August 25. 2013

Market Review

Not surprisingly, last week turned out to be a rocky one, since the 9-week crash cycle has pushed the S&P 500 down towards 1,639 on Wednesday, before stocks rebounded for the week. All three major U.S. averages finished the week with a mixed performance. For the week, the Dow Jones Industrial Average fell 0.5 percent to close at 15,010.51. The blue-chip average declined for a third consecutive week, its longest weekly losing streak since Nov. 16, 2012. The S&P 500 rose 0.5 percent to close at 1,663.50. The Nasdaq added 1.5 percent for the week to end at 3,657.79. Both the S&P 500 and the Nasdaq snapped their two-week losing streaks. Among the key S&P sectors, materials were the best weekly performer, while consumer staples dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell to near 14.

Short-Term Technical Condition

According to our cyclical roadmap we have been expecting a significant price top in Q3 and with deteriorating indicators all across the board, we mentioned that the upside potential of the July rally was capped at 1,710/1,720. After the S&P 500 broke below 1,685, the market reached our initial price target of 1,655 two weeks ago and afterwards we saw further down-testing towards our second support target price of 1,635, before stocks rebounded for the week. Despite the fact that we have seen a quite strong counter-trend rally, the technical picture of the market remains quite much the same as last week. The short-term down-trend of the market remains well in force, since the S&P 500 is still trading 23 points below the bullish envelope line of the Trend Trader Index, the Modified MACD remains in a free fall with widening gap and the Advance-/Decline 20 Day Momentum Indicator has not turned bullish yet.

More importantly, this short-term bearish trend is strongly being confirmed by short-term market breadth and, therefore, further declines can be expected. Especially, the percentage of stockss which are trading above their short-term oriented moving averages remain bearish (20) or depressed (50), indicating that the underlying trend structure of the market remains outright weak at the moment. In addition, the Modified McClellan Oscillator Daily has not shown any signs of strengths yet, plus the number of stockss hitting a fresh 52 week?s high has not increased at all and, therefore, the High-/Low Index Daily still remains bearish from a pure signal point of view. On top of that we can see that the rebound from last week was mainly driven by short-covering since there was only a reduction in the amount of new yearly lows and, therefore, we think that the current bounce should be limited in price and time.

If focus on our contrarian indicators, we can see that Smart Money is still selling into the market, whereas the option market as well as dumb money are still too greedy to trigger a longer-lasting counter-trend. Another reason of concern is the fact that the gauge of our reliable WSC Capitulation Index still keeps on rising, indicating that there is not bottom at hand right now! So, therefore, we strongly believe that the worst is still yet to come and, therefore, we remain extremely cautious for the short-term time frame.

Mid-Term Technical Condition

The mid-term oriented trend of the market remains bearish biased and has continued to deteriorate for the week, as the gauge of our mid-term oriented Global Futures Trend Index has reached the lowest level since May 2012. Only the WSC Sector Momentum Indicator, still remains bullish from a pure signal point of view, although its gauge has slightly decreased for the week.

More importantly, mid-term market breadth does not look rosy at all. The readings of the Advance-/Decline Index Weekly as well as from the Upside-/Downside Volume Index Weekly remain depressed, whereas the Modified McClellan Oscillator Weekly has been pushed to a new monthly low, indicating an extremely fragile tape structure. Only the from the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) have increased for the week and are, therefore, trading well above their bearish threshold, which can be seen as a positive breadth signal. Nevertheless, as we do not see a recovery or at least a bullish divergence in the readings of the Global Futures Trend Index, the Modified McClellan Oscillator Weekly, the Advance-/Decline Index Weekly or the Upside-/Downside Volume Index Weekly we remain extremely cautious since in such a constellation, nasty waterfall declines are highly likely.

Long-Term Technical Condition

Our positive long-term outlook has not been changed so far, since our entire long-term trend indicators remain bullish at the moment (WSC Global Momentum, Global Futures Long Term Trend Index and the Global Relative Strength). Nonetheless we can see that the global bull market is losing some kind of steam, since only 59 percent of 38 global markets indexes remain in a long-term up-trend. This can be also seen, if we have a closer look at long-term market breadth. Despite the fact that two out of three long-term tape indicators (High-/Low Index Weekly and the percentage of stocks trading above their 200 day SMA and the Modified McClellan Volume Oscillator Weekly) remain bullish from a pure signal point of view, we think their readings should be much higher if we compare them with the current level from the S&P 500. Another red flag on the horizon is the fact that the U.S. market has lost its leadership within the WSC Global Relative Strength Indicator and, therefore, it is highly likely that Europe will outperform within the next couple of weeks. Anyhow, right now it is a bit too early to get concerned about those readings, but we will monitor them closely over the next couple of weeks.

Bottom Line

The bottom line: since the market remains quite bearish (biased) for the short- to mid-term time horizon, we strongly believe that any upcoming bounce will be limited in price and time. For that reason, we would advise our aggressive members to sell into any upcoming bounce/keep their short position, as long as we do not see any significant drop in our WSC Capitulation Index or a bearish trend break in our short-term oriented trend-indicators. If we see a break below 1,655 further down-testing towards 1,635 can be expected. The next major support line after 1,635 would be 1,617. More conservative investors should stay at the sideline, since the current technical condition of the market remains outright weak at the moment. Stay tuned!