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Technical Analysis Weekly - Correction Leading to a Test of Support

Wednesday Morning 05/16

Here are today’s newsletter advisory sentiment figures and a paraphrase of some comments from Investors Intelligence:

U.S. indexes all continued lower last week, building debt tension in Europe is primarily to blame. Slower Chinese growth added to the concerns. U.S. indexes tested and then undercut their recent and 10-Apr lows. There was a small increase for the BULLS to 39.4% as some bulls noted the markets were washed out and due for at least a trading move back to the upside. There was also a higher number of BEARS to 22.3%, after two weeks at 20.4%. Some advisors add a political element to their analysis and don't expect the stock market to shift to long-term bullish until there is a change in government policy to what they believe will favor economic growth and job creation.

Many times, when people come in to my office and watch me record intraday hourly statistics, they think I’m “wasting my time.” That would be until yesterday, when as early as 11:00 a.m., when the DJIA was trading marginally positive, there was a significant number of net declining issues. This negative relationship, between price and internal readings, continued. Shortly after noon, the DJIA recorded its intraday high, up 63 points, yet there were only a fractional number of advancing issues. At 2:00 p.m. the DJIA was higher, yet there were over 300 net declining issues. When weak internal readings are combined with “up early-down late” tape action the end result is rarely good as it is indicative of a market that hasn’t finished downside probing. The negative weekly cross by the MACD indicator from almost two weeks ago, when the DJIA (12632) was trading over 13000 and the S&P 500 (1330.66) was at 1369, played out again. At the final bell, the DJIA fell 63 points, the NASDAQ lost nine points, NYSE volume expanded (another distribution day), and new NYSE 52-week lows expanded again.

Consistent with the comments above, the breakdown by the S&P 500 under 1357 (chart of the SPX below), the top-side breakout yesterday by the Volatility Index (VIX - chart below), and NASDAQs close under 2900, etc., etc., short-term trading bounces aside (the McClellan Oscillator and my overbought-oversold oscillator, based on breadth figures, have finally reached an oversold condition), until there is either 1) a low-rally-retest sequence that occurs within the context of a current area of support or after establishing a new support level through some type of capitulation type hour or 2) upside buying interest strong enough to register at least one "90% upside day" or a string of "80% upside days" and the recent breakdown points (now resistance) are overcome, the primary trend is still in a “corrective” condition (5% to 10% down).

Relative to the comments above and the short-term oversold condition, which implies another try on the upside is due, please place a premium on stock selection.

CBOE SPX Volatility Index (VIX)

Charts courtesy of Thomson Reuters/Dorsey Wright & Associates.

Tuesday Morning 05/15

( Let our advance worrying become advance thinking and planning - Winston Churchill

April Showers Bring May...Showers: The “beneath the surface” weakness that has been in place for at least the past few weeks continued yesterday. The DJIA and the Russell 2000 Index joined the party in closing under important support (now very short-term resistance), defined by 12710 and 784, respectively. So far, the NASDAQ has held out as the “index for the next century” and hasn’t violated support at 2900 – if you are looking for a “plus,” that is it, in my opinion. In any event, and similar to last week, when there were multiple set-ups for the stock market to rally (it didn’t), after yesterday’s “80% downside day” in which declining issues and declining volume readings were above 80% of their respective total figures, I can’t stress enough the importance for some type of upside probing now, enough to nullify the breakdowns by the DJIA, etc. Also, upside demand needs to be strong enough to register at least one “90% upside day” or a string of “80% upside days.” A failure to get back above the breakdown points on a closing basis or a lack of strong and consistent upside demand will imply further downside probing.

Having highlighted a number of different big-cap, small-cap, and mid-cap stock market indices over the past few weeks and relative to the comments above, let’s step back and look at a broader index, specifically the Wilshire 5000 Total Market Index (full-cap). I don’t have a symbol for Market Q.

Chart courtesy of Thomson Reuters.

As my new colleagues have wisely stated, “Days when the tape is weak is always a good time to scan the ‘up on volume list’” for stocks exhibiting good relative strength.

Monday Morning 05/14

Primary Trend: While the S&P 500 is the only index to break down, the uptrend for many other stock market indices is under pressure as the weekly MACD reading has negatively crossed and the primary trend for many individual stocks is “Bearish.”

Please don't be slow to exit “losers.”

Short-Term Trend: “Bearish.”

Key Support (buying interest) Levels: DJIA: 12710, S&P 500: 1340, NASDAQ: 2900.

Crossroads: On the heels of discussing the absolute and relative price trend breakdown in the S&P Financials and Bank Index (BKX) one day earlier, I found last Friday’s “JPM-induced” sell-off interesting. While last week’s decline wasn’t too bad, during which the DJIA, S&P 500, and the NASDAQ lost 1.67%, 1.15%, and 0.76% respectively, it had a terrible feel to me. The negative weekly MACD signal from the previous week wasn’t alleviated, an oversold condition and the intraday reversals did not produce a meaningful rally or any upside follow-through for that matter, the S&P 500 broke down, NYSE volume expanded on “down” days,” volatility is increasing, more high growth stocks broke down, and there were 1318 net declining issues yet the DJIA only fell 218 points. The weakness was more prevalent than what the stock market indices would have you believe.

Consistent with this, please make sure that your stop loss points are palatable and that you have exit strategies in place should conditions escalate. Review portfolios and identify stocks showing negative price divergences. Let me know if I can help.

In light of the critical support levels listed above for the major stock market indices, shown below is a chart and important underlying support, for the mid-cap universe, defined by the S&P Mid Cap 400 index (MID).

While there are additional support levels, including longer-term moving averages and retracement levels (not shown), a breakdown below critical support at 947.70 would open up lower prices, in line with the next support levels shown on the chart and a price target of approximately 890 – approximate 12% pullback from its recent peak.

Charts courtesy of Thomson Reuters.

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