Market Analysis

Weekend Charts: Levitation Trick

LevitationI’d call it a cheap levitation trick if it weren’t continually financed by billions of central bank dollars every week and thus so incredibly expensive. But fair play they did it again even though it is getting more strenuous by the week.

After getting extremely close to breakdowns on the major indices (including the Nikkei’s momentary break below 14,000), the magic forces of levitation appeared again and saved indices from experiencing serious technical damage. One has to chuckle though at the predictable change in tone of voices predicting large corrective targets last week to now seeing price targets raised. All it took were 3 up days. That’s the retail side show of course and one has to be a bit more granular to reflect on the action.

First to note is that the strained close at $SPX 1,900 occurred with the lowest volume of the year and with 40 fewer stocks on the NYSE making new highs than the last time we hit the same number. The next item to note is the rather odd structure the market has taken on to get there. Aside from one day last week we saw 4 days following a rather repetitive programmed structure on ever decreasing volume: 1. Ramp the open then 2. Park in a really tight range for 4 hours (a mere 2.5 handles on Friday):

$SPX 5 min

One other item to note was that these opening buy programs were launched independent of what was happening overnight. Any gap down was green by market open. Tuesday’s entire down move was erased within minutes of Wednesday’s open. One could not help but sense that someone wanted prices to hit 1,900 by Friday. Congrats. Mission accomplished. Moving prices of course gets easier as trading volume is simply disappearing:

SPX daily

But this price structure is similar to what we have seen for weeks now. The higher the $SPX the lower its volume only to be followed then by selling on higher volume. It’s called distribution. Yet, again, on a weekly chart basis it must be noticed that 0 damage has been done and the negative MACD divergence has not mattered. In fact, one could argue it could easily cross-over and repeat the structure of last summer:

SPX weekly

The most prevalent arguments for buying at these levels seem to center on three elements: 1. People are too negative 2. The central banks won’t allow a correction. 3. There is no alternative. If that’s your reason for buying stocks at all time human history high prices be my guest of course. While the trade could certainly work in my humble view it represents poor risk/reward for several reasons:

1. $VIX is near historic lows now. One of the most stunning aspect about Friday’s close into the long weekend was that there was literally 0 selling into the close. No worries, or even a desire to lock in some profits. Complacency at its finest. So if you buy stocks here, know you are doing it at one of the most complacent times in history:

$VIX monthly

2. NDX rallied into major resistance and is now extended above its Bollinger band. The last time $NDX got to its upper Bollinger band in January it sold off hard:

NDX daily

3. The $SPY weekly chart continues to show its largest deviation from its 100 weekly MA ever. History suggests this is a really bad time to be long from a risk/reward perspective:


4. The $RUT bounced and closed above its 200 daily MA. Great! The bad? It’s no longer oversold, rather it is overbought and the monthly chart looks extremely vulnerable still:

$RUT monthly

5. Why is volume declining so hard? Maybe, just maybe, because more and more investors are sensible enough not to chase the most vertically disconnected transport chart in history:

TRAN monthly

Good risk/reward to buy long here? Not in my book. But central bankers need to keep the game afloat and if investors’ primary reason for buying stocks here is this:


….then I suggest they take heed in the message she sent to hundreds of newly minted N.Y.U. graduates who didn’t even know who she was:

Yellen Message

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