Advance -Decline line and Price slight divergence,

The following two charts shows the NYSE and the SP500 against their respective Advance-Decline lines for 2010. The past few days have seen a slight divergence between the direction of price and the respective  Advance-Decline lines.  This may be flashing a caution sign with regard to stocks.- I have highlighted previous occasions this year where directional divergence has occurred. - Often in previous years this directional divergence has led to corrective activity. 

(Click on charts to enlarge)

SP Index - Trying to define the trend. + Betty Grable (GBP/USD)

First my gratitude to Michael for pointing out that the NYSE Advance-Decline line I used in my analysis from a couple of days ago was for all NYSE securities, this includes heavily interest rate sensitive securities such as ETFs and the like. Traders Narrative has previously written a piece last year which refers to this difference.

If I look at the the NYSE Advance-Decline line for Operating Companies instead the price action of the past 2 weeks looks less bullish than my earlier analysis suggested, however it still in my eyes looks like price action in the past 2-3 months look corrective rather than a trend change. The charts below show the comparison of the NYSE All securities cumulative Advance-Decline line  Advance-Decline line (Top Chart) versus the NYSE (Operating Companies) Advance-Decline line (Middle chart). I have also added a chart of the NYSE index at the bottom.  -

Looking at some of the many many blogs commenting on Equity direction one finds much debate and confusion on where we are now and where we are heading. This is understandable, price action has been confusing, I myself have veered between a bullish outlook and bearish outlook recently, though with an overall bearish bias. Right now I am neutral, there are just too many mixed signals. FWIW worth I believe above 1130 could see this take off back toward April highs and maybe higher (before eventually revisiting 2009's lows at a minimum), on the other hand a move back below 1040, and definitely 1010 then the downside is favoured. 

Finally Betty Grable has flown these past few days (Unless you've worked in the London FX markets you probably have n't a clue what I'm talking about: - Betty Grable = GBP/USD FX Rate). Since posting a low near 1.4950 on Monday the GBPUSD has soared to 1.5350. (See top chart below).  Looking at the lower longer-term chart, it can be see that GBPUSD has broken up the downtrend line which connects 2008s pre-Lehmans crash high, and a series of highs from late 2009. Additionally recently it broke up above the 100 day SMA and held a re-test, this is encouraging for the much bigger picture for GBPUSD.

 

SP Index , EURUSD, and German 10 Year Yield.

The advance in US equities continued apace yesterday, the SP500 index has now had 6 solid days of gains. However, it is now running against some key levels which may check its advance in the short-term, and could even be pivotal in the bigger picture. These can be seen in the chart below: The top of the wedge and the 50 day SMA both coincided with last night's close around 1095/96, additionally short-term momentum studies (60 & 30 minute) are showing some minor divergence up here.  Also the round number 1100 possibly adds some weight to this, particularly with the 76.4%  SP Sep 10 future retracement at 1099.5.

Looking further ahead; yesterday I discussed the possibility of the NYSE advance-decline line signalling further bullish move in US equities (Click here to see this post). Today I present a chart showing the SP500 together with its advance-decline line. The SP500 advance-decline line has broken above its the upper boundary of its declining channel, which may be a bullish signal, however it would need a clear break and close over the equivalent price line to add any weight to this. I have also re-emphasised the similarity of the  price pattern over recent months with the a smaller price pattern last May - July. It is noteworthy that the Adv-Dec line for these 2 patterns are also moving in a similar fashion.

Moving on to the EURUSD (Click on chart below to enlarge), over the past couple of days  the downtrend line from the December's high has been breached, this adds to the possibility of a deeper retrace towards a cluster of targets near 1.3100. However arguing against this is considerable resistance in the form of the neckline of the Multi-year Head & Shoulders pattern (See lower chart). The neckline of this pattern occurs in the 1.2720/1.2750 zone, which continues to cap this for now. - Note a break of the neckline would not necessarily kill this Head & Shoulders pattern,  it would need to a major corrective move over many weeks before its potential downside threat is lessened .

Finally a look at the German 10 year yield. The top chart below shows another pattern similarity, again on different scales. This suggests growing possibility of a turn higher (lower in the Bund future) in yields possibly towards 2.86%. This would fit in with a scenario in these highly correlated risk-on/risk-off markets of higher stocks and a higher EURUSD. This move higher is supported by Bullish momentum divergence on the weekly German 10 Year yield chart (See Lower Chart). Further to this, I will add that the break out of the base in Mar 2009 was co-incidental to the low in the stocks, however also note how tortured price action was before finally squeezing higher. If this repeats it may go through a similar process, before finally breaking higher.

The next few days will be critical. With key earnings reports and options expiry on equities coming up, and some key pivotal level as mentioned, I would not be surprised if we were to see some corrective activity over the next few days. How far this goes will be key as to whether the next few weeks turn more bullish, or whether my prior bearish scenarios, which I have termed as currently on life-support, manages to make a return.  

Goodbye Bear - Hello Bull ??? !!! ???

My stop on my Bearish view of equities in recent weeks has been 1075 on the S+P500, this does not mean it is dead, however it on at best life support. In the meantime I have started to explore the bullish side of the case. - Last week I alluded to the bounce and the possibility of a larger bullish move (Click here to see) , at the time I saw this as stating the bullish case, but still favoured the downside. I realise we may be in a headfake, after all Mr Market likes to make it as hard a possible to make money out of him, and a headfake would certainly fit with that.

Further to the above, something worried me when I looked at my analysis showing various Equity markets last week. in the post titled 'Equity Topping Patterns - Everywhere' (quite ironic really). I had tried to justify what I thought were Head & Shoulder confirming patterns in various Global Equity Markets. However I now think I was guilty of trying to make non-confirming patterns fit as confirming patterns. As I look at the various overseas markets again, I believe that most of them may have actually been taking the form of a falling Wedge pattern, these are actually Bullish continuation patterns. Furthermore on the next day, when I looked at the possible bullish case for US stocks, which I refered to above, I stated this may also be forming a bullish wedge. (FWIW I also hate downward sloping necklines anyway on Head & Shoulder patterns such as the NYSE and SP500 have).

In light of this I have decided to look at the Advance-Decline line on the NYSE. I have posted 2 charts below. The top chart is the NYSE cummulative Advance-Decline line, the second chart is the NYSE Composite Index for the matching period. (CLICK ON CHARTS TO SEE ENLARGED)

The ultimate level of the Advance-Decline line is not an issue for me, though such a huge divergence between new all-time highs on one index and not the other is slightly baffling. - No the issue for me is what happens at corrections in the Advance-Decline line. If one looks at the above an upward sloping correction, it is usually consistent with a bear market, and a downward sloping correction is usually consistent with bull markets. Obviously at the turn of a trend this is going to be crucial since there will be conflicting signals. The recent move lower in the NYSE advance-decline line appears to me now to be a correction. In fact one can go further in saying that it appears similar but the opposite to the correction at the bottom of the downtrend in late 08/early 09. - This would be interesting, since if it did unfold as such, it would imply ; a) a test of the recent highs from April and quite possibly a break though there b) That this past couple of months, may actually be part of a larger topping process which has a few more months left to go...

Just to re-iterate. I am now neutral. My bearish analysis of recent weeks has served me well, however it may soon be past its 'sell-by' date. I am looking at a potential bullish scenario. I will elaborate on this in further posts. - If my analysis does prove to be correct, then this may have major implications for the 'Risk-on' v 'Risk-off' trade across varying markets.