I do not pretend to be an expert of any sort when it comes to stock market 'Breadth' indicators, however some of the other Blogs I read occasionally cover this sort of stuff in detail, and recently they have been making some interesting points. One of the better blogs, Trader's Narrative, posted a good article yesterday highlighting that one significant breadth indicator, the percentage of stocks in the S+P 500 index trading above their own 50 day moving averages, has reached the highest level since Apr 2010. The article can be seen on this link. - The article does makes an interesting point; that the level at over 90% is typically associated with market tops, however it does stress that there are exceptions to this rule, and when this occurs the market will often power higher. An exception occurred in April 2009, I have tried to highlight the periods when this breadth indicator flashed up this signal on the chart below (Timings of this signal will not be precise, but approximate only). It may be that this is one of those exceptions, I have tried to show on this same chart how the price action in recent months is not dissimilar to the price action in March - April 2009. This may favour this being one of those exceptions, either way I guess a big move may be coming in the next month or two.
Another excellent Blog that I follow is 'The Trend' blog, he also discusses Breadth in the sense that 92 of the Nasdaq 100 stocks are in an uptrend in his own particular system, typically in the wake of this sort of reading the Nasdaq move sideways to downwards over the next 5/6 weeks. The article can be seen on yesterday's posting by clicking here.
Is Apple forming a '3 Peaks and and a Domed House' formation ?
I am wondering whether Apple Inc is in the process of forming a rare '3 Peaks and a Domed House' formation. For more information on this pattern click here. The chart below shows Apple Inc over the past four years on a weekly Log-scale chart, with labeling and the idealised 3 Peaks formation shown below. If this does actually follow through it could mean a very sharp correction lies ahead at some point for Apple. On the assumption that this pattern is valid, then a crucial issue will be are we at label point 23? or is this high still to come, and if it is it could still have some way to go higher. Apple of course matters, it is close to 20% of the Nasdaq, and is one of the 'Poster Boys' of the equity markets.
As an example of what happens when the '3 peaks and a Domed House' formation does work out I have added a completed pattern which occurred on the Weekly Bank Index over the period 1992 - 2009 on the chart below.
A very strong performance across the equity markets yesterday, seems to hint that last weeks fears of a setback have abated, and further gains are now favoured. The chart below shows the Weekly SP500 after last nights close. Yesterday's price action appears to have overcome a potential hurdle in terms of the line connecting the peak of 2007 and the Apr 2010 peak. Whilst I do not consider this a majorly important line, since it only included 2 touches, and did not define a trend or trend channel, it nonetheless had the ability to become significant if it held the markets advance at around 1150.
I have also highlighted the Inverted Continuation Head + Shoulder pattern on the weekly. The consolidation of the past 2 weeks appears to have been a break-out consolidation, and with the re-test of the neckline on Monday, it would appear that this pattern may have some mileage in it. The potential upside over the next several months, using the measured target would appear to be around 1249. Personally however, I am not a big fan of this particular pattern, however one can not ignore how well it appears to have formed. It also fits in well with my other Bullish indicators, I covered this in detail in a post on Friday which can be seen by clicking here. I always like to put the other side of the argument too, this was covered in detail too in Friday's post, and while many of these points appear to have been overcome in yesterday's move, there is always a risk of a false move sucking in new bulls, and forcing bears to cover.
One of the points I mentioned which had been giving me some concern was the performance of the Bank Index, this was a major laggard in the September rally. However this too showed good strength yesterday and there is growing confidence on my part that the pattern formed over the summer on this chart is a bullish Falling wedge pattern. Still I would like to see yesterday's high overcome as it coincides with two other recent highs, in addition there is a Gap from 10th/11th August a close above this would also be a strong Bullish sign (This gap also exists on the BKX index itself though it is much smaller). (The chart below shows these points).
Markets continue to churn, in a rather ugly fashion. The SP500 briefly broke below 1130 yesterday on poor volume and follow through was lacking. Elsewhere shares in EURO area countries have been moving lower over the past few days, however I stress EURO area as opposed to Europe, the UK index has not drifted off with European shares. This suggests that we may be seeing a reaction to the stronger EURO rather than anything more concrete. The charts below emphasise this point. The top chart shows the German DAX future relative to the SP500 since the beginning of April, with the EURUSD FX chart directly below. Note how both indices dropped more or less in tandem through May, however towards the end of May, the DAX started to outperform the SP500, probably helped by the EURUSD weakness. This out-performance on the DAX has been maintained since then, however the recent EURO strength maybe the reason that over the past few days the out-performance of the DAX may be starting to lessen.
The next 2 charts show the EUROSTOXX 50 index and the UK FTSE index, note how the EUROSTOXX has been moving lower in recent days, whilst the FTSE has maintained recent levels. The third chart below shows the EURO FX rate versus the UK pound (GBP), the Euro has seen good recent strength here too. This backs up my view that the recent under-performance in EURO area stocks is probably more closely linked to Euro strength than anything else.
The SP500 continues to churn within the consolidation zone of the last 2 weeks. A sustained break of either side of the approx 1130/1150 range is needed for this to start gaining some momentum in either direction. My bias is neutral at the moment, with the more bullish technical arguments offset by some concerns that highlight a potential bearish resolution. I covered these extensively in Friday's post, they can be seen by clicking here.
G7 10 Year yields are once again pushing the recent lows. JGB 10 year yields, which had rebounded sharply from 0.90% to 1.2% little over a month ago are once again threatening the 0.90% lows, currently they reside at 0.93%. German 10 Year Bund yields are at 2.24% having only recently rebounded to 2.50% from around 2.10%, and US 10 year yiel , which had rebounded in late August from 2.40% to 2.85% are back to below 2.50%. All three yields charts can be seen below. -
With regard to the US 10 year yields, I still favour these to push towards 2.20% and probably lower. There is a chance that the recent rebound may be a precursor to a deeper correction, with this move a re-test of the low and perhaps the early stages of a trend change, however I feel this is the less likely scenario. The next chart shows the US 10 Year Note continuation future weekly, the correction in yields shows up on this chart as a Bull Flag, with a strong Bullish breakout over the past couple of weeks. I have highlighted a strong similarity between the Bull move in 10 Year notes over the past few months and the late 2007 rally into early 2008. I have also added extra emphasis on the current Bull Flag and breakout and a similar pattern in Dec 2007, whilst a repeat is not guaranteed the similarities are quite striking, and I believe this supports the idea of higher 10 year note prices/lower yields in coming weeks.
I am not sure how significant yesterday's failed breakout was, it was so brief and fleeting that I am not sure whether to give it serious consideration or not. Turning to the bigger picture, I think overall things still remain finely balanced, the medium-term trends favour the bulls at the mom, the shorter-term indications are sending some ugly warning signs, whilst the overall longer-term picture and outlook still remain ugly in my opinion. Thus we remain at some sort of Crossroads, I have summarised the various components that I see which contribute to the current outlook below. In the meantime I think that a meaningful and sustained break over 1150 (SP500 Future) will favour continued further upside progress. However the longer this fails to materialise, the increasing chance we see some sort of correction, with breaks of 1132 and a sustained break of 1118 as likely catalysts for a deeper move.
Just to re-iterate the above points: Medium Term I see some favourable factors which I have pointed to over the weeks and months. Amongst these include:
Large bullish 'Falling Wedge' on the weekly charts.
Inverted 'Head+Shoulder' continuation pattern.
40 Week moving average (Approx equivalent to 200 Day ma) failed to turn lower (or maintain a turn lower), and price has broken back over this level.
The SP500 has made a new 20 Week High (though as I write it has failed to maintain it).
Note, the above is largely true for a number of other key broad indices, including the Dow Industrials, the Dow Transports, the NYSE comp, the Nasdaq comp, the Russell 2000.
The chart below shows some of the above.
In addition to the above points there are one or two other signals which fall outside the realm of less-conventional Techinical Analysis, that I watch:
The first of these is my own long-term trend following system on the SP500, unlike the 50/200 day moving crossover, this did not give a sell-signal in the summer, and is thus still in buy signal mode. (Click here for more detail of my system). I will add however, that this is a lagging indicator, and has little short-term forecasting ability as an indicator.
Secondly is a comparison between the charts in the mid-70s and the current chart (Can be seen here). I have been following this from a distance as this is a not a tool to be used in daily decision making.
In addition, the recent USD weakness, continued ultra-low rates, and strong possibility of a new round of QE, all continue to be favourable short-term developments for US equities.
Also, strength in certain currencies, notably the EUR and the AUD suggest that risk aversion is low, although JPY strength does somewhat seem to mitigate this a touch.
The Short-term charts continue to cause me concern however, particularly if a sustained break above 1150 on the SP500 futures does not materialise.
Firstly I have some short-term patterns which bear watching. I have highlighted these on the chart below. In particular the Broadening/Expanding formation. However, as I have previously pointed out these patterns are erratic and can be misleading, as I have also highlighted on the chart. Nonetheless, this current formation is bearing a close similarity to the pattern which formed in late April, though it also looks like the March pattern which led to one final rally higher.
I also have a strong rising Pivotal line, which currently resides near 1150, this line is drawn in Purple on the chart below. Previously failed attempts to break above, or indeed to follow though on a break above have led to deep corrections on a number of occasions. Note however, that when this line was successfully broken, it then switched to very strong support.
Additionally 1150 is also the centre line of an Andrews Pitchfork, and is the high of the market before it topped in January.
1150 is also a 2/3rds retracement. Although this is not a Fib level, the 2/3rd retrace can be significant when it stalls the market and is tied with other signals. Also worth noting is that the Nasdaq Composite and the NYSE Comp have both stalled at the 2/3rd retracement, whilst the Dow Industrials has hit the 76.4% retrace. The confluence of these key levels as resistance may yet prove to be significant.
Finally I have highlighted on the chart that the RSI is showing signs of bearish divergence, though this may be just a correction of the overbought status.
In addition I do have some other concerns.
The Bank Index continues to lag heavily. This may of course be a red herring, as it is only one sector, however it is a key sector.
The VIX is churning and not moving lower, though as the period in Q3 showed last year, this need not hold the market back.
The European Sov Debt Crisis continues to rumble on in the background, though the market has largely ignored this of late, it still has the potential to be the 'Elephant in the Room'.
Finally the very long-term charts. The possiblity of a Large Expanding/Broadening formation in my opinion continues to overhang this market. The chart below shows this, together with the large pattern highlighted from 2007. As I have mentioned before these patterns are extremely difficult to navigate, and I do not feel that right now it is a major feature with regard to the short-term direction.
Finally something for the weekend. It is one of my favourite comedy sketches, it comes from 'the Two Ronnies' ,a British TV series from the 1970s. I hope you enjoy it. Have a good weekend.
PM Update. Some ugly price action today, seen both sides of the range (mentioned below) touched with minor breaks. Also interesting pattern possibly formed, looks like upward sloping Diamond, similar to the top in April. (See chart below).
_________________________________________________________________________________ AM Update
Today, is one of those days, when I am lacking inspiration. Not much has changed over the past 24/48 hours, the SP500 has been rangebound, having touched exactly the resistance at 1150 on Tuesday, then fallen away to the first support at 1132, for me these 2 levels are key for now. I remain undecided as to direction, there is definately an underlying Bullish momentum behind the SP500 after the surprisingly strong September, however as I have pointed out over recent days, there are plenty of potential warning signs that this could turn ugly again (See postings below). In the meantime patience is required.
The SP500 remains in consolidation mode. Last week it broke out above the June and August peaks, setting up an inverted Head + Shoulders consolidation breakout, and at the same time breaking the string of lower highs which has been a feature since late April. It has however balked at the 1150 resistance level, I have covered the various resistances at this level in the posts over the past two days. - The past two week have seen tests of the breakouts and failed attempts to overcome 1150. Hence we remain stuck inside this range for now, capped by 1150 and supported by 1132 and backed up at 1118, with lots of noise in between. (See chart below - Click on chart to enlarge).
One new aspect I am considering on the SP500 is the Broadening/Expanding pattern possibly being formed. The 4 hourly candle chart on the E-mini S+P futures below highlights this. - Broadening or Expanding formations tend to be reversal patterns, however one problem with these types of patterns is that they can be extremely difficult to confirm, price action can be very volatile and erratic and what may appear to be a Broadening Formation could easily turnout to be consolidation.
If however this does turnout to be a Broadening Formation, then this could have strong Bearish implications. The next chart shows the SP500 Index over the past year, I have highlighted the current formation, and 3 previous Broadening Formations, each of which led to significant corrections.
One noteworthy obsevation, all three prior formations saw minor breakouts to the downside, followed by a sharp correction back to the upper half of the pattern before ultimately breaking lower. This is not unusual with these type of patterns, I stress that they are one of the most difficult patterns to successfully navigate, however they can have serious reversal consequences once successfully completed. I highlight this further by showing the weekly SP500 Index back to 2005; the major top in 2007, prior to the 2008 bear market, was a Broadening Formation, and as I have stressed before, it is possible that our current price action over the past year may be part of one ugly Broadening Formation.
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