30.) Next up is the MACD indicator. This indicator has been flattening out over the last few weeks, which is slightly worrisome. Finally, in the bottom panel of the chart is the Money Flow Index, which works like the RSI but incorporates volume. Despite the potential for a divergence, nothing quite concerning here.

S&P 500 60-Minute Chart

To take a step further in looking under the hood of the equity market I like to watch a 60-minute chart of the S&P 500 ($SPX). What I’m looking for here are short-term levels of support and resistance as well as confirmation in measures of momentum. Right now, we have established support just above the 1800 level, as show by the dotted purple line. Looking at momentum, we have a slight divergence in the Relative Strength Index in the top panel of the chart. While the price action has headed higher, RSI has been making lower highs over the last two weeks. We are also not seeing confirmation in the MACD indicator, another measurement of momentum. I’ll be watching to see if the previously mentioned level of support holds up as well as the 50-1hr moving average.

Last Week’s Sector Performance

Below is a chart of last week’s sector performance. Being a shortened holiday week, it’s not surprising we didn’t see much movement in the major S&P sectors. The leading two sectors were technology ($XLK) and consumer discretionary (Cyclicals $XLY) with energy ($XLE) being the worst performer.

Year-to-Date Sector Performance

For 2013 the leading sector has been health care ($XLV), followed by consumer discretionary ($XLY) and industrials ($XLI). The utility sector ($XLU) continues to show the weakest YTD performance.

Bonds

To represent the bond market I’m using the iShares Aggregate Bond ETF ($AGG). We’ve seen some nice strength in bonds off the Sept. low, even in the face of a strong equity move. At the close of last week it seems $AGG is creating a wedge between its 200-day moving average and 50-day moving average. Things still look bullish for bonds but I’d like to see a breakout above the 200-MA.

International

Off the July low we had been seeing some relative performance strength out of the iShares EAFE Index ($EFA), as shown in the bottom panel of the chart below. However, domestic stocks have taken back the reigns and have been leading for the last month. Looking at the top panel of the chart, at the Relative Strength Index, we have some nice support just under 50 as buyers continue to step in to buy dips in $EFA. If price continues to rise I’ll be watching for potential resistance at the October high.

Commodities

The commodity markets have just been awful this year. I highlighted one potential bright spot last week, but on a relative basis there hasn’t been much to like in commodities. The RSI indicator is approaching resistance as $DBC, a commodities tracking ETF, struggles to break above its 50-day moving average. The trend in commodities is firmly negative.

Major Events This Week

While my focus is always on the price action, I think it’s important to know what major economic data announcements are approaching. Here’s a list of what’s being announced this week:

Monday: ISM Manufacturing
Tuesday: Motor Vehicle Sales
Wednesday: New Home Sales, ISM Non-Manufacturing, and Beige Book
Thursday:Jobless Claims and GDP
Friday: Non-Farm Payroll

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.