Today, I’m going to delve into some technical analysis–speak, so I apologize in advance if some of the material sounds like another language to some of our readers. I’ll try to explain recent events on charts as concisely as possible.
The last 9 trading days have been spent working off the Nov 16th distribution day in a sideways, consolidation zone. Nov. 16th was a distribution day because we broke trend, 90% of the equities on the NYSE were down on the day, and it was on high trading volume. The consolidation has occurred at 1200 resistance and 1174 support. I’m watching for breakouts at either point for a better sense of the intermediate term trend. The 11/16 gap down (noted below) has been filled, but is acting as resistance (thereabouts 1197.75) ever since 11/16. If the gap holds, it holds. If we’re able to break above 1200, then that’s a bullish resolution to the gap and near-term resistance over the past 9 days.
S&P 500 – 60min chart
Click images to enlarge
Here’s what I think should be kept in consideration, however, as a possibility. The current consolidation has occurred after a major trend break on 11/16 (cyan line below) and a 90% down day. We have rallied from that day with two strong advancing days (circled in orange). The same such setup and consolidation also occurred after the April 27th selloff (and 90%+ down day) where broken support acted as resistance near 1205-1209. The sideways consolidation pattern resolved to the down side, as it should due to the short-term trend down previous the consolidation area (after April 27th). I’ve drawn boxes to represent these two formations for ease of view. Now, in technical analysis, the motto is to wait for a consolidation period to resolve itself before buying or selling. So I’m doing just that, reserving judgment until 1174 or 1200 are broken with confirming volume; however, the setup looks the same – leading to an intermediate bearish trend change.
S&P 500 chart with Advancing Issues, Up Volume, Declining Issues, and Down Volume for the NYSE Composite
For a bullish resolve to the current consolidation zone (1174 to 1200), I’d like to see the percentage of stocks on the S&P 500 trading above their respective 10-day moving averages (DMA) rise above 80%. Short-term, the percentage of stocks above the 10 DMA on the S&P has rallied from oversold levels on 11/16-17; however, that has turned over the past three days. I’d like to see us break 80 percent on this indicator to confirm new strength and a new leg higher.
Percent of stocks on the S&P 500 that are trading above their respective 10-day moving average
We triggered a sell signal on the intermediate indicator when the percentage of stocks on the S&P 500 above the 50 DMA fell convincingly below 80 on Nov 11. We are nowhere near oversold on an intermediate level (anything below 20%).
Percent of stocks on the S&P 500 that are trading above their respective 50-day moving average
Looking at the VIX (Volatility Index) for other signs of anxiety in the financial markets shows nothing to worry about yet for the intermediate term outlook. That would change, I’m sure, if the S&P 500 were to drop below 1174.
VIX - Volatility Index
Because bonds are selling off, and inflation expectations are rising, I don’t expect a big deflationary push into bonds and out of stocks. The current correction is merely blowing off steam. As such, it should be shallow. The 38.2% Fib retracement is at 1155. The summer highs near 1130 should also act as strong support on the way down, ASSUMING WE RESOLVE DOWN through the current consolidation zone, AND THROUGH THE 50 DMA AT 1174.
30-Year U.S. Treasury - Price
Behind the market engine, not all of the parts are moving in sync. There are a few areas that have shown relative strength versus the S&P 500 such as in the semiconductor industry group. That group has done well over the past week, but took a breather today. Silver has consolidated nicely between and over the past couple of weeks and looks to have broken out of that consolidation today, up 3.67% to .145 on March 2011 contracts. Select retailers continue to rally before and after Black Friday. Uranium stocks continue to rocket to new highs while the energy sector consolidates. This has definitely been a stock-pickers market over the last few weeks.
Uranium - Price per Pound
Source: Bloomberg
In Summary
The short-term outlook looks neutral as the market is consolidating after a very strong uptrend from September to mid-November. Intermediate term – the outlook is leaning bearish due to percentage of stocks dropping below their 50-day moving averages, a trend break on November 16th, and a new declining trend forming due to the November high and failed rally at 1200. Select industry groups show promise despite the consolidation. It has paid to be a stock picker.
