Aside from the larger picture discussed something curious has been forming: Several large potential megaphone patterns. In technical jargon these type of patterns are often also referred to as broadening tops. Generically these patterns identify an expanding range to the up- and downside of a given price range.
These patterns are not a guarantee of either a bullish or bearish outcome, but they do have a bearish slant to them obviously. What is curious about the current formation of these patterns is the timing of their formation in relation to a larger macro development.
First notice the patterns on the $SPX and the $NDX:
What makes both patterns of note is that higher prices have been occurring on ever weakening internals. This was most pronounced on the Nasdaq which showed substantial weakness yesterday, but had been following a trend already in place the past few weeks: Fewer stocks supporting the index price level, creating a rather large negative divergence:
Yet what makes these patterns so striking is that they are occurring precisely in the same time line when M1 money supply is forming the same pattern:
The recent decrease in M1 money supply was not only the largest decrease in years, but it also does register as an outside month. QE3 is about to end and some of the underlying weakness we witness in Nasdaq and Russell stocks may well be anticipatory. The main supporting driver of this historic rally has alway been based on central bank induced liquidity. This M1 chart above certainly supports this argument. Of course one may argue that the concurrent timing of these megaphone patterns is purely coincidental. Maybe, but I’m certainly cognizant that they are there and are potential sending a very loud message. Megaphones tend to be loud after all 😉
This week Janet Yellen may yet again deny Fed watchers any clues as to the timing of future rate raises, but rates will eventually rise and money supply will shrink. The question is only the timing making navigation of the in between period tricky. The index charts above are sending conflicting signals. For today’s trade plan/outlook for premium members see here.
Categories: Daily Market Brief