Markets – Macro – Technicals

Weekend Charts: Choppy Waters

Markets moved lower on the first trading day of 2015 extending the weakness we had seen in the previous couple of days. So far none of this is unusual or surprising. Per some of the analogs we have been watching early January weakness is to be expected as people lock in deferred gains on some winners following big gains in the previous year:

Jan analogs

Per our 2015 outlook we continue to expect markets to experience increased volatility, chop and potentially very aggressive moves in both directions.

The 1999/2000 analog watch remains relevant as key aspects of the chart continue to follow the previous outline. How long such structural similarity will continue nobody can tell, but as long as it does it appears worth reviewing.

The key elements so far:

An August bounce, followed by a September correction bottoming in mid October, followed by a massive rally with a peak in early December, a pullback into mid December followed by new highs by year end. We got precisely these key structural moves and are now seeing some weakness at the beginning of the year:

Analog

No analog is perfect day by day and there will be deviations. We expected the mid December weakness and the rally into year end and benefited nicely. Now we are watching for signs of buyable early January weakness for a play off on significant chop over the next few months. Any forward looking moves are of course purely speculative as an analog can seize to be valid at any time.

But for now the message of the analog is to remain extremely flexible with these moves and not to get married to any particular outlook, but to be prepared for riding the waves.

What have markets done so far?

Basically we’ve seen a standard 38.2% Fib retrace and a test of the middle Bollinger bands:

SPX Daily

INDU

In case of the $NDX we saw a test of the 50MA:

NDX

And the $NYSE actually tested the 50MA, the 100MA and came close to the 200MA before bouncing:

NYA D

For small caps the bounce came off of the weekly 5EMA:

IWM weekly

Does this all mean the lows are in and off we go? Possibly, but far from certain. Adding to the uncertainty is indeed the $RUT as it has yet to decide whether the recent break-out was a failed break-out or whether it has simply been retesting the move:

RUT

A move below the break-out trend line would certainly put the break-out into question, a bounce from here exceeding previous highs could see an aggressive price expansion.

If Friday’s lows do not hold early next week we can certainly move on to the natural next targets such as the December 18 gap on the $SPY:

SPY 15

As the chart above demonstrates there is a small inverse in play, but buyers won’t control the action until $SPY crosses back above the $207.21 area so gap fill risk remains.

Since markets have now experienced 3 down days in a row (never more than 3 in 2014) markets have an immediate opportunity to demonstrate on Monday whether that trend from 2014 still holds steady.

In favor of buyers is early January seasonality which suggests that a positive day may be in the offing:

jan seas

Another sign of potential strength emerging soon is the behavior of the $VIX which, so far, has put in a similar performance to mid December by filling its previous gap:

VIX Daily

A larger down gap and move lower on Monday would further validate this structure.

On the flip side are signs of continued caution:

Negative divergences continue to mount. The weekly $SPX chart demonstrates this clearly in both the RSI and MFI while major trend lines are still holding:

SPX W

Stocks above the 200MA versus price show a ever widening negative divergence:

SPX 200 AR

Yet the $NYSI is far from overbought, in fact quite the opposite, as it shows potential for a positive stochastic crossover on strength next week:

NYSI

And, despite the recent weakness, we continue to see positive high/lows:

USHL

Another factor in favor of buyers is the one thing that hasn’t changed: M1 money supply keeps expanding despite the end of QE while other central banks have picked up the baton:

SPX M1

Principally this places the market into put up or shut mode next week in the short term. Per analog and seasonality a bounce into mid January is a distinct possibility.

Longer term this market has to contend with the fact that the monthly charts keep pointing to the possibility of a monthly MACD cross-over, and when that happens volatility will indeed rise significantly:

WLSH

Per the previous middle monthly Bollinger band tags one element missing for a major top appears to be the lack of a final upper monthly Bollinger band pierce. The 2000 analog gives us a framework and a target. This target remains in the 2200-2300 $SPX area.

For now the focus remains January. If we indeed get strength into mid month what could be the trigger for weakness into month end? Possibly the usual suspect on January 22:

draghi

For more information about our trade philosophy or on how to become a member please visit the About and Membership pages.

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5 Responses »

  1. Great article. Where do I find those seasonality stats? (jan-seas.png)

Trackbacks

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