Market Analysis

Weekend Charts: Moving Parts

Any engine performs as well as the sum of its parts and on the surface this engine called the $SPX continues to operate as smoothly as ever. As we look at a monthly chart of the $SPX the repetitive ping of the monthly 5EMA and 8MAs remain one of the most steady elements of its operation:


Yet for months we keep observing how the MACD seems to be running out of gas and, for the moment, it appears we may actually be seeing 2 red months in a row for the first time since 2012. And when are the last times we really have seen back to back red months in December and January on the $SPX? 2000 and 2008 come to mind. Both not exactly great years for markets.

But the month is far from over of course and this week’s massive rally off of early January lows demonstrate aptly that this engine is still very capable of amazing sprints. Those that followed the schematics (i.e. the 2000 analog) did really well (it was our best start to a year ever).

Still any well functioning engine has moving parts that need to be maintained as aging parts tend to break and could bring the engine to a sudden stop.

If you are partaking in this race that is the US stock market you may be well served to at least keep an eye on its moving parts for signs of potential breakage.

Below is a review of some of its key functioning components and their implications:

Yields keep sinking:


No that’s not the chart of a high flying tech stock it’s the $TLT which shows an insatiable demand for low yield bonds. While ZRIP remains in effect the expectations for rate increases in 2015 have not dissuaded investors from racing into them. As markets have experienced an expansion in volatility since October 2014 some of this demand may well be fear based. The current expansion above the monthly Bollinger band is comparable only to the corrections in 2008 and 2011.

The beginning of 2014 was marked by lofty projections for the 10 year to rise above 3%. As evidenced by the chart the opposite happened. The recent weakness marks a break in a major trend line and a failure to recapture this trend line soon could signal a part about to fail in the $SPX growth engine:


Trend line breaks are appearing in multiple parts indeed and are adding stress to the engine.

Currencies for example:


The ECB is expected, again, to announce their decision on QE on January 22. Growth remains anemic and record high unemployment continues to wreck havoc on Europe’s youth in particular.

The most pronounced break has occurred in oil. While initially viewed as a lucky break its continued collapse is now raising the specter of too much of a good thing as parts of the economy are very negatively impacted. Oil rigs are shutting down weekly as their costs of production are higher than the current price of the commodity they are aiming to sell:


While lower oil prices have a positive effect on consumer pocket books the underlying statistics continue to point toward the consumer at large struggling big time as wage growth remains anemic and spending growth continues to be reliant on debt fueled spending as opposed to an income driven expansion.

But consumers have not been the core component of this rally. It has been central banks and buybacks distorting the demand for equities.

Central banks remain the chief engineers of this engine and there is no doubt they are paying very close attention to its performance. As soon as it sputters they show up with a tune up.

Just consider the US Fed:

At the October lows it was Bullard that performed the “extend QE” tune-up. In mid December Janet Yellen performed the “patience” service. And just this week it was Evans whose “catastrophic to raise rates too soon” fuel injection that resulted in a massive overnight gap up when things got off to a shaky start to 2015’s race.

Bottomline: As long as the quick tune-ups work this engine keeps on running.

This coming week we will start to hear of earnings going into full swing in the following weeks. Buybacks remain high and will remain so until rates rise in earnest. This part of the engine seems to have quite a few months of a steady hum to it.

Yes the engine looks steady, but the sputtering is becoming more pronounced.

Consider the $DJIA, steady as goes on the weekly:

INDU weekly

Yet the daily shows increased volatility with a potential double top and heads and shoulders pattern, but closing above its key MAs:


This potential heads & shoulders pattern is very apparent in multiple indices, here the financials for example which experienced a strong rejection at the 21MA and displayed notable relative weakness this past week:


Heads and shoulders patterns have been notable for their failures in recent years and so they are guilty until proven innocent in my book, but the potential for a break is there.

It’s all perfectly consistent with the 2000 analog we’ve been watching and the recent accuracy has been stunning as even the initial new high on Friday followed by subsequent weakness fit well within the pattern. From our member feed on Friday morning:

SPX analog

It is this analog that does support the view of further weakness to come before sizable new highs can be reached later in the spring (assuming no engine break):


Per analog this next week may indeed be defined by chop continuing to reflect tension between the different moving parts. OPEX, earnings, terrorism, crude, yields, central banks, seasonality, etc all setting up for a curvy part of the race.

Some indicators of engine performance:

High/Lows remain positive even on down days:


The $NYSI is far from overbought or oversold:


..which is consistent with the $VIX which doesn’t show strong conviction either way at the moment:


Bottomline, this engine continues to run, but has parts at risk of breaking its performance. I don’t expect the 2000 analog structure repeat to continue indefinitely and at some point there surely will be a large deviation.

A break in the performance could have major consequences. The correction of October 2014 saw the first pierce of the weekly 50MA in years. A touch of the 100 weekly MA remains elusive, but it now shows confluence with the October lows and would make for an obvious point of long entry:


This corrective scenario would be violent and is certainly not projected by Wall Street and is dependent on one of the engine parts to break. In lieu of this happening the race may just continue as scheduled:

ES monthly

So you see the potential range of prices is vast and the prospect for tradable volatility remains awesome. When, if, or how an engine breaks remains unknowable, but keeping a close eye on the parts will make all the difference in maximizing one’s performance.

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