Market Analysis

Weekend Charts: It Ain’t Over Till…….

fatlady-singsIt ain’t over till the fat lady sings. What a week indeed. Volatility came back in a big way with the market experiencing larger back to back movements than in a long time. Traders generally love volatile action unless they get caught in the wrong direction of course which is never fun, but can be managed with tight stop management.

I’ve been very vocal about the deteriorating picture in the internals and was concerned about new highs during September OPEX being an optical illusion. Yet the challenge for any trader is to put opinions and trade calls very much separate as opinions can get in the way of solid trading. For those that have been following me for a long time you know that I have dreaded these recent non volatile markets and that my strength is indeed in volatile markets. I’m far from perfect as a trader (nobody is), but I do take pride in my ability to dissect the market, read the action and to make calls on it. There is a difference between bragging and taking pride in one’s work. So take the following bit in context of the latter please. This past week has simply been spot on and I want to reflect a bit on just the main directional calls as we rolled them out in the member area:

trade record

I can’t of course always guarantee runs like this, but I also doubt these types of results are common elsewhere. Sometimes one is in complete synch with the market and this has been one of those weeks. So I feel fortunate to have been able to navigate everyone on our end through this tricky market action. But one can’t sit on one’s laurels, but can only trade what’s ahead. Friday’s low $NYMO action combined with the high $TRIN reading Thursday night produced a sizable bounce on Friday closing the market above the 50MA, but below the daily 5 EMA.

So far the structure of this pullback matches very much what we have observed several times in 2014 which would suggest more downside to come in the days ahead:

SPX daily

If so the main question would be whether the action mirrors the pullbacks of April or August or more like the one in January. The April case in particular would suggest a bit more bounce action being likely before a renewed push to below the 100MA.

The weekly charts, on the surface, yield few clues as to the market’s true intent. The weekly $DJIA chart for example simply shows a test of the 5EMA and a bounce after a rejection of the upper trend line:


The weekly $SPX charts so far also suggests business as usual:

SPX weekly

But note the continued very apparent weakness in the high/low ratio. It is on the daily chart that this divergence takes on an ominous shape:


This is simply not a healthy picture and reflects a narrowing market move. It is small caps that keep waiving a red flag here and while the $IWM is extremely oversold it also broke key weekly trend line support:

IWM weekly

There is a fundamental disconnect taking place in front of our eyes and a good portion is related to the US dollar and the Euro. When currency moves are more volatile than equities one better pay attention. The ECB’s efforts to cheapen the Euro have definitely succeeded (probably much more than they expected) but in the process they seem to have created a more deflationary environment as metal prices have followed the currency move closely:


But the most fascinating aspect of it all is the supposed notion that a vastly appreciating dollar has no impact on the $SPX earnings picture. Multinationals generate large portions of their earnings from overseas and as the dollar appreciates that portion of earnings is depreciating unless one is perfectly hedged. But what are the odds every $SPX based multi-national was perfectly hedged anticipating this move:


In my humble view: No way. So there’s your disconnect right there. Markets near all time highs with high earnings expectations, but no analytical process apparent among Wall Street to adjust the earnings view downward. Instead: Buy, buy, buy.

No, somebody has to realign at some point. The dollar, equities or both. As it stands, despite the recent pullback, markets remain disconnected from even basic monthly moving averages and a sudden monthly close below the 5EMA and 8MAs would constitute a major trend change:

SPX monthly

That’s only a couple percentage points from here. If we do break these how could this all play out? Impossible to know for sure, but one scenario the $VIX is pointing toward suggests a possible speculative case similar to the one below:

SPX versus VIX

How’s this for volatile? And ironically it could still produce new highs later in the year and still have a bearish set-up in its structure by simply retesting the trend line.

And so this coming week’s monthly close could be rather telling as to whether the fat lady is ready to sing. We shall see and trade flexibly until then.

For more information about our trade philosophy please visit the About and Trading Process pages.

Categories: Market Analysis

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