Posts Tagged ‘Stochastics’
Markets Look Primed For A Fall
The short covering rally this week basically defined the upper levels of the downtrend channels that the major averages are locked into. Aside from a technical bounce off the SPY 200 day ma at 1278 that coincides with the bottom of the channel, there was the hope that either the Fed or the ECB would come to the rescue of the markets with more quantitative easing. Since neither event happened we are now back to the possibility of a financial meltdown in Europe, a severe slowdown in China and a recession in the U.S. Bear market rallies are based on the slope of hope whereas bull markets climb a wall of worry.
The S&P hit the upper descending trend line of it’s downtrend channel yesterday and then again today. This area coincides with the neckline of the head and shoulders top and is an area of both strong horizontal and downtrend resistance. The stochastic is almost in overbought territory and the RSI is right at the midline where it would be expected to turn down in a continued downtrend.
The QQQ
and DIA are exhibiting almost the exact same chart formations.
Another technical indicator that we should look at is the ATR or average true range, a measure of volatility. If we look at the weekly chart of the S&P 500 we can see that the ATR declines on uptrends and forms rounded bottoms at market tops. It then moves up significantly on market declines as happened in 2010 and 2011. Right now the ATR is forming a rounded bottom and starting to curve up.
This is even more pronounced on the daily chart as the ATR is still rising even though the market is rallying. While past performance is no guarantee of future performance, the implication of this chart is that the current rally is merely a counter trend bounce and the market has not seen the final panic dump that signifies a true bottom.
If the ATR starts to decline while the market continues to rise past the head & shoulders neckline and on strong volume then that would be confirmation of a bullish trend reversal. Right now that prospect does not appear to be in the cards.
The market also rallied between May 21 and May 29 but the ATR dipped slightly and then kept rising. The rally ultimately culminated in a sell off. We appear to be in the same situation but the potential decline from this point on could be much greater.
Technical indicators are for the most part bearish. While the S&P has moved back above it’s 200 day moving average, the 50 day ma is curving downward and would act as major resistance assuming the index can even get that far. The MACD is underwater and while it has given a buy signal positive momentum appears weak and volatility is increasing. Volume on down days is for the most part greater than volume on up days.
Conclusion: Fast, sharp rallies such as we have seen this week are typical of bear market rallies. While it is unclear if we are in a bear market we are at least in a sustained downtrend. China is going to announce economic numbers on Saturday and Spain is going to ask the eurozone for help over the weekend. The Spanish banks have been rallying this week as evidenced by the etf EWP. This implies that a bailout of their banks has in all likelihood already been priced into the market. China’s economic numbers are allegedly going to come in weak. Therefore we may very well be in a ‘sell on the news’ environment regardless of what that news is.
20 Year Chart of S&P Points To Bear Market
The above chart is that of the S&P over the last 20 years. The 3 indicators below the chart are Williams %R, MACD and Stochastics. As can be seen, the MACD is in a well defined downtrend channel where the tops correlate very closely to the market tops of 2000 & 2007 and the bottoms correlate to the market bottoms of 2003 & 2009. The MACD is currently finding resistance at the top of the downtrend channel and looks like it is about to give a sell signal.
Assuming this pattern continues, it looks like the rally from the March, 2009 lows is over and we have entered a bear market phase. In order for this to change, the market would have to stage a strong rally pushing the MACD above the upper downtrend line. Based upon the current macro economic environment the chances of that happening seem unlikely.
The MACD peak also corresponds to a period of global uncertainty. With European economies on the edge, France and Germany have made it clear that they are not going to immediately back stop the Eurozone. According to the Fed, the U.S. economy is going through a protracted weak period although certain recent economic data suggests that some areas of the economy may be improving.
Conclusion: Barring a rally that can bring the S&P back over it’s 50 day ma where it can sustain itself, it appears a bear market phase has begun.
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