S&P 500 – Andrew Thrasher

The Trend Continues

Posted on June 18, 2013 by Andrew Thrasher, CMT

In April as we bounced off support at 1540 I wrote a post called Technical Analysis Doesn’t Have to be Difficult, I identified the uptrend and showed possible levels of support. Today I wanted to provide an update, however not much needs to be said. The Relative Strength Index has continued to stay elevated above 40 and price found support. Yep, it’s that simple.

I’ll continue to post charts that look below the surface of the major indices and see if things begin to breakdown that could threaten the current trend. But at the end of the day we are still in an uptrend.

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.

Equities May Recover Based on Other Ways to View Momentum

Posted on June 4, 2013 by Andrew Thrasher, CMT

Based on a short-term view, things appear quite extended to the downside in the equity market. I tweeted yesterday that I’d be surprised if we didn’t get some kind of bounce following where we closed on Friday. From what I’m seeing after yesterday’s price action, I think it’s very possible price advances from here. A lot of traders will be setting their scopes on the May high if we begin to catch some bids, personally I don’t know nor do I care if we get there. Patience is a virtue.

In Constance Brown’s book, Technical Analysis for the Trading Professional, she discusses different ways we can view the Relative Strength Index. Two of the methods Brown mentions are what I’m going to look at today.

In the chart below I’ve put Bollinger Bands on top of the 14-period Relative Strength Index. As you can see, when RSI breaks out from the bands, momentum appears extended – without taking into consideration the nominal value of the indicator. We can also apply trend line analysis to momentum. For example, RSI is currently sitting above a rising trend line from the November lows. Based on both of these methods of looking at the RSI indicator, the bias appears to be to the upside.

So while most of the time we view momentum, specifically the Relative Strength Index, based on divergences and where the indicator is in relation to being overbought or oversold, there are other ways we can view the data.

However, we can still observe that the RSI is above 50 – staying in the bullish range as it finds the previously mentioned trend line support. The S&P 500 ($SPX) is also at support as we connect the November, December, and intraday low in April. The slope of this trend is higher than desired, but if this period of weakness does in fact turn into just healthy consolidation, then the bulls may be able to lick their wounds and keep marching. Time will tell.

Fearful Traders Send Put Buying to Lofty Levels

Posted on May 28, 2013 by Andrew Thrasher, CMT

Just three days of weakness with Friday being one of the lowest volume trading days of the year and traders are still shaking in their custom-made boots. Over the last few days we’ve seen a pick up in put buying as fear pours into the market.

Below is a chart of the S&P 500 ($SPX) and the three breakdowns of the put/call ratio. First we have index options, then equity options, and all options. Index put/call and all options put/call are both at extended levels as a surge in buying of puts has pushed the ratios off-balance. This type of data can help give us an idea of market sentiment. As more puts are purchased it typically signals more fear entering the market – sometimes too much fear.

Based on the strength of equity futures this morning, it looks like we are in for a pop – although still plenty of trading to be done. Last week I discussed whether the bout of weakness we were experiencing was a sign of a top or just the markets taking a breather. I put my ballot in the latter, guessing that we would see some continued strength as bulls buy the dip, and that appears to be taking place this morning.

Market participants appear jittery, fearful to have equity exposure but still nervous of missing out on any rally attempts. It’s important to stay focused and not get lost in the minutia. Create a plan and follow it and there’s a good chance you live to fight another day.

Equities Just Taking A Breath or a Market Top?

Posted on May 23, 2013 by Andrew Thrasher, CMT

It’s amazing how fast sentiment can change. Yesterday morning my twitter feed was full of bulls kicking the bears in the grown but once they came back from lunch those same instigators had put on their bear suits and where calling for mass panic. Amazing.

The move in equities has been described as parabolic and Fed-induced. But I must ask – who cares? We have/had an uptrend and that’s what matters. We can monitor market internals to get an idea of how healthy the move has been and how long in the tooth it may be.

But now that we’ve had what looks like the second down day in a row people are freaking out. So is this just equities taking a breather or have we put in a market top?

First lets look at the move that’s taken place. No one will argue its been unusual for equities to march this high this fast. In fact, going back to 1998, we have only seen equities this extended four previous times. The chart below shows the S&P 500 ($SPX) in relation to it’s upper and lower Bollinger Bands on a weekly basis. Three of the past four instances we have been this far above the upper band has led to a correction, with 2004 being the exception. So yes, it seems it would be healthy for the market to experience some type of down move or consolidation but we can’t be naive in assuming that because we are high in the clouds that the plane must crash.

Looking at the short-term view of momentum, we are already oversold based on certain metrics. I wouldn’t be surprised if traders view this recent bout of weakness as a buy-able dip. That’s what they have done with each of the drops we’ve experienced so far this year and muscle memory is likely to still be fresh.

It’s not my job to make predictions, it’s much easier to let the tape lead the way and allow price action to dictate my reactions. However, if I were to make a prognostication then my guess would be that buyers step in and take us to a fresh high. Not saying it happens today or tomorrow (although it could!) but that bulls take another whack at keeping risky assets in play. This could give us the opportunity to put in some negative divergences and see some of the ‘risk on’ components of the market stumble in relative performance.

Earlier this week I mentioned the extreme in sentiment from Ned Davis Research’s report. We have the building blocks for a correction, it’s just a matter of when the players deem them important. If anything has been apparent in 2013 it’s been that being a equity bear has not been fashionable. I have not put on my bear hat just yet but it may be time to dig it out of the closet.

The Bull-Bear Case For Equities

Posted on May 8, 2013 by Andrew Thrasher, CMT

Whenever I look at the market I try to view it from both sets of eyes – those of the bulls and the bears. For the better part of 2013 we’ve seen momentum and breadth drop, raising a yellow flag for the equity market. With the break above 1600 on the S&P 500 ($SPX) breadth has come back and started rising again along with some of the ‘risk on’ metrics. The cyclical sectors have picked up their performance as noted by J .C. over at All Star Charts,with defensive sectors like healthcare and staples giving up some of their relative gains. The bulls had their fair share of battles to fight to get the intermarket view of stocks to improve, and it appears they have done their job. Below is a chart showing the breakout in three breadth indicators: advancing minus declining issues, the Summation index, and the percentage of stocks above their 50-day moving average.

Turning to the bear side, we are extended to the upside. Yesterday’s price action took us completely outside the upper Keltner Band. The Keltner Bands overlay is similar to Bollinger Bands, except it uses volatility (Average True Range) to determine the distance between the bands. The S&P 500 ($SPX) has broken above the upper band three previous times so far this year, the first time was ignored, and the second caused equities to momentary dip before continued to advance. A rise above the upper band just lets us know that the market is due for a breather or some type of consolidation, it doesn’t mean we are about to enter a bear market. In my piece for TraderPlanet I noticed the level of resistance created by Andrews’ Pitchfork, which we last came in contact with in April. While yesterday’s close took us above the Keltner Band, it also knocked us into the Andrews’ Pitchfork resistance (not shown).

When weighing the above views of the market, I have a feeling the breadth is more important for the longer-term trend of the market, while the bearish case is more concerning for short-term trading. I’ll be watching to see if we have some type of consolidation while the buyers reload and keep breadth advancing and price moving higher.