$ES_F – Andrew Thrasher

Weekly Technical Market Outlook 3/31/2014

Posted on March 31, 2014 by Andrew Thrasher, CMT

On Friday we saw the energy sector break out of the resistance I discussed in last week’s Technical Market Outlook, confirming the bullishness that had been taking place in volume. The Advance-Decline Line for $XLE also broke its down trend, which is positive for energy bulls. I’ll be watching to see if the strength continues this week or if it turns into a false breakout. Also on Friday I wrote a blog post looking at the Kitchin Cycle. This cycle, which turned lower ahead of the 2000 peak, 2007 top, and 2011 high, will be turning negative later this year. This cycle also fits into the historically bearish period of time for mid-term election years, which we are currently in. It’ll be interesting to see how the market reacts as the cycle peak approaches.

Equity Trend

The trend of the S&P 500 ($SPX) is still positive although we are starting to see some short-term signs of lower highs. The channel that I discuss in the 60-minute chart is still in place and keeps the equity market in an up trend. Breadth

I’m still seeing a larger increase in the broad NYSE Advance-Decline Line (shown) compared to the Common Stock Only Advance-Decline Line (not shown). This means that breadth is still not as strong as we’d like it to be in equities for a chance to make a run at a new high; but this does not mean a new high is not possible.

The NYSE Advance-Decline Line, while still in an up trend, did break its short-term trend line as shown by the dotted red line. It has yet to make a lower low or diverge from price, which is what we would likely see at the start to a more substantial bearish move. The Percentage of Stocks Above Their 200-day Moving Average has begun putting in lower highs and lower lows but it is still above 70% which has been the level of resistance/support we’ve been watching for the last several months.

Equity Momentum

With the consolidation in the S&P 500, the negative divergences in momentum I’ve been highlighting the last several weeks have yet to work themselves off. I am currently watching the 49 level on the Relative Strength Index which had developed into potential support last week. If we do break 48 then the longer-term support of 35 will likely come into play.Small Caps

The Russell 2000 ($IWM) index has garnered a lot of attention lately due to its sudden period of weakness. With that, I thought it would be a good time to check in on the chart for $IWM. Right now price is approaching potential support at the 100-day Moving Average. This MA has held up as support in February as well as April and June of last year. We also have the Relative Strength Index touching its own support level. This momentum indicator has been bouncing off 35 for the last twelve months, and if the up trend is still in tact, should hold up this week. 60-Minute S&P 500

Right now this is the only chart that matters for the equity market. The S&P 500 ($SPX) has been in a channel since the start of March. The bulls view this as short-term consolidation before the next leg higher while the bears think traders have grown exhausted and unable to take stocks higher. Over the last week we do see a short-term down trend with lower highs in the S&P (as shown by the dotted blue line). The levels of lure are 1840 for support and just over 1880 as resistance. The overall trend remains positive until proven otherwise. Quarterly Performance

This table was created by Scheafer’s and tweeted by @ukarlewitz. If the S&P is able to close above 1848 today then we will see the fifth positive quarter for the index. As the table shows, the following quarter hasn’t seen great returns after the equity index has completed five consecutive positive months, with the average performance of -2.89%. It’s important to note that the table obviously doesn’t have a robust data set available for this average return with just five past instances. I’ll let you make your own conclusions about the level of importance for this type of data.

Last Week’s Sector Performance

As I mentioned in the first paragraph, we saw energy ($XLE) have a strong week last week – most notably on Friday. Utilities ($XLU) came in second with the financial sector ($XLF) the worst performer for the week.

Year-to-Date Sector Performance

Not much as changed with the YTD sector performance. Utilities ($XLU) and health care ($XLV) continue to be the star performers. With consumer discretionary ($XLY) and industrials ($XLI) as the weakest YTD.

Major Events This Week

With Janet Yellen announcing the decrease in importance of the unemployment rate for their decision regarding QE and interest rate policy we will likely see a decrease in market anxiety surrounding Friday’s NFP report.

Monday: Chicago PMI
Tuesday: ISM Manufacturing and Construction Spending
Wednesday: Factory Orders
Thursday: Jobless Claims
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.

Is A Cycle Peak Coming Later This Year?

Posted on March 28, 2014 by Andrew Thrasher, CMT

I don’t spend much time looking at market cycles, but it seems there’s an important one that’s peaking out later this year. Readtheticker.com is a site that spends a great deal of time looking at market cycles. One specifically that has been brought up is the Kitchin Cycle.

According to Business Cycles and Depressions:

The Kitchin cycle is a cycle in the level of economic activity with a period of about 50 months or 3.5 years. It is named after Joseph Kitchin, a British statistician who identified both minor cycles of 40 months and major cycles of 7 to 10 years. [….] Kitchin examined monthly statistics on bank clearings, commodity prices, and short-term interest rates in the United States and Great Britain from 1890 to 1922. All three series apparently moved together through 40-month cycles.

I’ve re-created the Kitchin cycle on the chart below. As you can see, the past four cycle peaks have lead to bearish periods of trading. We have the 2000 tech bubble top, the flat/down year in 2004, the 2007 peak, and the mini-bear market in 2011. If history continues to repeat itself, then the next Kitchin cycle peak will be later this year around July to September.

I’m by no means calling for a market top later this year. I’m simply presenting one piece of data and you’re free to make you’re own conclusions. I continue to let price dictate my bias and will watch the market internals for clues to potential weakness in the current equity up trend.

Weekly Technical Market Outlook 3/24/2014

Posted on March 24, 2014 by Andrew Thrasher, CMT

Looks like Friday had traders on the edge of their seats as the S&P 500 ($SPX) attempted to put in a new all-time high. I was in a meeting all day Friday, so I was predisposed during trading hours and wasn’t able to tweet any charts intraday. Last week we did see gold begin to weaken from its short-term up trend as we discussed in last Monday’s Technical Market Outlook. The equity market appears to be in a period of consolidation and so I will address that further into the post.

Equity Trend

You may be wondering why I always start this weekly post with the Equity Trend when it hasn’t changed for months. While the trend has continued to be positive I think it’s critical to understand where the overall trend of the market is before taking another step in market analysis. So yes, the trend of the S&P 500 is still positive as a new high was challenged although not achieved during trading last week.

Equity Breadth

There are different versions of the Advance-Decline Line that take into account different sets of stocks. The one that I use for my Weekly Technical Market Outlook takes into account all of the NYSE holdings. Each day as I review my charts I also look at the Volume Advance-Decline Line, Common-Stock Only, Small-Cap, and Mid-Cap Advance Decline Lines as well. Each of these tell a different story about the health of the market. The most commonly discussed measure of breadth looks at all of the holdings in the NYSE, which is why I use it for this post. But I would argue that Common Stock Only is much more important in understanding potential turning posts. If I begin seeing changes in one of the other Advance-Decline Lines, I’ll be discussing it in a post at the appropriate time. As of right now, they all are moving in similar fashions.

With the increase in the Advance-Decline Line I’ve drawn a short-term trend as shown by the dotted red line in addition to the long-term up trend shown by the solid red line. Both measures of Breadth we discuss each week experienced some consolidation last week, while staying firmly in up trends.

Equity Momentum

Momentum for the S&P 500 ($SPX) is still diverging from price in all three of the indicators I show on the chart below. The Relative Strength Index is currently unable to break above 60 as it nears a bear market range with the equity market challenging a new high. The MACD, while well off its lows, is still unable to meet its previous high.

Energy Sector

I’ve noticed the SPDR Energy Sector ETF ($XLE) chart showing an interesting setup. We have price approaching a new high, although it still is under performing the S&P since last September. The Relative Strength Index hasn’t been ‘overbought’ since last may and that only lasted one day. Momentum has slowly drifted lower as it has diverged from price.

Taking a look at volume, with the On Balance Volume Indicator, which adds the amount of shares traded on positive days and subtracts them on down days – we’ve seen a fairly large increase on this metric since February. It appears more shares are being trading on positive trading days for $XLE than negative days, a bullish sign for higher prices.

Looking at the underlying stocks that make up the energy sector in the Advance-Decline Line for $XLE, I’m seeing a defined down trend from the high last October. Participation in the advance/consolidation in price for $XLE has weakened considerably over the last several months, which doesn’t bode well for energy bulls.

I say this is an interesting setup because we have conflicting information. We have bullish volume over the last month but breadth for the sector in a down trend with momentum becoming stagnant as it refuses to break into ‘overbought’ status while at the same time only falling under 35 for a short period time in January. On the downside $XLE has respect its 100-day Moving Average, so I’ll be watching for this to act as potential support on any further weakness.

60-Minute S&P 500

As I mentioned in the first paragraph, the S&P 500 ($SPX) appears to be in a short-term consolidation. With price having difficulty breaking 1883 and treating 1840 as support. We saw trading end last week with the equity market holding its 50-1hr moving average. The MACD momentum indicator is still showing a negative divergence from price, refusing to confirm the attempted move higher in the equity index. I’ll be watching for this short-term range to break this week, with price holding short-term support last week I would expect price to break to the upside, but we may see the MACD win out and price begin to confirm the signs being show in momentum.

Last Week’s Sector Performance

Our year-to-date leaders, Utilities ($XLU) and health care ($XLV) took it on the chin last week as the worst relative performers. The Health care sector took most of its damage on Friday as biotech began bleeding. The financial sector ($XLF) was our strongest performer with technology ($XLK) coming in second.

Year-to-Date Sector Performance

While showing signs of weakness, it wasn’t enough to take the title of strongest YTD performers from utilities and health care. Consumer discretionary (cyclicals) ($XLY) and energy ($XLE) are now the worst performing sectors year-to-date.

Major Events This Week

We get another update to Q4 ’13 GDP this week as well as some important housing market data sets, including the Case-Shiller Home Price Index.

Monday: Chicago Fed National Activity Index
Tuesday: Case-Shiller Home Price Index and New Home Sales
Wednesday: Durable Goods Orders
Thursday: Jobless Claims, Pending Home Sales, and GDP
Friday: Personal Income and Outlays

Weekly Technical Market Outlook 3/17/2014

Posted on March 17, 2014 by Andrew Thrasher, CMT

Happy St. Patrick’s Day! We go into this week of trading with an unusual $VIX expiration mid-week and five of the nine S&P sectors nearing their respective 50-day moving averages. All eyes will be on the Fed on Wednesday, with the expectation of another step up in tapering the Fed’s QE program.

Equity Trend

While we saw some selling last week, the equity market is still firmly in an up trend. The January highs around 1850 need to be regained this week to keep the bull camp happy and to keep the previous high a solid level of support. I’ll also be watching to see how the S&P 500 ($SPX) acts around the 20-day Moving Average and if traders are able to re-take this short-term MA early in the week.

Equity Breadth

The Advance-Decline Line weakened alongside price last week. Since it shot up almost in a straight line in February, we do not have much to look for in regards to support for this measure of breadth, which means we can just look at the trajectory of movement it makes as price has declined. What we don’t want to see is breadth weaken at a faster pace than price, showing more severe selling than what may be showing up the day-to-day fluctuation of the S&P.

The Percentage of Stocks Above Their 200-day Moving Averages has once again fallen back under its resistance level of 72.5%. We were starting to see some strength in this data set, but that seems to have been lost with last week’s selling.

Equity Momentum

The potential divergences that I highlighted two weeks ago stayed in place as price fell. With the Relative Strength Index (RSI) taking out its short-term low, we have a confirmed bearish divergence in equity momentum. We still have momentum in a bullish range, which favors an upside breakout. But if the RSI indicator is unable to break above 65 on any new highs then that will be one of the bearish signs we’ll be monitoring for prices to weaken further.

Gold

Gold ($GC_F) has been having a great 2014, unlike many other asset classes, with the shiny metal up nearly 15% year-to-date. In February I discussed gold breaking above resistance and showing a positive divergence in momentum. This helped give confidence in the run gold has had and taken it up to prepare for a test of $1,400/oz.

One moving average that doesn’t get mentioned very often for gold is the 300-day MA. This has acted as great support and resistance for gold and is something that’s being tested right now. As the 11-year chart below shows, during the bull market in gold, the 300-day MA acted as support during the majority of short-term corrections in price. In late-2012 we saw gold prices break through the long-term moving average and eventual 400 point drop.

Will this moving average once again be important for traders and act as resistance or will we see price break through and continue on to $1,400? If we do break the 300-day MA I’ll be watching the August ’13 high of $1,435 as the next level of resistance. The August high will likely bring about a fair share of supply into the gold market and may require bulls to take a breath if they plan to continue the up trend in price.

Finally, we also have a historically high reading in sentiment based on COT data for gold. According to SentimenTrader’s Gold Sentiment Score, gold topped out at 92% in September 2012 and is now registering at 75%, which is just under the ‘overbought’ level of 80. SentimenTrader notes that, “over the past 20 years, there have only been four other times that sentiment climbed to 75% while gold was still at least 10% below its previous 52-week high. […] Each of those times, the rally was close to petering out, leading to negative returns over the next month (at least) each time, averaging -4.6%.”

60-Minute S&P 500

Like we saw on the daily chart, a bearish divergence in momentum developed on the 60-minute S&P 500 chart right before the down turn as well. On any further weakness I’ll be watching the March low just above 1830 as potential support. The RSI indicator is skirting around the 30 level, so it’s possible we see some form of over-sold bounce if things do weaken further and push this momentum indicator into ‘oversold’ territory.

Weekly Sector Performance

Once again we see the utility sector ($XLU) take the lead in relative performance of the nine S&P sectors. However, one new development last week was seeing consumer staples ($XLP) step up from being an under-performer and show some strength as traders shifted their bias to the defensive sectors of the market.

Year-to-Date Sector Performance

Utilities ($XLU) and health care ($XLV) continue to be the dominate forces in sector performance this year. Energy ($XLE) and industrials ($XLI) are now the worst relative performances for 2014.

Major Events This Week

This will be a busy week with economic reports. We will be getting some insight on inflation and the housing market to start the week, with the always important FOMC announcement on Wednesday.

Monday: Industrial Production and Housing Market Index
Tuesday: Consumer Price Index and Housing Starts
Wednesday: FOMC Announcement
Thursday: Jobless Claims and Existing Home Sales
Friday: Quadruple Option Expiration

Are Consumer Staples Preparing to Warn Us Of Trouble Ahead?

Posted on March 13, 2014 by Andrew Thrasher, CMT

As I go through hundreds of charts each day/week I’m looking at pure price action, comparisons, and indicators on various time frames. Each chart has a unique story and can tell us something different. By watching the relationship between consumer staples ($XLP) and the S&P 500 ($SPY), we can get an idea of trader’s risk appetite. When we begin to see a shift favoring the defensive sector in momentum, we can start getting cautious that price may be hinting at a potential down turn. Let’s look at some examples.

Below is a weekly chart of the price action of the S&P 500 at the 2000 top with the Relative Strength Index (RSI) from the $SPY and $XLP ratio. As you can see, we saw the momentum indicator break above 70 and then eventually put in a lower high as the equity market made a double top. This told us that traders were showing a stronger preference for the defensive consumer staples sector, which ultimately led to a large bear market decline.

The next occurrence of the Relative Strength Index for the ratio breaking above 70 and creating a negative divergence with the S&P 500 was in 2004. This lower high in momentum happened quickly and lead to a slightly negative consolidation for nearly six months.

Next we have the top in the S&P 500 ($SPX) in 2007. In July we saw the RSI indicator just barely break above 70 before putting in a lower high leading to the equity peak and multi-year bear market.

The fourth time we saw a negative divergence in the Relative Strength Index of the ratio between $SPY and $XLP was in 2011. While many traders point to the conflict over budget in Washington DC as the cause of the mini-bear market in stocks, we were seeing signs of weakness back in April that price was trying to tell us that something may be wrong.

Finally we have the current price action. At the end of last week the momentum indicator registered at 70.11, a few hairs above ‘overbought’ status which means we do not have a divergence just yet. Over the last 15 years we have not see the RSI indicator break above 70 and not eventually create a divergence. However, it’s important to recognize that a data series with just four inputs is by no means robust and history is not required to repeat itself.

I do not write this as an attempt to a call a market top. There are still too many bullish charts to make the assumption we’ve seen the highest prices for 2014 put in already. Although, I think the relationship between consumer staples and the S&P 500 is important and is something I’ll be keeping my eye on over the next few months.