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November 13. 2016

Market Review

U.S. rallied strongly for the week, with the three major indexes posting their best weekly gains of the year. For the week, the Dow Jones Industrial Average rose 5.4 percent to close at a new all-time high of 18,847.66. The blue-chip index booked its largest weekly gain since December 2011. The S&P 500 ended the week 3.8 percent higher at 2,164.44, posting its highest weekly gain since 2013. The Nasdaq closed at 5,237.11 and recorded a weekly gain of 3.8 percent, its biggest weekly rise since February. Most key S&P sectors ended in positive territory for the week, led by financials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.17.

Short-Term Technical Condition

The strong bounce from last week pushed the S&P 500 back to the upper band of its trading range which had started almost two months ago. As a matter of fact, most of our short-term oriented trend indicators got back on track. To be more precise, from a pure price point of view, the S&P 500 remains in a bullish uptrend as long as it does not close below S&P 500 trades above 2,123 (bearish envelope line of the Trend Trader Index). This price driven uptrend is also confirmed by the Modified MACD, which flashed a bullish but quite weak crossover signal on Wednesday. This indicates that the underlying trend structure of the market slightly started to gain positive momentum (at least on low levels). This can be also seen if we focus on the Advance-/Decline 20 Day Momentum Indicator, as its gauge increased significantly last week. Nevertheless, its gauge did not confirm the latest break-out by the S&P 500 and has, therefore, formed an outright bearish divergence at the moment.

More importantly, last week’s bounce led to some contradicting signals within our short-term oriented tape indicators. This becomes quite obvious if we focus on our NYSE New HighsNew Lows Indicator as we saw a massive spike in the number of stockss which are hitting a fresh yearly high, together with an outright high numbers of stocks which were pushed to a new yearly low! As a consequence, the High-/Low-Index Daily turned bullish, although both gauges strengthened last week. This is a quite rare event, as it indicates some form of uncertainty within the market. Another concerning fact is that the Modified McClellan Oscillator Daily has not managed to turn bullish yet, although the market rallied almost 4 percent last week. As a matter of fact, the Modified McClellan Oscillator Daily has definitely not confirmed the recent bounce from the S&P 500. On the other hand, we saw a small bullish crossover signal within the Modified McClellan Volume Oscillator Daily, which is telling us that advancing volume was exceeding declining volume on a very short-time frame. Despite the fact that this can be interpreted as a quite encouraging tape signal, its bullish crossover signal is a bit too weak to be taken too seriously at the moment. However, the strongest tape signal is coming from the percentage of stockss which are trading above their short-term oriented moving averages (20/50), as both gauges rocketed into deep bullish territory last week. As a consequence, both indicators (20/50) have clearly confirmed the latest move by the S&P 500.

Last week, we highlighted the fact that a stronger bounce could not be ruled out since we had received a growing number of evidences within our contrarian indicators that short-term pessimism among the crowd had reached extreme levels. Such a bounce normally relieves oversold conditions and dampens short-term pessimism before troubles might be due. In fact, the recent bounce has slightly started to have its designated impact as the market has now reached overbought (Upside-/Downside Volume Ratio) levels, plus market sentiment turned bullish again last week. Nevertheless, the Daily Put-/Call Ratio All CBOE Options Indicator is indicating that the current bounce might continue for a while. On the other hand, we can see that the Smart Money was not buying the rebound, whereas the fisher transformation from the WSC Capitulation Index is still indicating a risk-off scenario. Above all, the market triggered a Hindenburg Omen, which is a quite rare bearish technical signal. Basically, when it occurs, the market should be at risk for a correction within the next 30 days. According to our research, this pattern occurred 65 times since 1966. Since then in more than 25 percent of all cases, the market faced a maximum loss, exceeding the 5 percent range within the following 30 days!

Mid-Term Technical Condition

Moreover, the mid-term oriented trend of the market still remains unchanged compared to the week before and, therefore, we believe that the current recovery could still turn out to be corrective in its nature. This is mainly due to the fact that the gauge from the Global Futures Trend Index still remains within its bearish trading range area and is, therefore, not confirming the current levels (or recent move) from the S&P 500! As already mentioned several times, as long as the gauge does not close (strongly) above its 60 percent bullish threshold, the risks of sharp pullbacks remain outright high. In such a situation, stronger gains tend to be corrective rather than the start of a new a sustainable breakout. Only from a pure price point of view, the mid-term oriented uptrend remains intact as the WSC Sector Momentum Indicator has not turned bearish so far. As already mentioned last week, this indicates that the momentum score from the S&P 500 is still trading above the one from riskless money market within our Sector Heat Map. Nevertheless, if we have a closer look at this reliable scoring tool, we can see that the momentum score from 4 out of 9 sectors within the S&P 500 are trading below the one from riskless money market. This is another indication that the current mid-term oriented uptrend of the market still looks quite vulnerable at the moment. If the trend score of further sectors is starting to lose momentum versus money market, it might be just a question of time until the WSC Sector Momentum Indicator turns bearish and then strong losses are highly likely.

Examining mid-term oriented market breadth reveals that it has not shown any signs of recovery so far. This becomes quite obvious if we focus on the Modified McClellan Oscillator Weekly, which still indicates an outright negative tape momentum at the moment. On top of that, we can see that the bearish readings from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly nearly remained unchanged compared to last week. This is telling us that the market remains extremely vulnerable towards negative driven news flow as the tape structure within the broad market remains outright weak at the moment. This can be also observed if we focus on our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line), as they only improved very little, compared to the latest levels from the S&P 500! Only the percentage of stockss which are trading above their mid-term oriented simple moving averages (100/150) rallied for the week and reached solid levels. However, with such weak readings within our mid-term oriented tape indicators, we would be surprised to see a stronger rally from the S&P 500 above its latest all-time high (at least for the time being).

Long-Term Technical Condition

From a pure technical point of view, the long-term oriented up-trend of the market remains intact as the Global Futures Long Term Trend Index has not turned bearish yet. Nevertheless, we can see that the readings from the WSC Global Momentum dropped significantly. Thus, only 52 percent of all local equity markets around the world (all quoted in USD) remain within a long-term oriented up-trend for the time being. Also the WSC Global Relative Strength Index is showing a negative picture again, as the relative strength of all risky markets is trading at very low levels. In our opinion, those movements are definitely reflecting the fact that the market looks extremely vulnerable at the moment. This picture is also confirmed if we focus on the long-term oriented market breadth. Although the High-/Low Index Weekly remains bullish from a pure signal point of view, its readings did not improve. Above all, we can see that the Modified McClellan Volume Oscillator Weekly also remained nearly unchanged compared to the previous week. Only the percentage of stockss which are trading above their long-term oriented moving average (200) increased significantly for the week and are trading at very high levels. Therefore, we think that the current upside potential of the market looks extremely capped at the moment.

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, as our contrarian indicators are still quite bullish at the moment, we think that the current bounce could continue next week. From a trading perspective, a break above 2,175 would give way to 2,190 and if the S&P 500 will manage to close above this threshold, a rally towards 2,200 looks quite possible. On the other side, if the S&P 500 breaks below 2,150 further down-testing towards 2,130/2,115 can be expected. Despite the fact that the current bounce might look attractive for aggressive traders to play, we would advise them to use close stop loss limits. Moreover, we think conservative members should stay on the sideline, as the current risk/reward ratio is too low at the moment (as the risk of a stronger pullback cannot be completely ruled out at the moment). Stay tuned!