Interesting Technical Report attached. What caught our eye is the reasonable BULLISH assessment of the stock market
- last week was a bull market correction
- Indicators did not diverge, and thus not a market top
- From here, we should pay more attention to market breadth.
“We are still in the camp of ‘bull market correction’ at this stage, though we believe that over the short-run, the markets remain vulnerable while they sit below their respective 50-day moving averages. We believe investors should watch the following support levels going forward:
Index Support Level
SPX 1085 zone
DJIA 10,100 zone
COMP 2125 zone
RUT 600 zone”
Morning Chart Book: 05/10/10
Dan Wantrobski CMT (215) 665 - 4446
The S&P’s recent decline of 12% (from April 26th up until last week) was in line with our expectations of a 10-15% market correction in Q2 2010. The way it came about however shocked just about everyone, and will likely raise concerns regarding liquidity-driven volatility going forward.
It remains our opinion that the events of last week were more a function of a bull market correction rather than the onset of a cyclical bear market (which hold an average duration of 2 years and bring the markets to new lows). Coming into the crash of last week, we simply did not see the types of divergences that have marked past market tops. Typically, a ‘market top’ can last several months and will see many divergences underneath the headline tape (such as the loss of the banks, or perhaps the small- or mid-cap sectors). Instead, for the past year or so, U.S. markets have enjoyed rather strong ‘breadth’ readings for the majority of the cyclical uptrend. The only significant breakaway group we saw coming into last week’s decline were the broker-dealers- which had failed to make new recovery highs along with the broader markets since October of 2009.
Obviously going forward, the important metric to track as the markets rally will be breadth once again: are all / or most groups participating in the strength? Are the banks / financials participating or leading the charge? Will the consumers resume leadership as well- and what of the small- and mid-caps? If we start to see divergences such as these from here on out, then it will likely signal a churning / topping phase in the markets- and that would be a much bigger caution flag then the events of last week, in our opinion.
Here is what we are watching:
The S&P 500
SPX: 1162.17
We believe initial support now lies around the 1085 zone on the S&P on a closing basis (red circle above). Initial resistance is now seen near the 1175 region- which is the S&P’s 50-day moving average. Since March of 2009, closing breaks above the 50-day line by the SPX have triggered successful buy signals for the index- therefore, a break above this threshold would be bullish going forward in our opinion. We also note that the S&P’s 399-EMA (green line) is rising and has been a zone of support for the index since October 2009. We have found this particular moving average to be a reliable indicator of cyclical uptrends and downtrends. Therefore, we would urge traders to stay on the long side of the tape above 1085- which is where the 399-EMA currently resides.
We would also note that the S&P remains above it long-term 30-month moving average. This is important to note since continued closes above this indicator will start to reverse its declining trend upward. The 30-month moving average typically confirms cyclical uptrends when it is rising in our opinion.
The 30-month moving average on the SPX currently sits at 1104- and this level will be important to watch on a closing basis toward the end of May. We would also point out via the chart above that long-term readings of both MACD and RSI are not in overbought territory. This is a notable difference from their condition during the 1998-2000 and 2006-2007 market tops- where both were triggering extreme overbought readings.
The Dow
DJIA: 10791.66
We believe initial support resides near 10,100 for the DJIA. Initial resistance is now near the 10,850 area- which is the Dow’s 50-day moving average. Similar to the S&P, past breakouts above this 50-day have been bullish for new recovery highs- and so this is an important hurdle to overcome in the next few weeks.
The Dow also remains above its long-term 30-month moving average. That indicator currently resides near 10,250- and continued monthly closes north of this threshold will start to turn the average upward (which would confirm the broader cyclical uptrend in our view). And again- similar to the S&P- the Dow’s long-term monthly MACD and RSI indicators (lower portion of chart) do not appear overbought at this time- this should be viewed as a positive for the market’s primary trend.
NASDAQ
COMP: 2366.26
The NASDAQ Composite shows it leadership off the March 2009 bottom in this daily closing chart: here we can see the downtrend line breakout that occurred back in the summer of 2009. The primary trend for the COMP remains bullish above 2125 support in our opinion, which is outlined by the rising 399-EMA (green line- which confirms the action on both the SPX and Dow). However, we also note that the COMP remains extended off this key moving average (again, it currently sits at 2125)- which means we could see further downside over the short-run. The COMP’s 50-day moving average now sits near 2400 as initial resistance: similar to the S&P and Dow, we would like to see a closing break above this indicator to confirm the broader uptrend.
Russell 2000
RUT: 683.90
Finally, we continue to believe investors should keep an eye on the small- and mid-cap groups to confirm healthy breadth behind any new recovery highs. One way to do this is to watch the Russell 2000 index hold support at or above 600 on a closing basis, as this represents both the recent trend line breakout as well as the RUT’s rising 399-EMA (red circle above). Initial resistance is now seen near the 690-700 range as the benchmark’s 50-day moving average.
Bottom Line:
We are still in the camp of ‘bull market correction’ at this stage, though we believe that over the short-run, the markets remain vulnerable while they sit below their respective 50-day moving averages. We believe investors should watch the following support levels going forward:
Index Support Level
SPX 1085 zone
DJIA 10,100 zone
COMP 2125 zone
RUT 600 zone
Despite the intense pain inflicted last week, the primary cyclical bull remains intact above these thresholds in our opinion. We have stated in past reports that bull market corrections can be fierce, binary-black swans that temporarily send the markets into a tail-spin. For the majority of the bull market off those March 2009 lows therefore, we had escaped relatively unscathed until last week. The key going forward will be the breadth / internals beneath the tape: if we see a majority of sectors participating in the rally efforts once again, then we believe a benchmark such as the S&P can not only retest its recent highs (near 1220), but can eventually break out above them to make new recovery highs within the cyclical uptrend. However, if we start to see negative divergences in these rebounds- certain sectors failing to keep pace (or possibly even breaking lower against a strong headline reading), then investors should take that as a much bigger warning- since past market tops have exhibited those very same characteristics.
The Dollar:
The U.S. dollar is overbought on a short-term basis, but remains bullish technically in our opinion.
Even this morning, the currency is catching a bid as earlier weakness is being erased. The greenback continues to act as a global safe haven in the event of 1. geopolitical uncertainty, as well as 2. equity market liquidity concerns. For these reasons, we believe investors should maintain a long position in the dollar while it continues to trade above its rising 50-day moving average. That indicator currently provides initial support near the 81.50 zone.
For the euro, a reversion back to risk this morning on the back of a ‘global bailout’ has the currency stronger against the dollar, yet it still resides below its declining 50-day moving average- and is already weakening intra-day. We remain bearish on the currency and believe initial support remains near the 1.2500 zone (with a high probability of eventually breaking that barrier):
The events of last week saw the recent positive correlation between the U.S. dollar and the U.S. equity markets compromised, as investors flocked to safe havens. We still believe however that underneath all the short-term volatility and distraction, the US stock markets continue to quietly align themselves with the currency. This is allowing the United States to strengthen its position on a relative basis versus global competitors- as our dollar remains a reserve currency, our Treasury markets provide a safe(r) haven, and our equity markets provide better risk/return against the backdrop of a ‘mean reversion’ economic recovery here in the States. Again we must stress that relative strength does not imply there is no nominal risk in holding U.S. equities going forward, only that the risk in holding international / emerging markets securities may be greater going forward.
Though the events of last week saw a dollar rally against a crashing S&P 500, the short-term correlation between the two remains positive (0.4816)- which is in stark contrast to where it was for all of 2009 (nearly a perfect negative correlation).
Furthermore, on the very long-term correlation charts between the dollar and the S&P, we can see that the relationship is starting to reverse higher as well. Since 2004, extreme negative correlations between the two eventually ended up trending into positive territory over the course of several months. This chart therefore suggests to us that the relationship between the currency and the stock markets will continue to positively align in the months ahead.
Within this framework then, we would add the dollar to our list of ‘metrics’ to watch going forward: in our opinion, the continued strength of the currency will be a benefit to our stock markets, which will need to post strong breadth readings in order to continue their cyclical bull market. If we can achieve these technical conditions in the weeks / months ahead, we believe the U.S. can establish itself as a preferred home for both risk- and safe-haven money flows.