9:20am CST

Well I woke up early this morning to do this update and it just so turns out that the data feed on http://www.stockcharts.com is down. I can access the home page and the historical charts but I can’t access any charts or indicators. Therefore all of the charts and indicators that I wanted to show are currently unavailable.

Given that I can’t show the charts you will get an abbreviated version of my observations. Or at least no pictures.

The huge rally off of the lows over the past few weeks is highly unusual. Heart attack patients don’t get up and run marathons. Yet, the stock market had a heart attack a few weeks ago which broke the uptrend from November 2012 and it has jumped right off the gurney and run a marathon. Very unusual. Looking back through history the only period of time I could find that was similar to this at all was August 2007. What I was looking for was a period in which the S&P 500 had been above its 200 day moving average, fallen decisively below it (by at least 3%), then put in a V-bottom and rallied big. This rally has now run for 8 sessions and the S&P 500 is up 7.9% from trough to peak (1821-1965). Back in August 2007 the index rallied from a low of 1371 to 1479 in just 7 trading sessions. Coincidentally that rally was also 7.9%. If this analog holds true the index should retrace ~50% of its gains next week before ultimately heading higher. Assuming that the index makes no further upside progress on Monday that would imply a move down to ~1890-1905 on the S&P 500. The bad news about the August 2007 analog is that the bull market peak came only 6-8 weeks later. Back then small and microcap stocks were lagging badly and breadth was quite narrow. We are seeing the same today so that is definitely something to keep an eye on.

Regarding the heart attack analogy I was honestly expecting some choppy action coming into this past week. The big resistance zones I had for the S&P 500 were 1900-1905 and 1925-1933. I thought the index would chop higher but run out of gas around one of those two resistance zones, then roll over for some kind of a retest of the lows. That would have been normal. Instead we got what thus far has been a V-bottom. To give an idea of how unusual these V-bottoms are the only ones I recall in the past 13 years or so were September 2001, March 2009, and August 2007. The first two came within the context of bear markets so they wouldn’t apply to the current scenario. The first led to a huge 3 month rally before rolling over again and the second one of course began the bull market we are currently in today. I described what happened in August 2007 above. After the pullback I described above (which should happen this week if the analog holds true) the S&P 500 basically formed an inverse head & shoulders bottom as there was a pause and bounce at the 200dma on the first test. This time it was straight down from 1970 right through the 200dma without hesitation to 1821. Then straight back up to 1965 with virtually no more than a 20 point pullback along the way. VERY unusual.

As I was looking over the charts this weekend I noticed that a lot of indexes are nearing key resistance levels. 50 day moving averages, 20 week moving averages, 62% retracements, key gaps, re-testing broken trendlines, etc. Given how much this market has run to the upside already and the August 2007 analogy I’m personally expecting some weakness next week. 1966-1978 or so is really big resistance for the S&P 500. In that range is the 20 week moving average, 50 day moving average, a gap down from 1969 (the gap down after the huge fake out rally on 10/8/14), and then 1978 which was a bottom in September and also capped the early-October rally.

Before everyone thinks I’m all doom and gloom here is another interesting observation. I watch the Participation Index on the S&P 500 for breadth thrusts in either direction. Usually readings of -80 or worse signal that a market bottom is due within days (in bull markets). Readings of +80 or better are usually initiation thrusts to the upside.

On Monday October 13th the Participation Index posted a reading of -81. Thus a low was expected within days. We got it on October 15th. What really shocked me was the reading the following Tuesday. +70. It was actually +69.4% but let’s just say it was close enough for me to realize that this was highly unusual to see such polar opposite readings in such a short period of time. In just 6 trading sessions it went from -81 to +70. So I went back through the history of the indicator to find other periods of similar readings in such a short period of time.

First of all this indicator only goes back to January 1999 so that only gives me 15.5 years to work with but it is still interesting. The only times there was a -80 reading followed by a +70 reading in less than 6 trading sessions were October and November/December 2011. October was 5 days, November was 4 days. Obviously those were major lows.

Other occurrences were July 2010 (9 days, major bottom), October 2009 (8 days, led to 3 month rally), March 2009 (13 days, major bottom), March 2007 (13 days, led to big rally over the next 3-4 months).

There were 2 instances that didn’t quite fit the bill because the reading on the downside fell just shy of -80. They were February 2010 (7 days, led to 3 month rally before flash crash) and June 2010 (6 days, it was a fake out and market made marginal new low).

So based on the observation of the Participation Index the odds would highly favor that the market will be higher than where it was at the time of the signal (1941) in 3 months time. Or, this was a major low.

So why was there only one -80/+70 reading within 15 a 15 day span from January 1999-January 2009? My best guesses are high frequency/algorithmic trading and/or increased Central Bank intervention in the markets. Take your pick. I just know that the markets of today are nothing like they were prior to 2008. I remember the days of February/March 2007 very well. Market had a very nasty day at the end of February and then in mid-March the index was seemingly off to the races again. At the time I thought that was highly unusual and now in hindsight, it was. But it isn’t anymore. As you can see above there have been a total of 6 of these extreme readings since January 1999 with 5 of them coming since January 2009 (not including the signal on Tuesday since we don’t know the outcome yet). Every single one of them has produced a major low or at least a 3 month rally.

So how do I summarize all of this? Conflicting signals.  I just don’t see this V-bottom action holding. There will have to be some backing and filling. If the August 2007 analog holds up Monday and Tuesday would be down in sharp fashion. To maybe ~1900 on the S&P 500. Wednesday is the Fed Meeting. I’m guessing that they end QE but are quite clear that they don’t plan to raise interest rates any time soon. Is that a sell on the news scenario? We shall see. With so many indexes approaching key resistance levels after such a massive and unusual rally the odds would seem to heavily favor weakness in the coming week, possibly even longer. The market could seemingly move sideways between say 1900-1970 for the next 3 weeks just to work off the current overbought condition.

So the big question is whether this weakness is just backing and filling or the start of another big leg down? Its hard to say. What I will say is that with this big of a run in the market in such a short period of time we aren’t going to get something run of the mill like a double bottom (retest) of 1821. In my eyes that scenario went out the window once the S&P 500 got above 1925-1933. If the S&P 500 gets down to ~1900 and puts in hard reversal to the upside the odds would seemingly favor a bullish outcome which is what the Participation Index reading is telling me. If it falls much below 1900 it would seemingly be increasing the odds of a bearish outcome. Recall that there was a huge sucker rally in June/July 2011 that turned over and got ugly in a hurry once August rolled around. The big differences I see between now vs. August 2007 and June/July 2011 were that the declines had started months before (as opposed to this decline which just started about a month ago) and the 50 day moving averages were sloping down at a pretty nice clip. Unlike now where the 50 day moving average is sloping down but after the recent rally it is beginning to flatten out. I would also point out that we are now in what is seasonally a bullish time period vs. those other two periods which came over the summer months which are typically weak.

So I am watching 1966-1978 as resistance on the S&P 500 going into next week. I’m thinking this range should cap this initial rally. A retracement down to 1900 or so would be quite normal. Get much below that and it would start raising red flags. Also watching the weakness in small caps. If they can’t begin to get something going it may be setting up a situation similar to August 2007 where the big caps make new highs but the small caps lag which puts in an important top. If the markets were to stay weak (as in make new lows below 1821 on the S&P 500) into December or January the risk of a bear market would seemingly increase quite a bit.

 

Update This Weekend

October 24, 2014

12:55pm CST

Organizing my thoughts for an update. October has no doubt been a wild ride and I doubt the volatility is over yet.

 

Typo in Morning Post

October 16, 2014

2:00pm CST

I posted the wave 5 target this morning as 1785 and it should have been ~1820. I accidentally used the 93 points of wave A instead of the 53 of wave 1. So wave 5= wave 1 @ 1820 which would essentially be a double bottom testing the low of yesterday. Thus far the S&P 500 has stalled in the 1873-1878 range that I mentioned this morning. Get above 1873-1878 and this count is likely off the table. Definitely off over 1883. Over 1883 I favor that the first leg of the correction is complete and we should see the best rally in quite a while. In other words the S&P 500 will rally more than 55 points and the rally will last longer than a day. The Russell 2000 has already posted its biggest gain since August so that would be an argument that the first leg down is complete. Watching 1878-1883 on the S&P 500 very closely. Seeing lots of positive divergences, particularly in small cap. The S&P 600 has had a positive advance/decline line in every session this week and there were less new 52 week lows on the Wednesday spike to a new low than there were at the previous low which was last Friday.

My thoughts here on the S&P 500:
A= 2019-1926= 93
B= 1926-1978= 52
C as follows
1= 1978-1925=53
2= 1925-1970=45
3= 1970-1821= 149
4= 1821-1873 or 1878 (52-57 points, 1878 would be 38% retrace of 1978-1821 and close the gap down from yesterday, 52 points would be equal to the bounce of wave B above)
5= wave 1 @ 1820

Update on S&P 500

October 16, 2014

9:05am CST

When the rally of last Wednesday failed to follow through on the upside but more meaningfully gave back all of the gains of the previous day it implied to me that we were definitely dealing with a different playbook than we have for the past 2 years or so.

There was a -81 reading on the SPX participation index on Monday. That is the first reading of -80 or worse since June of 2013. Readings below -80 generally produce a meaningful low within days. The problem is that this reading came among a cluster of days in which we had already seen 5 readings of -70 without a reading above +40 heading in between. So my anticipation was that yesterday’s bounce was most of the rally but that it would make a bit more headway up to ~1873-1878 on the S&P 500. Then from there it would roll over for a final leg down.

My thoughts here on the S&P 500:
A= 2019-1926= 93
B= 1926-1978= 52
C as follows
1= 1978-1925=53
2= 1925-1970=45
3= 1970-1821= 149
4= 1821-1873 or 1878 (52-57 points, 1878 would be 38% retrace of 1978-1821 and close the gap down from yesterday, 52 points would be equal to the bounce of wave B above)
5= wave 1 @ 1785

Of course this depends on whether the market can bounce from here into tomorrow. Would provide alternation for waves 2 and 4 of C. The good news at the moment is that the market didn’t just fall apart on the open after the gap down.

There are multiple forces at play here in my view. The first is that I believe many hedge funds became complacent, pulled back on their hedges, and got extremely long. Jumping into a basket of stocks like GPRO, AAPL, GILD, and other high flyers. It is widely known that hedge funds have been under-performing the S&P 500 for 2-3 years and I think the pressure they felt to perform took their eye of the ball in terms of risk management. I heard on CNBC yesterday afternoon just after the close that the past 15 market days were the worst for hedge funds since 2008. Maybe it was 2011 but I could have sworn they said 2008 because I was a bit surprised.

The other force was that there was just so much complacency. Plus, when the market hasn’t had a real correction  in over 2 years when it does crack, it cracks big. That appears to be what we are seeing now.

I had said recently that 1687-1735 were logical targets for this correction. We may get to 1735 a bit faster than I expected. 1875-1925 is now a very key range. In other words the market needs to get down to a range where a retracement of 50-62% will get back up into that range and fail. Yesterday’s low of 1,821 was close enough. A 50% retracement from 2019-1821 would be 1920. But, if the market came down as low as 1738 (the low from February 2014) a 50% retracement would take the index back to 1878 which was the gap down from yesterday. Numerous scenarios to keep an eye on and I remain cautious. Still holding SDS from ~1930 on the S&P 500.

Monster Rally

October 8, 2014

3:15pm CST

To say that today’s rally was bigger than I expected would be an understatement.

It appears at first glance as though this will be the strongest day for market internals since July.

Both the Russell 2000 and S&P 500 closed above the gaps down from yesterday, and above their 62% retracements from the highs of Friday/Monday to today’s low.

Key reversals in all indexes.

Russell 2000 broke below 1,082 but it sure didn’t stay there long. Strong price rejection from lower levels today. Given the sentiment in small caps and all the hoopla over the death cross this may be the start of something.

As mentioned this morning some key levels held. 615 on the S&P 600 and the 150dma on the S&P 500 (closing basis).

Market seemingly had every chance in the world to fall apart today and it didn’t.

The odd thing is that I never sensed any capitulation and I still feel that the majority is quite complacent.

Something else worth noting is that the momentum stocks (momo) never really broke down. AAPL, GILD, CELG, GPRO, TWTR, LOCO, MBLY, etc. never broke down technically. This is seemingly bullish.

Need to look at this some more but today was quite surprising and this sure didn’t feel like a countertrend rally. Did the S&P 500 bottom at the 150dma (which has held all corrections since 2012) and at the same time did we see a bottom in small caps which have been weak for 3 months? Looks possible.

Interesting Juncture

October 8, 2014

10:10am CST

Last week the market initially bounced at two key levels I was watching. 1,077 on the Russell 2000 and ~1,928 on the S&P 500. Bounce didn’t last long and the retest is already on.

S&P 500 is testing its 1,926 low of last week. While the Russell 2000 has broken below key support at 1,082 the S&P 600 is sitting on 615 which has been a key pivot dating back 13 months. If the market doesn’t bounce here the S&P 500 should test the key 1,900 level. 595 and 1,042 would be the next support for the S&P 600 and Russell 2000.

Charts later. Time is tight now.

 

Also Watch 17,151 on the Dow

September 30, 2014

11:45pm CST

17,151 was the high in July. Note that in two of the past 3 trading sessions the Dow has topped out around that level. 17,151 is very similar to 1,986 on the S&P 500. Get above those levels and it puts a dent in the near term bearish case. Keep a close eye on these levels.

dowresistancenew

11:35pm CST

These posts tend to speak for themselves. Here was an interesting breakdown of where the market gains have come from in the past 2 years as I recently suggested that most of it was multiple expansion and financial engineering. According to this data only 15% of earnings growth has come from actual increased sales. 85% has come from P/E multiple expansion and margin expansion.

“That’s a legitimate source of concern for the broader market. In the past two years, SPX is up approximately 45%. About 70% of this gain is from multiple expansion. Another 15% is from margin expansion and the remaining 15% from sales growth. Stagnating margins when multiples are already at a premium leaves the market reliant on only sales growth. If the trend in macro growth continues to be a good barometer for corporate sales growth, then the rate of share appreciation will likely approach 2-3% (real).”

http://www.fat-pitch.blogspot.ca/2014/09/weekly-market-summary_27.html#more

The 4th quarter rally is missing something. This fits in line with what http://www.sentimentrader.com was saying a month ago. Generally when the market does really well into Labor Day, returns over the next 2-3 months tend to not be very favorable. 2012 was the last time this happened. S&P 500 peaked in mid-September around 1,475 and bottomed in mid-November at 1,343.

http://www.fat-pitch.blogspot.ca/2014/09/a-4th-quarter-rally-without-incoming.html#more

11:30pm CST

Unless one is looking at the small caps which were beat up for the majority of the 3rd quarter its hard to look at the current market juncture as a potential bottom. I won’t rule it out but it seems unlikely considering that the Dow, Nasdaq, and S&P 500 just hit fresh new bull market highs on 9/19/14.

See the link below. I have observed over the years that volatility occurs near market peaks and bottoms. We have obviously seen an increase in volatility of late. In the article below there is an interesting stat. When the market has its two biggest up and 2 biggest down days of the month in a single week the performance going forward wasn’t very good. In the 17 occurrences since 1996, the market was positive two weeks later in only 2 of the 17.

Here is another interesting piece of information from the article below:

“Lastly, while it is probably a stretch to make such a link, we don’t want to fail to mention the fact that a few of these occurrences happened almost immediately prior to some major cyclical tops, including February 1966, December 1972, April 2000 and June 2007.”

http://jlfmi.tumblr.com/post/98740906260/stocks-roller-coaster-week-has-negative-short-term

Here is the graphic showing the 17 times this kind of volatility has occurred since 1996.

volatilityburst

If one wants to try to find a silver lining here it would be the fact that the media has gone crazy with the “death cross” on the Russell 2000. My past observation is that when the media starts talking technicals you generally want to do the opposite.

The key near term resistance for the S&P 500 is 1,986. Key support is ~1,950. Break 1,950 and it opens up a new can of worms. Support then falls to 1,928, 1,900, and 1,890. Get below 1,890 and it opens up the potential for a move down into the 1,687-1,735 range I mentioned the other day.

See the charts below as to why 1,986 is so key. 1,986 is a key regression dating back to the end of 2013. It also happens to be the 62% retracement from 2,000-1,964. 2,000 was the 50% retracement of 2,019-1,979. Now we have 1,986 as the 62% retracement of 2,000-1,964. Note that price has been rejected at 1,986 twice in the past 3 trading sessions. RSI and ADX are both looking bearish.

Daily

SPXregressionnew

60 Minute

SPX60minutebearish'

Here is another key range to watch. $99.98 marks a gap down on the QQQ. There is also a gap up at $97.74. I would argue that whichever gap gets filled first has the odds of seeing the market follow through in that direction. If the QQQ gets over $100 on a closing basis, that would be bullish. If it closes below $97.74, look out below.

As the market was going into the close today it sure looked like fund managers were absolutely desperate to blow out anything that was an under-performer in the quarter. Small caps were one of those asset groups. On the other hand the larger cap stocks held up. So was today a capitulation in the small caps or were the larger caps just being held up into quarter end? We won’t have to wait long to find out.

10:45am CST

In my opinion this has introduced additional risk in the credit and equity markets. Keep in mind that at one point they were managing $2 trillion. Yes, you read that right. As in if all of the assets at PIMCO were 100% liquid today they could hypothetically pay down our national debt by more than 10%.

Most of the investors in PIMCO were there for Gross and Mohammed El-Arian. Now that those two have departed the only person there that I am aware of with a big public profile is Paul McCulley. My point is that if there is an exodus from PIMCO Funds, it could cause some serious disruptions in the credit markets which could leak over to the equity markets.

1,950-1,955 is a key level for the S&P 500. There is a gap at 1,955 and 1,950 represents the uptrend from the June 2013 low of 1,560. On  break through 1,950 I believe we could see a move down to 1,550-1,800. My best guess would be 1,687-1,735. I will go into more depth later. This appears to be one of the most interesting junctures for the market in at least 2 years.

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