June 29. 2014

Market Review

The three major U.S. averages finished the last week with a mixed performance. For the week, the Dow Jones Industrial Average fell 0.6 percent to close at 16,851.84. The blue-chip index is up 0.8 percent for June. The S&P 500 slid 0.1 percent in five trading days to close at 1,960.96. The broad index is up 1.9 percent this month. The Nasdaq, in contrast, added 0.7 percent for the week to end at 4,397.93. The technology-laden index is up 3.7 percent for June. Among the key S&P sectors, utilities were the best weekly performer, while industrials dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell to 11.26.

Short-Term Technical Condition

Apparently, the short-term oriented trend of the market remains almost unchanged compared to last week as the S&P 500 finished nearly flat for the week. The Trend Trader Index is telling us that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 1,938. Furthermore, we can see that both envelope lines of this reliable indicator are still drifting higher, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend, at least from a pure price point of view. If we focus on the overall trend momentum, we can see that the Modified MACD flashed a small bearish crossover signal last week, indicating some form of short-term exhaustion, which is a sign that the recent consolidation from last week is likely to continue. This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator. The gauge from this indicator is trading more or less sideways on quite bullish levels, indicating that the pace is likely to slow down within the next couple of trading sessions. In our last week’s comment we highlighted the fact that from a pure contrarian point of view, the chances for a healthy pullback/consolidation period were increasing and now we have received more confirmation from our short-term trend indicators.

Nevertheless, the current situation still remains constructive in its nature if we take a look at our short-term oriented breadth indicators. The percentage of stockss which are trading above their 20 day moving averages are still trading far above their bearish 50 percent threshold, and also on a 50 day basis we even saw some improvements on a quite solid level, indicating a quite healthy tape structure at the moment. This can be also seen if we focus on the number of stockss which have reached a new 52 weeks high or low, respectively. During the whole week, we saw quite solid readings in the number of stockss hitting a fresh yearly high, whereas there where hardly any stocks around which have been pushed to a new low and, therefore, the participation within the current uptrend remains healthy. Thus, also the bullish gauge of our High-/Low-Index Daily is still trading on high levels, giving no reason to worry right now. Only the Modified McClellan Oscillator Daily is about to flash a bearish crossover signal soon, which is another indication for a continuation of the recent consolidation period.

In general, the rationale behind a consolidation period is that it should relieve overbought conditions and dampen short-term optimism. In fact, the sideway trading from last week had the positive effect of relieving overbought conditions (Arms (Trin) Daily) and we saw also some form of decreasing optimism among the crowd. Especially, the gauge from the Daily Put-/Call Ratio All CBOE Options Indicator moved from deep contrarian- to quite bearish readings, whereas the ISE Call-/Put Ratios dropped back into normal levels. Nevertheless, we did not see any improvements in the readings from the Global Futures Dumb Money Indicator, the Equity Options Call-/Put Ratio Oscillator and the Global Futures Put/Volume Ratio Oscillator and, therefore, the chances for further consolidation/down-testing remain quite high. Nevertheless, as long as the WSC Capitulation keeps trading at outright low levels, in combination with such strong readings within our short-term trend- as well as breadth indicators, we think any upcoming consolidation period/pullback should be limited in price and time. From a pure trading point of view, we think that a break below 1,938 (lower threshold from the Trend Trader Index) will lead to further down-testing towards 1,925. Moreover, if that threshold does not hold, further weaknesses towards 1,900 (in extreme circumstances) might be possible.

Mid-Term Technical Condition

Despite the fact that some down-testing on a short-term time frame is possible, any upcoming pullback should be limited in price and time as our entire mid-term oriented trend- as well as breadth indicators still remain quite bullish at the moment. The gauge of our reliable Global Futures Trend Index is still trading above its extremely bullish 90 percent threshold, indicating an outright healthy uptrend. The WSC Sector Momentum Indicator is far away from being bearish, telling us that most underlying sectors within the S&P 500 are still trending higher on a mid-term time horizon. This can be also seen if we have a closer look at our Sector Heat Map, as the relative strength score of riskless money market remains at zero percent, whereas energy and technology are the strongest sectors for the time being. Moreover, the current mid-term oriented up-trend is still confirmed by mid-term market breadth, as our entire tape indicators still remain bullish from a pure signal point of view.
Despite the fact that some down-testing on a short-term time frame is possible, any upcoming pullback should be limited in price and time as our entire mid-term oriented trend- as well as breadth indicators still remain quite bullish at the moment. The gauge of our reliable Global Futures Trend Index is still trading above its extremely bullish 90 percent threshold, indicating an outright healthy uptrend. The WSC Sector Momentum Indicator is far away from being bearish, telling us that most underlying sectors within the S&P 500 are still trending higher on a mid-term time horizon. This can be also seen if we have a closer look at our Sector Heat Map, as the relative strength score of riskless money market remains at zero percent, whereas energy and technology are the strongest sectors for the time being. Moreover, the current mid-term oriented up-trend is still confirmed by mid-term market breadth, as our entire tape indicators still remain bullish from a pure signal point of view. Last week, it was quite encouraging to see that the Advance-/Decline Index Weekly as well as the Upside-/Downside Volume Index Weekly kept trading at quite solid levels, although the broad market finished nearly unchanged for the week. Furthermore, we can see that the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) are still trading strongly above their bearish 50 percent threshold, indicating that the majority of all NYSE listed stocks are still per definition in a robust mid-term oriented up-trend. Above all, the Modified McClellan Oscillator Weekly has not shown any signs of weaknesses yet and, therefore, the current tape condition still remains constructive in its nature. For that reason, we think that after the current consolidation period the market is highly likely to continue its rally.

Last week, it was quite encouraging to see that the Advance-/Decline Index Weekly as well as the Upside-/Downside Volume Index Weekly kept trading at quite solid levels, although the broad market finished nearly unchanged for the week. Furthermore, we can see that the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) are still trading strongly above their bearish 50 percent threshold, indicating that the majority of all NYSE listed stocks are still per definition in a robust mid-term oriented up-trend. Above all, the Modified McClellan Oscillator Weekly has not shown any signs of weaknesses yet and, therefore, the current tape condition still remains constructive in its nature. For that reason, we think that after the current consolidation period the market is highly likely to continue its rally.

Long-Term Technical Condition

As per last weeks’ report, the long-term uptrend of the market (WSC Global Momentum, Global Futures Long Term Trend Index and the WSC Global Relative Strengths) remains well in-force,, therefore, our long-term bullish outlook has not been changed so far. The WSC Global Momentum Indicator reached a score of 97 percent, indicating that the vast of all global market indices (all denominated in USD) are/remain in a strong long-term uptrend at the moment and, therefore, the global bull-market remains well-intact. More importantly, long-term oriented market breadth remains bullish and is, therefore, confirming the long-term uptrend of the market. The percentage of stockss which are trading above their 200 day simple moving average remain stable at 62 percent, while the gauge of the High-/Low Index Weekly remains quite bullish and showed some encouraging strengths last week. At the same time, the Modified McClellan Volume Oscillator Weekly has continued to push higher for the week, indicating a quite healthy long-term tape structure!

Bottom Line

The bottom line: the situation compared to last week remains unchanged. From a pure contrarian point of view we think that the market looks vulnerable for a 2-3 percent pullback or at least a short-lived consolidation period into early-/mid July and, therefore, we could see some rocky sessions ahead. Nevertheless, as long as our mid- to long-term oriented indicator framework remains bullish (at least from a pure signal point of view) and as long as we do not see a typical top-building process pattern, we think it is too early to call for a major market top right now. Therefore, we think that the market could easily overshoot towards 1,970/2,000 into late summer, before major troubles might be due! For that reason, we would advise our conservative members to hold their equity position, while aggressive short-term traders should buy the dips as long as our short-term indicator framework does not turn completely bearish. Stay tuned!