IWM – Andrew Thrasher

Weekly Technical Market Outlook 12/15/2014

Posted on December 15, 2014 by Andrew Thrasher, CMT

After a seven week run up to new highs it appears sellers woke up from their winter naps and turned on their trading terminals. The S&P 500 ($SPX) fell 3.52% last week while small caps ($IWM ) dropped 2.53%, International stocks also finished in the red by 4.66%. Of course we can’t forget the oil market which stumbled 12.4% over the last five trading days.

Trend
While the trend for the U.S. equity market remains positive, I did not like seeing price fall under the prior September high in the final hour of trading on Friday. Because of its round number status no doubt we’ll hear a lot about 2,000 for the S&P this week and why it ‘matters.’

Breadth
While breadth had been improving we still have yet to see the NYSE Common Stock Only Advance-Decline Line break back above its prior high. Two weeks ago I discussed how the other A-D lines had confirmed the most recent high but the broader, NYSE equity only has yet to do so. The Percentage of Stocks Above Their 200-day MA has continued to hit new lows which has only been intensified after last weeks selling.

Decrease in New Low-High
One of my favorite follows on Twitter is Dana Lyons. Dana does some really interesting analysis and produces some great charts that he also shares on his Tumblr. Below is a chart Dana recently shared that shows the data points where the S&P 500 has been near a 52-week high but the breadth, as measured by the number of new lows minus new highs is greater than 2%.

Dana notes that we last saw this occur in August of last year, which as we know did not put a stop to the up trend in stocks. However, the previous instances are hard to ignore.

LIBOR
Over the last several years the 3-month LIBOR rate has been fairly uneventful in its decent. In its simplest form, LIBOR is the international rate that banks charge each other for short-term loans. When the trend in LIBOR begins to rise that often means banks are growing nervous and are charging a higher premium for loans to one another. During previous dips in the U.S. equity market we haven’t seen a noticeable rise in LIBOR.

However, this last week has been difference. While the market is off just a couple of points LIBOR rose 3.10% which is the largest 1-week increase since 2011 when the S&P downgraded the U.S. and politicians were debating whether they should ~~do their job~~ keep the government open.

A one week move is not something to ring the siren over but I don’t believe it’s something to simply ignore either.

Momentum
Many traders will point to this chart as a reason for last week’s selling. While the S&P made a new high the Relative Strength Index put in a small bearish divergence. Two weeks ago I highlighted the divergence in the MACD histogram as a sign of potential weakening momentum. This lower high in the RSI helped confirm that.

Gold
It seems Oil has gotten most of the attention recently but before that it seems the focus had been on the slide in Gold prices. As Gold broke through its 2013 lows I think many traders wrote it off as a dead asset. But those lows have once again been breached and the bulls have been putting bids under gold over the last two weeks. We now have a sign of a possible false break which is being accompanied by two bullish divergences in momentum: the RSI and MACD indicators.

It appears the bears just didn’t have enough left in the tank to keep driving Gold prices lower. Or many they shifted their focus from the shiny metal to the black gold market, oil, to tickle their fancy. Nonetheless, spot gold prices are back above their prior low and with these weekly bullish momentum divergences, this asset may become interesting to some. However much work is to be done to regain the trust of the market and see the down trend broken. Two weeks of gains is hardly enough to base a complete turnaround on.

60-Minute S&P 500
It seems the fairly long divergence on the MACD is finally getting its day in the sun as price begins to follow its lead. The Relative Strength Index also started putting in a series of lower highs near the intraday top for the S&P 500. Which was soon followed by multiple ‘oversold’ readings which as I wrote about last week, doesn’t mean a bounce has to be produced.

Last Week’s Sector Performance
As the major indices sold-off last week traders sought the ‘safety’ of the defensive sectors, most notably Utilities ($XLU) and Consumer Staples ($XLP). Relative to the S&P 500, Energy ($XLE) was the worst performing sector followed by Materials ($XLB).

Year-to-Date Sector Performance
The trend continues another week of Health Care ($XLV), Utilities, and Technology ($XLK) in the top spots of relative performance YTD. Energy, Materials, Consumer Discretionary, and Industrials remain under-performers with just a couple of weeks left of 2014.

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 12/1/2014

Posted on December 1, 2014 by Andrew Thrasher, CMT

It’s been a few weeks since I’ve done a Technical Market Outlook post, but I’m back and ready to run through some charts.

We’ve seen the U.S. equity market continue to grind higher, being led by large caps ($SPY) with Small Caps ($IWM) under-performing over the last couple of weeks. Bond traders have still shown a lack of interest in risky assets, and international markets have remained in the shadow of the S&P 500, all while commodities have disappointed. Spot gasoline prices took a fall on Friday, dropping 9% and Crude Oil fell even harder, down over 10% for the day.

Trend
As the S&P 500 ($SPX) continues to hit new highs, the up trend remains in tact. We also have the 20-day and the 100-day Moving Averages upward slopping which is a good sign for equity bulls.

Breadth
In my opinion, breadth is currently a mixed bag. The chart below shows the NYSE Common-Stock Only Advance-Decline Line, which has broken above its falling trend line but has yet to make a higher high and confirm the rise in the equity market. We also have the down trend in the Percentage of Stocks Above Their 200-day Moving Average. However, the Advance-Decline Line for the NYSE has hit a new high, which was helped by its inclusion of some bond funds. The S&P 500 and the Nasdaq Advance-Decline Lines have also confirmed their respective index’s move.

With three of the four major A-D lines hitting new highs, this is likely to be viewed by most in a positive light. While I had been cautious of the advance due to a lack of breadth confirmation, the measurements mentioned above have eased the bulk of my concerns.

Breadth Part Two
On October 15th, just as the S&P 500 was finding a bottom I wrote a post called “We Haven’t Seen A Market Top Yet.” In that post I showed the following chart, which has a unique measure of market breadth. The blue line on the chart measures the S&P 500 components relative to their respective 52-week high and low. Rather looking at just whether stocks are rising or falling like the Advance-Decline Line; this indicator is more concerned with where the stocks are relative to their prior moves which can give us a better idea of market internals to some degree.

In my October post I wrote that in 2007 we saw much more deterioration in this breadth measurement compared to where we were at the September ’14 high. I wanted to see if the divergence widened when the market rose and tested or made a new high. Well now that this has happened I wanted to check back in with this breadth indicator. Unlike in 2007, more S&P 500 components have gotten closer to their respective 52 week highs. We are currently testing the September level and the indicator is back in a health range, well above were we were at the ’07 peak.

While there are still signs that things maybe extended, I do not believe we are currently seeing the same level of corrosion in breadth like we were in prior market tops.

Momentum
The divergence in the Relative Strength Index that sent up a warning flag in September is no longer present as the momentum indicator has once again broken above 70, and is now giving an ‘overbought’ reading. As a reminder, being ‘overbought’ while can lead to short-term weakness is a longer-term positive as it shows strength within a market.

The MACD has also cleared out its divergence, however one piece of the MACD that does have me concerned about the short-term is the histogram. Like in March and August/September of this year, the histogram has been diverging from price and is almost negative. The Histogram of the MACD indicator is simply the difference between the ‘fast’ and ‘slow’ lines represented. This type of divergence often gives an early warning to a crossover of the MACD lines, which is bearish for price.

Energy Sector
The slide in the Energy Sector ($XLE) has been picking up steam, down nearly 8.5% year-to-date. Back in July when it seemed like everyone loved the energy space and thought $XLE could do no wrong, I wrote about whether the sector was due for a pullback. The RSI indicator was at its highest level ever, price was the furthest above its 200-day Moving Average since the 2011 and 2008 peaks, and price was testing a long-term level of potential resistance. That day ended up marking the peak for $XLE and it hasn’t looked back since.

Now, we have another interesting chart for the energy space, this time relative to the S&P 500. Below is a monthly ratio chart of $XLE and $SPY. Since the inception of these two ETFs we have never seen the Relative Strength Index (RSI) fall below 30, until now. Momentum has just been getting pounded as the U.S. equity market rises and energy gets destroyed. Looking at the prior lows in 1999, 2000, and 2003 we can draw a trend line that may act as support if we see the relative performance between these two continue to favor $SPY.

60-Minute S&P 500
It’s been interesting to watch the intraday movement of the S&P 500 since the prior low. Price has been able to hold above the 50-1 hour Moving Average since it last crossed above it in October. The Relative Strength Index (RSI) has also done a great job at holding support near the 50 level, which is where we find it after the close on Friday. The MACD has been declining for the bulk of the advance. I would not call this a divergence since the decline does not include any significant swings in price for the S&P. I’ll be watching to see if the RSI continues to hold support and if price also remains above its Moving Average.

Yield Curve
As I’ve discussed multiple times, the bond market is either disconnected from equities or is not feeling the same level of jubilance as stock traders. The yield curve does a good job at depicting this. Over the last 25 weeks, the Rate of Change for the bond curve is down nearly 22%, a level we haven’t seen since the 2011/2012 lows. A declining yield curve can be trouble for the financial sector. While financials have not been a star performer this year, they have been able to outpace the broader index YTD. The yield curve is likely on everyone’s radar and the repeated drumbeat of new lows is becoming hard to ignore.

Sector Relative Rotation Graph
Below is the RRG for the nine S&P sectors. This graphic shows the trend in performance as well as the momentum of that trend for the sectors relative to the S&P 500, for more information go here. In the current depiction of the RRG we can see the strength in Utilities ($XLU) and Consumer Staples ($XLP). While Health Care ($XLV) has been a leader this year, it has begun to see its trend momentum weaken as it nears the ‘Lagging’ category. The Financial ($XLF), Consumer Discretionary ($XLY), and Material ($XLB) sectors are also experiencing weakened trend momentum.

Last Week’s Sector Performance
While it was a shortened week with no doubt lower volume due to the Thanksgiving holiday, we still had some trading days to look back at. For the week, Consumer Discretionary and Technology led the way relative to the S&P 500. With Energy of course being the worst performing sector followed by Materials.

Year-to-Date Sector Performance
Looking at the last 11 months of 2014 the sector leaders have rarely changed. Health Care is back in the top spot followed closely by Utilities and Technology. Energy holds the up the rear along with Materials, Consumer Discretionary, and Industrials as the four sectors still under-performing the market YTD.

Weekly Technical Market Outlook 11/3/2014

Posted on November 3, 2014 by Andrew Thrasher, CMT

The S&P 500 closed out last week up 1.17% while small caps ($IWM) fared better, up 4.94%. and International stocks ($EFA) had a good week as they bounced 2.76%. With the strong recovery back to new highs seven of the nine S&P sectors are back above their respective 50-day Moving Averages. Materials and Energy remain the laggards, still trading below their intermediate MA.

Trend

As the V-shaped recovery pushed the S&P 500 to a new high, we now have the ingredients for a new positive trend in stocks. I had been watching the prior trend line off the past series of higher lows (dotted green line) and whether it would act as resistance on the bounce, it did now as stocks powered higher. Price is now firmly back above the 100-day Moving Average and 20-day MA.

Breadth

When the market makes a new high, what do you not want to see? Breadth not confirming the high by still being under its own previous peak. As measured by the Common Stock Only Advance-Decline Line and the Percentage of Stocks Above Their 200-day Moving Average, breadth is continuing to diverge from price.

One positive note to make about breadth, is that the S&P 500 A-D Line (not shown) has confirmed the new high in stocks. So which is more important, the NYSE Common Stock Only or the S&P Advance-Decline Line? The price action over the next couple weeks will likely let us know.

New 52-Week Highs

While the Breadth chart above shows a bearish divergence and a lack of confirmation, how many stocks in the NYSE did in fact try to confirm the new high in the major index? A pretty large amount, 521 to be exact. This is the most issues on the NYSE to hit a new 52-week high since May 2013 and before that it was 2010. During the bull market off the ’09 low, when we’ve seen this many stocks hit a new high we’ve seen the S&P pull back on a short-term basis.

While a lot of traders have been comparing this market to the peak in 2007, myself included in the post from October 15th, We Haven’t Seen a Market Top Yet. However, this spike in new highs puts another arrow in the quiver for the bulls, as this set of data created a large divergence back in ’07, not showing the strength we saw on Friday.

Momentum

The downtrend in the Relative Strength Index (RSI) is nearly over with the momentum indicator testing the prior high around 68 and has broken above its falling trend line. The Weekly RSI is still showing a series of lower highs, as last week’s rally did not push hard enough in getting momentum higher. The Money Flow Index is now ‘overbought’ and may be signaling for a short-term decline in stocks.

Bond Market

If you believe that bond market is ‘smarter’ than the equity market, this next chart has likely kept you out of stocks for the bulk of 2014. Traders have continued to show a preference for long-dated Treasury bonds over High Grade debt, pushing the ratio between the two into a down trend. The same can be said for the 10-Year Treasury Yield.

There use to be a time where bonds would confirm the moves made in stocks and this would make traders feel nice and cozy inside, but that time has passed. Either the correlation between stocks and bonds is changing or traders no longer feel High Grade bonds deserve to be price like stocks.

60-Minute S&P 500

It’s hard to not appreciate the level of aggressive traders had during the recovery off the October low in the S&P 500 ($SPX). Gap ups have gone unfilled and momentum has remained elevated for the majority of the advance. We now have a level of support in the Relative Strength Index by connecting the lows. A break of this support zone will likely act as a ‘tell’ for an intraday decline. While there is a slight divergence in the MACD, the strength in the RSI in my opinion outweighs it. When these two momentum indicators tell different stories, I often find myself relying more heavily on the RSI, but that’s just me.

Sector Relative Strength

We’ve seen quite a bit of improvement on the Relative Rotation Graph. Five of the nine S&P sectors are now in the ‘leading’ category, although Consumer Discretionary ($XLY) is close to falling into the ‘Weakening’ category as its trend and trend strength both appear to be losing steam. Materials ($XLB) and Energy ($XLE) continue their trek deeper into the ‘Lagging’ category, unable to get a good footing to improve relative the S&P 500.

International Relative Strength

Traders have continued to show preference for U.S. equities over their international brethren. It’s been five weeks since we last saw a foreign market in the ‘Leading’ category. While a handful of countries are strengthening in the momentum of their relative trend, only one, the Netherlands ($EWN) has been able to break into the ‘improving’ category.

Sector Performance Off the Low

Understanding sector leadership off a low can help us better understand of the strength the move in stocks had. The best performing sector off the October 15th low was Health Care ($XLV) followed by Industrials ($XLI). Consumer Staples ($XLP) which held up well during the down turn, being the second best sector, was not shown a positive bias on the march back to new highs.

Sector Performance Year-to-Date

Not much as changed for sector leadership for 2014, with Utilities ($XLU), Health Care, and Technology ($XLK) still holding the top three spots. Energy ($XLE), Consumer Discretionary, and Materials have been the worst performing sectors YTD.

Head & Shoulders Pattern in Small Caps

Posted on October 6, 2014 by Andrew Thrasher, CMT

There seems to be a lot of discussion about the current bearish pattern that’s taking place in the Russell 2000 ($IWM). While there are likely tens if not hundreds of price patterns found throughout technical analysis, few are as popular or often discussed as the Head & Shoulders pattern. There is good reason for is this as it has lead to some major declines in financial markets. For example there was a Head & Shoulders pattern that lead to the peak in the Dow back in 2007.

Should we be concerned about this bearish pattern? Does it hold any relevance? One good resource is thepatternsite.com, which does a great job looking at the data of varies candlestick and price patterns. According to Bulkowski’s analysis, the Head & Shoulder pattern ranks number 1 among 21 well-known pricing patterns. This is based on the 4% failure rate and 22% average decline calculated by Thomas Bulkowski.

So it appears we may have good reason to take these types of setups seriously, so what defines a Head & Shoulders top? There are few better resources to turn to than Robert Edwards and John Magee’s, Technical Analysis of Stock Trends – often considered the bible of Technical Analysis. Edwards and Magee seem to agree with Bulkowski stating in their book, “This [the Head & Shoulders] is one of the more common, and by all odds, the most reliable of the major Reversal Patterns.”

They continue in their writing to define what they believe is the “ideal” Head & Shoulders top:

A. A strong rally, climaxing a more or less extensive advance, on which trading volume becomes very heavy.

B. Another high-volume advance which reaches a higher level than the top of the left shoulder, and then another reaction on less volume which takes price down to somewhere near the bottom level of the preceding recession.

C. A third rally, but this time on decidedly less volume than accompanied the formation of either the left shoulder or the head, which falls to reach the high of the head before another decline sets in.

D. Finally, decline of price in this third recession down through a line (the “neckline”) drawn across the Bottoms of the reactions between the left shoulder and head, and the head and right shoulder, respectively and a close below that line by an amount approximately equivalent to 3% of the stock’s market price. This it he “confirmation” or “breakout.”

We now know what we are looking for with respect to the bearish reversal pattern in $IWM. Now lets see if the latest price action meets the above mentioned criteria. Below is a daily chart of the iShares Russell 2000 ETF ($IWM). I’ve marked the two shoulders and the head as well as the horizontal neckline at $108.

In the bottom panel we can see that volume has been declining with the formation of the head and right shoulder. Based on the work done by Edwards and Magee, we would need to see a breakdown to roughly $104.76, which would be 3% under the neckline. Volume on the break can also be an important ‘tell’ as bears will be looking for a strong move on heavy volume to help confirm and complete the pattern.

With this type of pattern we can calculate the expected measured move by looking at the distance from the head of the pattern to the neckline. This would take us nearly 10% low down to $98. However, it’s important to note as Bulkowski stated, only 55% of the patterns actually complete their expected measured move.

While these types of patterns garner much attention nothing matters until the neckline is broken, which Edwards and Magee point out that roughly 20% of necklines are “saved,” meaning the pattern is not 100% completed. Going forward I’ll be watching the $108 level and see if we get a break on heavily volume and if price is able to drop to $104 to confirm the move is not in fact a false breakdown. But until then we must be a patient.

Source: Technical Analysis of Stock Trends by Robert D. Edwards and John Magee (ninth edition)
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 9/8/2014

Posted on September 8, 2014 by Andrew Thrasher, CMT

It has been a couple of weeks since I’ve written a Technical Market Outlook, so it’s good to get back to updating these charts again. Last week the S&P 500 ($SPX) finished 0.22% higher, the Russell 2000 ($IWM) ended the week down 0.15%, and Emerging Markets ($EEM) had a strong finish, closing out on Friday up 1.75%.

Trend

As the S&P 500 continues to head higher and hit new highs, the trend is of course still positive. We remain above both the 20-day and 100-day Moving Averages as well as the long-term trend line.

Momentum

As the equity market has been strong over the last couple of weeks, we have seen momentum apparently hit some headwinds. A small divergence has developed in the Relative Strength Index as well as the MACD indicators on the daily time frame. While the momentum indicators have not begun turning lower, they have also not confirmed the new highs seen in price.

Treasury Yield

On July 10th I tweeted the below chart showing the divergence that was taking place between the 10-year Treasury Yield and the ratio between the U.S. Dollar and Emerging Market Currency Bonds. Jeff Gundlach once said that he watches the relationship between the U.S. dollar and emerging market’s as a leading indicator for the direction of U.S. Treasury yields. Back in July the ratio between the Dollar and Currency Bonds was heading lower, which ultimately followed by the continued drop in the 10-year Yield to.

Now we are seeing the correlation between the 10-year Yield ($TNX) and the ratio once again break down as the dollar strengthens against Emerging Market Currency Bonds with $TNX not responding in-kind. While the 10-Year Treasury Yield has found support at the 100-day Moving Average, I’ll be watching to see if it begins to react to the rise in the dollar against emerging market currency’s or if this divergence becomes more severe.

Breadth

Like momentum, we have a slight divergence in the NYSE Common Stock-Only Advance-Decline Line, which has yet to take out its previous high. However, I will note that the S&P 500 ($SPY) Advance-Decline Line (not shown) has confirmed the new high. We are also not seeing much strength in the Percentage of Stocks Above Their 200-Day Moving Averages, as the indicator remains under 70%.

60-Minute S&P 500

Looking at the intraday price action of the S&P 500 ($SPX) the strength in price does not appear to be being confirmed in the RSI or MACD momentum indicators. We last saw an example of this in Late July which led to price dropping a couple of percent and eventually creating a bullish divergence in momentum and sending price right back and to a new high. 1990 has acted as support recently, so that’s the level I’ll be watching if price does weaken this week. If we can’t hold on to that then price may see some more selling.

Small Caps

Dana Lyons has become one of my favorite follows on Twitter and Tumblr accounts to follow. Dana produces some really interesting research and is someone definitely worth a follow. Last week Dana wrote an interesting post looking at the duration of the divergence between small and large cap indices. While this topic of lack of confirmation in small caps has gotten discussed quite a bit this year, the length of time of the divergence, based on the work done by Lyons’, actually doesn’t lend itself to a complete bearish argument. Dana writes that the “Long-duration S&P 500-Russell 2000 divergences have not led to the calamitous types of events one often hears warnings about. 10 of the 11 such historical precedents have led to only moderate hiccups in the market. The two most similar to our present divergence, however, have had split results, including a bear market.”

The chart below shows the previous examples of previous 100+ day divergences between small and large caps while the large caps were making new 52-week highs.

Last Week Sector Performance

Once again, Utilities ($XLU) lead the way last week, followed by Consumer Staples ($XLP) and Financials ($XLF). The Energy ($XLE) sector was the big under-performer for the week, followed by Materials ($XLB) and Technology ($XLK).

Sector Performance Year-to-Date

While Utilities had faulted a couple of weeks ago, it has moved back to being the best performing sector YTD as it just barely beats out Health Care ($XLV). Consumer Discretionary ($XLY) and Industrials ($XLI) round out the bottom of the pack.

Source: Is the duration of the small cap divergence a concern? (Dana Lyons)