Market Analysis

Monthly Charts

I like monthly charts, especially in context of trends, trend lines and key moving averages such as the exponential 5 EMA. February saw the first serious correction since early 2016 and it came on the heels of record optimism and technical extensions.

Below are some select index charts and observations I’d like to share.

Firstly, the big story in February was yields, specifically the 10 year and the break above the 30 year descending trend line brought an at least temporary end to the rally at precisely the moment as markets tried to break above their 30 year trend line, the same one they fell below in 2008 and have never managed to recapture. And this rejection in correlation to the yield break-up resulted in a volatility explosion:

Here’s the $VIX monthly chart showing a very clear break out of its downward trend:

Markets have been used to “V” bottoms off lows and February did not disappoint in this regard. The key mission: To save price above the monthly 5 EMAs. And in many cases the missions was successful:

$SPX:

$NDX:

$OEX:

2 takeaways on all these charts: While the monthly 5 EMAs were saved these charts remain very much overbought from a long term trend perspective.

But there was a notable deviation in the recovery. Other indices did not manage to close the month above their respective 5 EMAs.

$RUT:

$NYSE:

The takeaway here: Money jumped back into the larger cap stocks which also makes sense as many of them have the largest buyback programs. After all we saw heavy buyback operations conduct the buying off of the lows.

And good thing too for many investors as the correction has not yielded a notable change in bullish allocation. Investors, according to Rydex, remain fully allocated:

So with longer term overbought readings and a mixed bag of closes what’s the outlook here?

Well, frankly stocks may be in serious trouble technically speaking even if they end up making new highs. Why do I say this? Firstly recognize that March and April are seasonally strong months so new highs may come into play at some point. Indeed $NDX nearly made new highs this week before retreating into month end.

While new highs are an uncertainty what is far from a technical uncertainty is that, if new highs are made, they would come on a negative RSI divergence.

Remember we’ve seen these before. Here is $XLF as an example:

When things look their best they often aren’t. Back in 2007 the initial correction was bought, then produced new highs on a negative divergence and then it was all over.

So bulls have their work cut out for them and that is: They need to not only prove they can make new highs with rising yields, they also need to be able to sustain new highs.

At this precise moment the 3% area on the 10 year scares them. In March we have the first Fed meeting with Jerome Powell and then it’s off to earnings season. However this turns out know that volatility is back and based on the monthly chart I showed you it’s here to stay for a while.

Buckle in.

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