July 19. 2015

Market Review

U.S. stocks ended the week with gains. The Dow Jones Industrial Average booked a 1.8 percent weekly gain to end at 18,086.45. The S&P 500 recorded a 2.4 percent gain over the week and closed at 2,126.64. It’s first weekly gain after three weeks of declines. The Nasdaq rocketed 4.3 percent for the week to close at 5,210.14. Nearly all key S&P sectors ended in positive territory for the week led by technology. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held just above 12.

Short-Term Technical Condition

Against the background of an outright deteriorating trend- and tape structure, we saw increased pressure on equity prices over the past couple of weeks. After the S&P 500 had closed far below its critical support level of 2,067 in early July, we received the final confirmation that the latest reaction high from the S&P 500 in mid-May (at 2,134) represents an important market top. After the strong sell-off, we saw stronger signs of capitulation within our fear indicators, indicating a minor low. This is a typical behavior, as the market has to work off the predominant bearish sentiment first (especially within our option based indicators), before further losses can be expected.

Due to the strong bounce from last week, most of our short-term oriented trend indicators got back on track. The Trend Trader Index turned bullish on Tuesday and intensified its signal until Friday. So from a pure price point of view, the short-term oriented uptrend of the market remains intact as long as the S&P 500 trades above 2,082 (bearish envelope line of the Trend Trader Index). In addition, the Modified MACD also managed to flash a bullish crossover signal last week, indicating an intensifying trend structure. Only the gauge from the Advance-/Decline 20 Day Momentum remains quite depressed and is, therefore, far away from confirming the current levels from the S&P 500. As this indicator tends to be a leading one, its non-confirmation can be additionally seen as a red flag on the horizon. Anyhow, during a volatile bearish biased top-building process it is not unusual to see a lot of changing signals within short-term oriented trend indicators. Therefore, our tape indicators will give us guidance if the recent move will turn out to be corrective or eventually the start of a new sustainable up-trend.

Despite the fact that the market finished the week with solid gains, the readings within our short-term breadth indicators have been developing moderately so far. Apart from the fact that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily turned quite bullish last week, the overall short-term oriented tape structure of the market remains quite shallow. This is mainly due to the fact the percentage of stockss which are trading above their short-term oriented simple moving averages (20/50) remain bearish and, therefore, outright non-confirmative if we consider the current levels from the S&P 500. This indicates that the recent recovery was mainly driven by heavy weighted stocks within the index, whereas the broad market still remains a bit weak-kneed. This can be also seen if we focus on the NYSE New Highs-/New Lows Indicator, as the total amount of new lows has not decreased significantly over the past week, whereas the total amount of new highs should be much higher if we consider the current levels from the S&P 500. Therefore, it was no big surprise at all that the High-/Low Index Daily did not manage to flash a bullish crossover signal last week.

Although last week’s bounce worked off some bearish sentiment within our contrarian indicators (Global Futures Put/Volume Ratio and the), some pessimism remains persistent. This is mainly due to the fact that the z-score of the Daily Put/Call Ratio All CBOE Options has not dropped into its neutral territory yet. This indicates that the current Daily Put/Call Ratio is one standard deviation away from its historical mean, which can be still seen as a quite supportive signal. The same is true if we focus on OEX Options Call-/Put Ratio Oscillator Weekly and the All CBOE Options Call-/Put Ratio Oscillator Weekly. As a matter of fact, further bouncing into next week cannot be ruled out at the moment. Nevertheless, the recent move can be still classified as a bounce rather than the start of a new sustainable uptrend, as the Smart Money Flow Index is far away from confirming the current levels from the Dow, whereas the WSC Capitulation Index is still indicating a risk-off scenario.

Mid-Term Technical Condition

Another piece of evidence for such a view is the fact that we have not seen any major improvements within our mid-term oriented trend- as well as tape structure yet! Especially, the gauge from the Global Futures Trend Index still remains below its very important 60 percent threshold and, therefore, the risk for a stronger pullback remains outright high. So even if the market will manage to retest its old May top again, we would remain quite cautious if this retest will not be confirmed by this indicator (levels clearly above 60 percent). However, from a pure price point of view the mid-term oriented up-trend of the market still remains intact. This is mainly due to the fact that the WSC Sector Momentum Indicator has not turned bearish yet, although its gauge closed near its multi-month-low. This indicates that the underlying trend-momentum of most major industries is slowing down. 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 and other major industries is narrowing.

More importantly, mid-term market breadth still does not look rosy at all. As a matter of fact, the readings from our entire mid-term oriented tape indicators are far away from confirming the recent bounce! Especially our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) remain non-confirmative, whereas the Modified McClellan Oscillator Weekly has not shown any signs of stabilization yet. On top of that, we can see that the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly still remain extremely bearish, whereas the percentage of stockss which are trading above their mid-term oriented simple moving averages (100/150) are far away from confirming the current levels from the S&P500. All in all, this indicates that the overall tape momentum/-condition remains outright weak at the moment. Consequently, the latest move from last week can be definitely categorized as bounce rather than the start of a new sustainable up-trend.

Long-Term Technical Condition

The long-term oriented technical picture of the market remains almost unchanged compared to last week. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500, whereas most local market indexes around the world remain in the middle of a correction at the moment. This is mainly due to the fact that the gauge of the WSC Global Momentum Indicator continued to drop significantly for the week to close at 28 percent. This indicates that 72 percent of all global markets which are covered within our Global Momentum Heat Map have already dropped below their long-term oriented trend-lines. In a global context, we, therefore, received further confirmation that our suggested summer top is already in place. More importantly, long-term oriented market breadth has also not shown any signs of recovery yet. As per last week’s report, the Modified McClellan Volume Oscillator Weekly continued to gain more bearish ground, whereas the percentage of stocks which are trading above their long-term simple moving averages hardly managed to close significantly above their bullish threshold. Above all, we can see that the High-/Low Index Weekly still remains bearish, which is another serious long-term tape signal.

Bottom Line

Although the current rebound turned out to be stronger than previously expected, the market remains in a bounce mode. So even if we see a retest or a minor move above the May top, we think that the upside potential of the market looks extremely capped at the moment (with such weak readings all across the board). Consequently, it is just a matter of time until we expect to see further weakness. From a pure trading point of view, 2,044/2,050 represents an important key support level. A break of below that numbers would be immediately bearish as further down-testing towards 2,014 and 1,980 can be expected. On the other hand, we think the market looks quite capped at 2141/2170. Anyhow, as the current risk-/reward ratio remains too low we keep advising our conservative members to stay at the sideline, whereas aggressive traders should sell into the first meaningful bearish reversal candle. Stay tuned!