August 10. 2014

Market Review

All three U.S. major averages posted modest gains for the week. The Dow Jones Industrial Average gained 0.3 percent from the prior Friday’s close to end at 16,553.93. On Friday, the blue-chip index had its biggest one-day percentage gain in more than 4 months. The S&P 500 added 0.3 percent for the week as well to close at 1,931.59. The Nasdaq climbed 0.4 percent in five days to 4,370.90. Most key S&P sectors ended in positive territory for the week, led by materials. The CBOE Volatility Index, a measure of investor uncertainty, finished at 15.77.

Short-Term Technical Condition

Obviously, the short-term down-trend of the market remains well intact, as the market finished nearly unchanged for the week. If we have a closer look at the Trend Trader Index, we can see that the S&P 500 was not able to break above the lower resistance line of this reliable indicator, which would be the first indication for a short-term trend reversal. To be more precise, the S&P 500 is still trading 36 points below the bullish threshold from that reliable indicator. The Modified MACD picked up even more negative momentum, indicating an outright strong bearish trend at the moment. This is mainly due to the fact that it would need quite strong gains, to get the Modified MACD back on track. This can be also seen, if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator, which is still trading far below its bullish threshold, signaling further troubles ahead. Worth mentioning is the fact that we saw a small bullish divergence in its readings on Thursday (as the gauge did not confirm the new low on that day) and, therefore, the strong rally on Friday was not a big surprise at all.

Anyhow, this short-term bearish trend is still strongly confirmed by short-term market breadth, which remains quite weak at the moment. Although, we have seen a small recovery in the number of stockss which are trading above their short-term oriented moving averages (20/50), their gauges kept trading well below their bullish 50 percent thresholds, indicating that the underlying trend structure of the market remains outright weak at the moment. The Modified McClellan Oscillator Daily has not flashed a bullish crossover signal so far, plus its longer-term oriented trend-line is still drifting lower on a fast pace, indicating that the overall tape momentum has not shown any signs of recovery so far. In addition, we have not seen any major increase in the number of stockss hitting a fresh 52 weeks high, rather than a decrease of those stocks which hit a new 52 week low, indicating that the bounce on Friday was mostly driven by short-covering! This can be also seen if we have a closer look at the High-/Low Index Daily.

The situation on a contrarian side looks quite different as we saw a strong increase within our fear indicators. Therefore, a stronger (unsustainable) bounce towards 1,955/1,960 or even 1,980 cannot be ruled out next week. Especially, the strong spike in the Daily Put/Call Ratio All CBOE Options Indicator is telling us that the crowd is heavily searching for protection. As those guys tend to be dead wrong, it could be quite possible to see stronger gains until Friday, as the option expiration date is due on that day. Moreover, we received another bullish signal from the Equity Options Call/Put Ratio Oscillator Weekly and the Global Futures Put/Volume Ratio, which is another indication that the market hit a minor low, which acts as a basis for a short-term (5-10 days) rebound. In the worst case, such a rebound would only produce a lower high, before further step losses into September can be expected.

Mid-Term Technical Condition

If we have a closer look at our mid-term oriented indicators, we have received even more confirmation that we have seen the major top already. The main rationale behind that is the fact that the gauge of our reliable Global Future Trend Index dropped significantly below its bullish 60 percent threshold. As long as the Global Future Trend Index remains within its bearish trading range area, the chances for a fast paced pullback/correction remain outright high. On the other hand, as long as the gauge remains below 60 percent, the upside potential is capped as any upcoming bounce should be limited in price and time! As we have not seen a significant correction by now, the mid-term uptrend of the market remains intact from a pure price point of view. Therefore, the WSC Sector Momentum Indicator still remains quite bullish, as most sectors within the S&P 500 have not broken below their mid-term oriented up-trend so far. 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 health care and technology are/remain the strongest sectors for the time being.

Anyhow, mid-term oriented market breadth remains quite bearish biased and, therefore, we would be surprised to see sustainable gains ahead on a mid-term basis. Despite the fact the recent bounce on Friday has led to small improvements in the percentage of stocks which are trading above their mid-term oriented moving averages (100/150), their readings remain below their bullish threshold. Furthermore, their readings are not confirming the current levels from the S&P 500 and, therefore, the current tape condition looks quite grim. The most important mid-term breadth signal is coming from the Advance-/Decline Index Weekly as well as from the Upside-/Downside Volume Index Weekly. As already mentioned last week, we waited to see further confirmation/deterioration within those two reliable indicators. Last week, both indicators continued to deteriorate further and are, therefore, close to flash a bearish crossover signal. If this is the case, it is just a question of time to see nasty waterfall declines ahead! For that reason, conservative members should stay on the sideline until we see a better technical environment.

Long-Term Technical Condition

The long-term up-trend of the market remains intact so far, although we can see already some signs of exhaustions. This is mainly due to the fact that the relative strength of most risky markets remains quite weak! Moreover, we can see that WSC Global Momentum dropped by 700 basis points to 78 percent, signaling that a lot of global risky markets have broken below their long-term uptrend last week. This is another indication that global equities have started to be in a correction mode. Nevertheless, we should not forget that the absolute readings of that indicator still remains quite constructive. This can be also seen if we focus on the Global Futures Long Term Trend Index, which still indicates a technical bull market. More importantly, apart from the High-/Low Index Weekly, long-term market breadth remains quite weak at the moment. This is mainly due to the fact that the Modified McClellan Volume Oscillator Weekly continued to drop further, plus the percentage of stockss which are trading above their 200 day simple moving average remain weak. This is another indication that one of the longest bull-market ever is losing steam and, therefore, we would not be surprised to see rough waters ahead within the next couple of months!

Bottom Line

The bottom line: the situation remains almost unchanged compared to last week as our mid-term bearish outlook has not been changed so far. Nevertheless, we received a growing numbers of evidences that the market hit a minor low last week, which should act as basis for a short-term (5-10 days) corrective rebound. In the worst case, such a bounce could push the S&P 500 towards 1,955/1,960, whereas a break of those levels would give way to 1,975. Such a move would only produce a lower high, which is a typical pattern if the market is topping out. Therefore, it is just a question of time until further step losses into September can be expected. Short-sellers should take profits if we see a break above 1,940 or some bearish trend breaks within our short-term oriented indicator framework. If that is the case, start shorting the market again, if we see the first meaningful bearish reversal candle. Moreover, we think conservative members should stay on the sideline, as we think it is too early to call for an important bottom right now. Stay tuned!