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July 27. 2014

Market Review

The three major U.S. averages finished the week with a mixed performance. The Dow Jones Industrial Average lost 0.8 percent over the week to close at 16,960.57. The blue-chip index had its biggest weekly loss since June 14. The S&P 500 finished the week roughly where it started it and closed at 1,978.34. The Nasdaq eked out a weekly gain of 0.4 percent and closed at 4,449.56; its second straight weekly rise. Among the key S&P sectors, energy was the best weekly performer, while consumer staples dragged. The CBOE Volatility Index, widely considered the best gauge of fear in the market, finished nearly unchanged at 12.61.

Short-Term Technical Condition

In our Technical Market Outlook 2014, it was one of our key calls that the market would face a stronger pullback on the beginning of the year (suggested by the Decennial Cycle), followed by a significant and strong rally into summer, which could push the S&P 500 towards 1,970/2000, before a major top-building/distribution process might start (as the Juglar Cycle as well as the Decennial Cycle are topping out in late July/early August). However, as our Technical Market Outlook should only be seen as a general guideline instead of a precise trading plan, we have been waiting to see a growing number of divergences within our indicator framework to confirm those seasonal bearish patterns.

Right now, it looks like that the market is following our Cyclical Roadmap, as most of our short- to long-term trend- as well as breadth indicators have started to deteriorate significantly, although the S&P 500 reached a new all-time high on Thursday (1,991)! From a pure price point of view, the short-term oriented uptrend has not been broken yet as the S&P 500 is still trading 11 points above the bearish threshold from the Trend Trader Index (1,967). Additionally, both envelope lines from this reliable indicator still remain constructive as they have not shown any rounding top so far. But apart from this single bullish fact, our reliable Modified MACD has not flashed any bullish crossover so far, signaling that the market still remains vulnerable for further down testing/consolidation. Moreover, the gauge of the Advance-/Decline 20 Day Momentum Indicator decreased significantly and dropped into bearish territory last week. Therefore, it is not confirming the current level from the S&P 500!

More importantly, this deterioration in the short-term trend structure is also widely confirmed by short-term market breadth. Our Modified McClellan Oscillator Daily continued to gain more bearish ground last week and also the number of stockss which are hitting a fresh yearly high (NYSE New HighsNew Lows and the High-/Low-Index Daily) decreased significantly during the last week. Another concerning fact is that the amount of new lows reached the lowest level since May, indicating that the current consolidation period could/will turn out to be more corrective in its nature! Additionally, also the percentage of stockss which are trading above their short-term oriented moving averages remain bearish (20) or have been pushed below their bullish threshold (50). This indicates an extremely weakening upside participation at the moment. Moreover, if we consider the current levels from the S&P 500 in combination with such weak readings within our breadth indicators, it is quite obvious that only large cap stocks are pushing major indexes higher! Such a situation can never be sustainable over the long run, although a final minor overshoot (on low market breadth) slightly above 2,000 into early August could be possible!

From a pure contrarian point of view, the situation remains nearly unchanged compared to last week. Dumb money is chasing the market aggressively higher as the ISEE Call-/Put Ratio remains in contrarian territory. The WSC Capitulation Index continued to increase on low levels, plus the WSC Smart Money Flow Index is not confirming the current levels from the Dow, indicating further troubles ahead! Only the Daily Put/Call Ratio All CBOE Options Indicator is still trading in quite contrarian territory, although it lost some bullish ground last week.

Mid-Term Technical Condition

All in all, the current readings from our short-term indicator framework are telling us the current consolidation period is definitely corrective in its nature at the moment! As large caps are pushing major indexes higher and as the market always tends to overshoot, it could be possible to see further strengths on low market breadth. However, such a situation can never be sustainable and, therefore, the upside potential of the market should be capped at 2,030 (2-3% from the current level), which represents an important Fibonacci resistance level. For that reason we advise our short-term traders not to chase the market higher into early August! Moreover, it would make sense to place a stop-loss limit/start shorting around 1,950 as the current trend condition of the market looks extremely weak-kneed at the moment and a fast paced pullback cannot be ruled out!

Another reason, why it is possible to see a final overshoot into early August or at least further top building is the fact that our mid-term oriented trend indicators still remain supportive. The gauge from our reliable Global Futures Trend Index remains on the upper end of its bullish consolidation period and, therefore, the market has still some chance to overshoot. Nevertheless, the gauge is still showing a quite bearish divergence to the current levels from the S&P 500. In such a scenario, the upside potential of the market should remain capped! On the other hand, if we see a break below 60 percent, we will have the ultimate confirmation that an important price top is in place! From a pure price point of view, the mid-term oriented up-trend remains intact as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far. This indicates that most sectors within the S&P 500 are per definition still in a mid-term oriented up-trend and according to our Sector Heat Map, energy and technology remain/are the strongest industries for the time being.

More importantly, mid-term market breadth remains supportive but continued to deteriorate for the week! Especially, the Modified McClellan Oscillator Weekly is about to flash a bearish crossover signal soon, indicating that the market internals are losing momentum! Moreover, the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) dropped below their bullish threshold last week (100) or about to do so (150), indicating that the current rally is running out of fuel! Only the Upside-/Downside Index Weekly and the Advance-/Decline Index Weekly remain quite bullish and, therefore, an overshoot scenario still looks quite possible. Normally, bearish or extreme weak readings of those two indicators in combination with a mid-term oriented trend-break mostly led to a stronger correction or a cyclical bear market in the past. Therefore, it might be quite likely to see a deterioration of those two indicators within the next 2-3 weeks, which would be another important indication for a major price top!

Long-Term Technical Condition

As per last week’s 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 Global Futures Long Term Trend Index is still indicating a technical bull market, whereas the WSC Global Momentum Indicator remains outright bullish, indicating that 97 percent of all global market ETFs, which are covered by the WSC Global Tactical ETF Portfolio, are still in a long-term uptrend. If we have a closer look at the global relative strength scores, we can see that Global Emerging Markets are the most attractive region from an asset allocation point of view. Nevertheless, we can see that the scores from all markets remain weak or even below zero percent, indicating that the global trend pace is losing steam, which is another indication that a major price top could be at hand soon. More importantly, mid-term oriented market breadth still looks constructive, although they have also started to deteriorate significantly. Especially, the percentage of stockss which are trading above their 200 day simple moving average still remain bullish from a pure signal point of view, but their readings have reached the lowest level for months, signaling a weak demand. Basically, the same is true if we focus on the Modified McClellan Volume Oscillator Weekly! Only the reading from the High-/Low Index Weekly still looks quite bullish, if we ignore the long-term bearish divergence to the current level from the S&P 500.

Bottom Line

The bottom line: the short-term situation remains almost unchanged compared to last week. Right now it looks like that the current consolidation period is definitely corrective in its nature. Nevertheless, as large caps are pushing major indexes higher, a final but not sustainable overshoot towards 2,020/2,030 into early August could be possible. On the other hand, as the risk of a fast paced correction could also not be ruled out at the moment, we would advise our aggressive traders as well as our conservative members to place a stop-loss limit around 1,950! This stop-loss limit should be in place as long as those bearish divergences have not been sorted out. Stay tuned!