weekend update

by Tony Caldaro

REVIEW

New all time highs. The week started at SPX 2055, gapped down to open the week, then hit 2042 late Monday afternoon. That was the low for the week. Tuesday the market gapped up, and then made higher highs for the rest of the week culminating with an all time high at SPX 2097. For the week the SPX/DOW gained 1.55%, the NDX/NAZ gained 3.00%, and the DJ World index gained 1.75%. On the economic front reports were not quite as rosy. On the uptick: wholesale/business inventories. On the downtick: retail sales, export/import prices, the WLEI, plus weekly jobless claims and the budget deficit increased. Next week, after the Monday holiday, we get reports on the NY/Philly FED, Housing and Industrial production.

LONG TERM: bull market

The 2009 Cycle wave [1] bull market continues to unfold as labeled. This five Primary wave bull market has only completed Primary waves I and II. When this occurred in 2011 Primary wave III began, and it has been underway ever since. Primary I divided into five Major waves, with a subdividing Major wave 1 and simple Major waves 3 and 5. Primary III appears to be alternating. It has had a simple Major wave 1, a quite extended and subdividing Major 3, and possibly a subdividing Major wave 5 is now underway.

During Primary I the market displayed somewhat of an oddity in its five Major wave pattern. Major wave 1 was longer than both Major waves 3 through 5 combined. Normally, the first wave of any five wave sequence just does enough to kickoff the sequence. Then after a second wave decline, the third wave is the longest and thrust of the advance. Once this occurs, and after a fourth wave decline, the fifth wave can be any length. Primary wave III is displaying exaggerated but more normal characteristics. Major wave 1 did just enough to kick off Primary III. Then after a Major wave 2 correction, Major wave 3 advanced a near perfect Fibonacci 4.236 relationship to Major 1: SPX 2082 v SPX 2079. Also during the five Intermediate waves, that created Major wave 3, Int. wave v was a near perfect match to Int. wave i: SPX 2084 v SPX 2079. And, to our surprise, we have alternation now between the zigzag of Major 2 and the irregular flat of Major 4. Despite these lofty levels, wave patterns are actually starting to normalize.

MEDIUM TERM: uptrend

After making a new high in early-December the market entered a two month trading range which ended on the first trading day of February. We labeled the early-December SPX 2079 high as Major wave 3. Then the correction to SPX 1973 by mid-December Int. A, the uptrend to SPX 2094 in late-December Int. B, and the downtrend to SPX 1981 in early-February Int. C. This completed an irregular failed flat for Major wave 4. From that low the market has rallied 5.9% in less than two weeks to kick off Major wave 5.

As noted in the previous section: once the third wave is longer than the first, the fifth wave can then be any length. Normally, after an extended third wave, like we observed during Major wave 3. The fifth wave might be equal to the first wave. Should this be the case, the minimum we should expect for Major wave 5 is SPX 2199 (i.e. 1981 + 218). The market closed at its high on Friday: SPX 2097. However, this has not been just any normal market. It has been a market driven by central bank liquidity in an attempt to avoid the deflationary effects of a Saeculum crisis cycle. Or, as most like to call it a deflationary Secular cycle. As a result we are expecting Major wave 5 to advance well beyond the one to one relationship to Major wave 1. However, we are not quite ready to post a potential price/time target until the DOW makes all time new highs. Maybe next weekend. Medium term support is at the 2085 and 2070 pivots, with resistance at the 2131 and 2198 pivots.

SHORT TERM

After the downtrend low at SPX 1981 two weeks ago, we started seeing five wave patterns for the first time since December. We noted the first five wave advance: 2010-1991-2040-2028-2050, and called it a potential uptrend. The market rallied to SPX 2072 that same week, then pulled back to 2055 on Friday. During that advance the market generated a WROC buy signal, also suggesting an uptrend was underway. Then after Monday’s SPX 2041 low the market took off to the upside again in a five wave pattern: 2058-2049-2071-2058-2097. The uptrend was confirmed and new highs were hit on Friday.

Taking a conservative approach this uptrend may be all of Major wave 5, ending Primary III when it ends. Major wave 1 was only one uptrend too. Therefore, one could count the SPX 2072 high as the first wave, the SPX 2042 low as the second wave, and the current advance as part of wave 3. At SPX 2133 this third wave will equal the first wave, and this is close to our next OEW pivot at 2131. At SPX 2189 this third wave would have a 1.618 relationship to the first wave, which is close to our OEW 2198 pivot. Either way, the two pivots look like a good match for the internal structure of this uptrend.

A more aggressive approach would be to suggest this uptrend is only Intermediate wave i of Major 5. We actually tend to favor this approach for reasons we will explain when we present the price/time targets. Short term support is at SPX 2058 and SPX 2049, with resistance at the 2131 and 2198 pivots. Short term momentum ended the week with a potential negative divergence.

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SPY Trends and Influencers February 14, 2015

by Greg Harmon

Last week’s review of the macro market indicators suggested, heading into the week that the equity markets were coming off of a good rebound higher but showed signs of exhaustion Friday. Elsewhere Gold ($GLD) looked to continue to pullback while Crude Oil ($USO) tried to move higher off of a bottom. The US Dollar Index ($UUP) might continue to consolidate the rise, pulling back mildly, while US Treasuries ($TLT) were biased lower in their uptrend.

The Shanghai Composite ($ASHR) looked to continue its pullback from a major run higher and Emerging Markets ($EEM) continued to consolidate in a bear flag in their downtrend. Volatility ($VXX) looked to remain low but slowly rising slowing the wind behind equities to move higher. The equity index ETF’s $SPY, $IWM and $QQQ, were all in a consolidation pattern in the intermediate term, despite the moves higher last week. The IWM looked the strongest and ready to test the all-time highs this week while the SPY was close behind but the QQQ a bit weaker.

The week played out with Gold continuing lower before a small bounce Friday while Crude Oil held another test of support in its bull flag. The US Dollar did continue the sideways consolidation while Treasuries continued down to new 6 week lows. The Shanghai Composite reversed back higher, in what could be a bear flag, while Emerging Markets looked messy in a tight range. Volatility made a new 2015 low as it neared a critical level. The Equity Index ETF’s saw this as good news, with the SPY and IWM making new all-time closing highs and the QQQ 14 year highs. What does this mean for the coming week? Lets look at some charts.

SPY Daily, $SPY

The SPY ended last week at the 50 day SMA with a Spinning Top doji, and Monday confirmed it higher. This also confirmed a break of the range since the start of the year. The rest of the week continued higher with Thursday a new all-time high close and followed up with another on Friday. The Bollinger Bands® have opened higher allowing the move to continue on the daily chart as the 20 day SMA turns up. The RSI on this timeframe is making a two month high as it continues into the bullish zone over 60. The MACD is also pointing higher.

Moving out to the weekly timeframe sees the strong candle piercing the consolidation zone that has held the SPY since late October. The RSI is making a marginally higher high and rising. It never left the bullish zone. The MACD is about to cross up, also supporting more upside price action. There is resistance (maybe) at the spike to 212.97 with a Measured Move to 224 above. Support lower may come at 209 and 206.40 followed by 204.30. Continued Upward Price Action.

SPY Weekly, $SPY

Heading into a shortened February Options Expiration week the equity markets look strong, breaking long consolidations to the upside. Elsewhere look for Gold to lower in the short term in the longer consolidation while Crude Oil consolidates, and may be ready to reverse higher. The US Dollar Index looks to continue in a consolidation range while US Treasuries are biased lower.

The Shanghai Composite looks to continue to pullback in the uptrend and Emerging Markets look to hold in the bear flag, and might prove it a reversal higher. Volatility looks to remain subdued and now drifting lower, keeping the bias higher for the equity index ETF’s SPY, IWM and QQQ. Their charts all look strong on both the daily and weekly timeframes. If you had to pick a weakness then the gaps in the QQQ chart and move out of the Bollinger Bands® may signal short term exhaustion not seen in the SPY and IWM. Use this information as you prepare for the coming week and trad’em well.

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The Week Ahead: Will Stocks Melt Up?

by Tom Aspray

Greece leaving the euro, war in the Ukraine, and lousy Retail Sales data could not keep the stock market down last week. In this week’s technical review, I point out that several of the major averages have staged marginal upside breakouts, but most market analysts are not impressed.

Instead the focus seems to remain on how much the stronger dollar has hurt earnings, which they feel do not justify the current high levels of the major averages. Others are worried about what type of ripple effect the low crude oil prices will have on the economy.

Many may wait for the preliminary reading on GDP that is due at the end of the month. As I discussed in Barron’s Roundtable-Too Cautious Like 2013? the bullish panelists are only expecting gains of 10% or less. Many seem to think that the market needs a 15-20% correction to get in line with the fundamentals.

Others remain convinced that, as one analyst said, “Stocks will be ‘ripped to smithereens,’” or that are already in a recession or bear market. In the most recent trading lesson Tell Tale Signs of a Correction I took a look at what type of warning signs we typically see before a 15-20% market correction. I concluded that we currently do not see such warnings but that did not rule a 5-10% market correction.

With this week’s strength, a 5-10% correction is looking less likely, but a convincing upside breakout will make it even less likely. I have not seen anyone discussing the potential for stocks to melt up from current levels. This could be a rally like we saw in 2013 when the Spyder Trust (SPY) was up over 32%. If we get a confirmed breakout, a 3-6 week rally to significant new highs is likely, which would clearly surprise the majority.

In a December column (Is the Bull Market Only Half Over?) I discussed the following quote from Sir John Templeton, “Bull-markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” If we are in this type of bull market now, we have not yet reached the optimism phase.

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There are some technical reasons that I think we could see a much stronger rally from now than the market expects. They are based on breakouts above long-term resistance and what a market typically does after such a breakout.

To look at these periods, I use quarterly close only charts of the S&P 500. The first example is what happened after the market top in 1929. The chart covers the period from 1929 to 1954 when the S&P 500 was finally able to surpass this key resistance, line a. It took the market twenty-five years to overcome this resistance and the market’s reaction was very powerful.

The chart on the right covers the period from 1946-1981 as the S&P rose from the breakout level in 1954 at 30 to a high in 1972 of over 121. The S&P then formed a new long-term trading range using the 1962 and 1974 lows, along with the 1972 high. It took eighteen years before this trading range, lines c and d, was completed in 1980 (point 2).

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One gets a different perspective on the 1980 breakout in the chart of the period from 1955 through 1997. After the breakout at point 2, the S&P 500 corrected back to the breakout zone in a fifteen month correction that took the S&P 500 down 23%. This market decline was accompanied by a high level of bearish sentiment. From the 1982 correction low, the S&P 500 started a multi-year uptrend that finally peaked in 2000.

Another range developed using the 2000 and 2007 market highs and the intervening lows (lines e and f). This trading range lasted for thirteen years and was completed in the first quarter of 2013, point 4, as the S&P 500 moved decisively above the resistance at line e.

I would expect that the completion of such a trading range would result in a significant multi-year rally. From the chart, it is clear that the S&P 500 has had little in the way of a correction since the upside breakout.

If this breakout was the start of another longer-term bull market, then one or more significant corrections are likely before it is over. In fact, one is possible before the year is over, but the current technical evidence suggests it may come from significantly higher levels.

Many investors continue to be fixated on if and when the Fed will raise rates. The next meeting is on March 18. As many of you have noticed in the past year, the stock market turns soft heading into the meeting, so would expect the uncertainty to grow as we get closer.

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The weekly chart of the 10-Year T-Note yield shows that yields have risen since the end of January as support going back to early 2013, line b, was tested. There is strong resistance in terms of yield at 2.20%, so that is where any further rise in rates is likely to stall.

There are no signs from the weekly studies that yields have bottomed as the MACD is still in a solid downtrend. I would expect to see more signs of bottoming before there is clear evidence that yields have really bottomed.

There also has been quite a bit of interest in the gold market in 2015 as many gold bulls are proclaiming the start of a new bull market. Both gold and the gold miners have had a very nice rally as the Market Vectors Gold Miners (GDX) is up 15% so far in 2015.

I did not recommend buying as my long-term analysis did not indicate that a major low was in place. I was also concerned that gold typically tops out in February so that the rally might be short-lived. But I did miss a great trading opportunity.

One technical tool that I have used for many years in the commodity markets is the Herrick Payoff Index (HPI) developed by the late John Herrick. Early in my career, I had the pleasure of meeting John at several conferences. The HPI uses open interest, volume, and price to determine whether money is flowing in or out of a commodity.

I have featured it periodically in my daily columns and pointed out in Crude Oil Money Flow Turns Positive that the HPI was signaling positive money flow after the close on February 2, which favored a sharp rally in crude oil.

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Some of my readers have wondered what the HPI is telling me about the gold market. The weekly chart of Comex Gold shows that the rally topped out four weeks ago at the converging resistance, lines a and b. The next good weekly support is in the $1180-$1200 area with the monthly projected pivot support at $1195.

The weekly OBV did not form any positive divergences at the lows and looks ready now to drop back below its WMA. The weekly HPI moved above the zero line on Friday, January 9 and gold rallied the following two weeks. The HPI has turned lower but is holding above its WMA and the zero line. This is positive. I will be watching the weekly HPI closely as the correction proceeds as the daily HPI (not shown) is currently negative.

The economic calendar was light last week as Retail Sales were weak on Thursday, declining in January at the same rate as December. Some are attributing this to the possibility that consumers are spending more on services. Gasoline sales dropped 9.3% and are down over 16% in the past two months.

The University of Michigan mid-month reading on consumer sentiment dropped back to 93.6 after the January reading of 98.1, but it is still in a positive trend. With the markets closed Monday, the first reports are on Tuesday with the Empire State Manufacturing Survey and the Housing Market Index.

On Wednesday, we get Housing Starts, PPI, Industrial Production, and the FOMC minutes, which could cause some volatility Wednesday’s afternoon. On Thursday, we get the flash PMI Manufacturing Index as well as the Philadelphia Fed Survey. It looks like many of the manufacturing gauges have softened in the past few months, but it is still in a positive trend.

What to Watch

The stock market rally tried to stall on Friday, but then accelerated to the upside in the afternoon. The almost 2% gain in the S&P 500 and other major averages was a clear positive for the technical studies. I had argued a week ago in Do Stocks Have Enough Juice to Breakout? that such a breakout could occur.

A few of the key market averages like the NYSE Composite had closed January below their quarterly pivots (see Pivot Table here) but reversed the next week to close back above them.

The weekly technical studies are generally positive, but some of the daily studies—especially the OBV—are lagging. To further support the view that stocks can accelerate even higher from here, we need to see a close well above the all time highs in the next week or so. Such a move is consistent with the new weekly and daily highs in the NYSE Advance/Decline line.

The defensive sectors like the utilities were hit hard last week, but the longer-term technical picture discussed last week suggests the decline will turn out to be a buying opportunity, though the pullback could last a while.

At the end of January, it was clear from the monthly charts (Any Warnings from the Monthly Charts?) that the major trend was positive. I have found that when you are in a choppy daily environment, relying on the longer-term charts is best.

The AAII survey saw an increase in the bulls last week as the bullish % rose from 35.49% to 40%. The change in the bears was even more severe as the bearish % went from 32.42% to 20.33%.

One industry group that I recommended in January was the semiconductors and we were able to get long the Market Vectors Semiconductor (SMH) near the correction lows. I reviewed this group last week in Are These Tech Stocks Ready for Lift Off?

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There have been some significant improvements technically as 5-day MA of the % of S&P 500 stocks above their 50-day MAs has completed its bottom formation, closing Thursday near the mean of 64.3%. Typically, it will now move towards the 80% level as more stocks move above their 50-day MAs.

The weekly chart of the NYSE Composite shows that it completed its short-term flag formation, lines a and b, last week. The weekly starc+ band is at 11,305, along with the quarterly projected pivot resistance. The target from the flag formation is in the 11,500 area.

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The weekly NYSE Advance/Decline made new highs over the past two weeks as it continues to lead prices higher. The former highs have been overcome, yet the NYSE is still below the September high of 11,108. The daily A/D line (not shown) is in a strong uptrend and is well above its clearly rising WMA.

The weekly on-balance volume (OBV) has moved back above its flat WMA—which is a plus—but it is still well below the late December high. The daily OBV is also lagging.

S&P 500
The daily chart of the Spyder Trust (SPY) shows that it dropped back to its rising 20-day EMA last Monday before turning higher  It has held above the quarterly pivot at $199.42 on a weekly closing basis but just by a fraction. The starc+ band and the resistance from the prior peaks, line a, is in the $212 area. The weekly starc+ band is at $215.58.

As I noted last time, the daily close above $206.50 was significant.  There is minor support now at $207.24 with the rising 20-day EMA at $205.24.

The daily S&P 500 A/D line broke through its resistance, line b, at the start of the month and could test its all time highs this week. The A/D line is above its now rising WMA.

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The daily on-balance volume (OBV) is much weaker as—while it’s now above its WMA—it is still below the January highs. Stick with the previously recommended long positions.

Dow Industrials
The SPDR Dow Industrials (DIA) is now very close to the all time highs at $180.56 as the Friday high was just a few cents lower. The daily starc+ band is at $183.08 with the weekly at $185.65.

DIA has short-term support now at $177.50-$178.50 with the 20-day EMA at $176.98.

The Dow Industrials A/D line has broken its downtrend, line h, but is well below its prior highs and is acting weaker than prices.

The daily on-balance volume (OBV) is in a short-term uptrend and well above its rising WMA. The weekly OBV (not shown) will close above its WMA this week.

Nasdaq 100
The PowerShares QQQ Trust (QQQ) accelerated to the upside last week after it overcame the upper boundary of the trading range, line a. The daily starc+ band is at $107.56 with the upside target from the trading range in the $109-$111 area. The quarterly projected pivot resistance is at $115.62.

The Nasdaq 100 A/D line moved through its downtrend, line c, at the start of February. The daily A/D line is still below the all time high at line b.

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The daily OBV is back above its WMA, but is still acting weaker than prices. The weekly OBV (not shown) is close to moving back above its WMA this week.

There is first good support at $104.58 with the now rising 20-day EMA at $103.58.

Russell 2000
The iShares Russell 2000 (IWM) moved well above the all time highs from late December in Friday’s session. The daily starc+ band is now at $123.74 with the quarterly projected pivot resistance at $132.98.

The Russell 2000 A/D line is back above its WMA, but is well below its December high. The A/D line now has important support at line g. The daily OBV has barely moved with prices, while the weekly is back above its WMA but also below its previous highs.

For IWM there is some support in the $119.50-$120 area with the rising 20-day EMA now at $118.83. We are still long IWM from our January recommendation and would stay with them.

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