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Technical Analysis Weekly - Exhausted

Friday Morning 02/10

“Beware of Greeks Bearing Gifts?” I received a call yesterday concerning the “frothy” nature of the stock market. My response was, “Other than AAPL, my quote screen is showing a lot of ‘red.’ This indicates to me that within the context of an uptrend (the ingredients prior to a severe decline are not in place), the stock market is weary (exhausted and selective) short-term.”

As a side note but consistent with this, despite all of the “hundreds” of different sentiment indicators used by Wall Street, do you think that Nouriel Roubini, now betting on additional stock market gains, or that traders in the Rydex family of mutual funds nearly set a new record for assets in long funds versus assets in inverse funds in the major equity indexes is the ultimate in bullish sentiment?

Consistent with the observations above, the S&P 500 is trading pretty much at resistance at 1357 and the DJIA is contending with psychological “round number syndrome” resistance at 13000, I continue to suggest traders tighten stops and/or scale sell. Speaking of such, AAPL’s chart is parabolic and was trading approximately three standard deviations above its 50-DMA yesterday. While straight up parabolic moves can be exhilarating and very profitable, they rarely end well. I also suggest taking some type of defensive approach towards stocks that are acting poorly on an absolute or relative basis. Two companies that meet these criteria are D and LINE. Relative to LINE, my suggestion is to please consider using some type of hedging strategy to benefit from this observation either now, going into the earnings report on 2/23/12, or if the stock closes under $35.80 – you choose. Support for LINE under $35.80 is $35.18 and $32-$31.

Chart courtesy of Thomson Reuters.

Thursday Afternoon 02/09

Opa! Greece said its political leaders had agreed to an austerity plan although a final deal with its creditors is still nowhere in sight. As one wise stock market prognosticator quipped, “This is obviously a plus, but before the celebrations start, let’s see what the reaction of the citizenry is. Expect the unions to hold their breath and stomp their feet.”

With that as the backdrop, let’s review some of the major developed European bourses including Spain, because Spain is likely to gain further attention, as well as the banks defined by the DJ STOXX 600 Bank Index.

Germany - DAX 30 Index (DE; DAXX): Following a number of bullish short-term breakouts, this index quickly approached an area of overhanging selling pressure (resistance) between 6900 and 7000. Consequently, a pullback or a period of consolidation shouldn’t be surprising. In the meantime, near-term support exists around 6600 and more importantly 6430, under the belief that “broken resistance becomes support.”

United Kingdom - FTSE 100 Index (GB; FTSE): Amongst the major developed European bourses, this has been one of the strongest indices. Consistent with this, the FTSE is approaching major selling pressure “in and around” 6100. Consequently, a pullback or a period of consolidation shouldn’t be surprising. Additionally, under the guise that “broken resistance becomes support,” please see how the index reacts to pullbacks towards 5800 and 5700. Also, support exists closer to 5584.

France - CAC 40 Index (FR; CAC): While many individual companies within this complex look better than this index, the CAC is on the verge of completing a bullish Double Bottom pattern. Stabilization above approximately 3415 over a period of days to weeks would complete the pattern and could send the index higher. In the meantime, trend line support exists at 3350 followed by 3245.

Spain - IBEX 35 Index (ES; IBEX): While the near-term chart configuration is getting more bullish, a close above resistance at 9351 (October 2011 peak) could produce an acceleration of the current uptrend. However, it’s just as important that during any setbacks, this index not violate support at 8600 and/or 8400.

Euro-STOXX 50 Index (DE; SX5E / comparable to the Dow Jones Industrial Average in the United States): Within the context of a bullish short-term trend, this index will complete a bullish intermediate-term Double Bottom pattern, similar to the CAC in France, on a sustained close above 2506. In the meantime, important near-term support exists “in and around” 2430 to 2400.

DJ STOXX 600 Bank Index (DE; SX7P): This index has followed through from a short-term breakout over 140 and completed a bullish Double Bottom pattern. Initial support exists at 152, 143, and 140. A move towards the low to middle 180’s wouldn’t surprise me.

Summary: With the exception of the bank index, most of the indices highlighted in this report have approached, or are approaching resistance (selling pressure). Consistent with this, new money should only be deployed on a pullback or very selectively – in stocks that are attractive from both a fundamental and technical perspective and immediately coupled with a plan to manage risk.

As a note of interest, there are country-specific exchange traded funds that seek to mimic the European stock market indices highlighted in this report. Please call Closed-End Fund Research for specifics.

DAX 30 Index (Germany)

FTSE 100 Index (UK)

CAC40 Index (France)

IBEX 35 Index (Spain)

Euro-STOXX 50 Index

DJ STOXX 600 Bank Index

Charts Courtesy of Thomson Reuters and quoted in local currency.

Wednesday Morning 02/08

Here are the recent newsletter advisory sentiment figures and a paraphrase of some comments from Investors Intelligence:

The 2012 rally resumed last week with additional index gains. The NASDAQ and S&P Small Caps followed the NASDAQ 100 with moves above their 2011 highs. The advance did inspire some new advisor optimism although it may take broad new highs before we get the sentiment reading often shown at tops.

The BULLS jumped to 52.1%. In April 2011, the BULLS peaked at 57.3%. The latest increase is a move in the wrong direction but not yet negative. For that we would need the BULLS to exceed 55% and then reverse direction to signal a peak. Major market tops usually include BULLS between 55% and 60%. The BEARS were lower at 28.7%. A contraction to at least the mid-to-low 20%s should occur before we are convinced the high for the market is at hand. The spread between the bulls and bears was 23.4%. The recent differences were all well below the 28.0% reading shown in July and the 40.0% difference last April. A spread above 30% would suggest danger for a rising market – advisors’ sentiment charts below.

Charts courtesy of Investors Intelligence, a division of Chartcraft Inc.

Relative to yesterday’s tape action, possibly motivated after only five weeks of a new year by “performance anxiety,” the “buy the dip crowd” showed up again. This was evident by an intraday reversal of over 100 points by the DJIA, down 62 points at the open yet up over 40 points early afternoon. At the close, the DJIA gained 33 points and the NASDAQ added two points. Within this context, the U.S. Dollar Index continued lower while at the same time the euro completed a bullish short-term pattern of accumulation (inverse head and shoulders bottom).

One glaring point to yesterday’s trading has to do with the number of new 52-week highs on the NYSE. While realizing that this is a difficult indicator to use in terms of timing market tops or market bottoms, it is an excellent indication of broad or narrow buying interest. Yesterday’s reading was 157 coupled with a new reactionary high by the DJIA. This is a terrible reading and while one reason for such a low reading may be related to the weakness in the fixed income market yesterday, I don’t want to rationalize an indicator. It is what it is and yesterday’s reading was awful, relative to recent new 52-week high readings over 300. It implies selective buying and weariness of the current advance. It also suggests that new buying, see below, should be coupled with well-defined stop loss points.

Shown below is a bullish chart of the iShares S&P GSTI Networking Index Fund (IGN/$31.07 – category 1).

Chart courtesy of Thomson Reuters.

Tuesday Morning 02/07

S&P 500 (1344.33): Initial resistance = 1347 and 1356. Initial support = 1312 (rising 20-DMA) and 1300 (1/30/12 low) etc.

In light of the first chart shown below, I found the following, written by a colleague of John Murphy, timely and consistent with our always insightful Energy team:

West Texas Intermediate Crude (WTI/$96.91), also known as light sweet crude, is used to benchmark oil prices in the U.S. Light refers to the density and sweet refers to the sulfur content, both of which are low. Brent Crude ($115.93), which is sourced in the North Sea, is the benchmark price for Europe. More than half the world uses Brent as their benchmark for crude oil prices. Even though both WTI and Brent are interchangeable commodities, they are geographically separated ... Brent crude goes mostly to Europe and is more affected by Iranian supplies, which could be curtailed due to sanctions.

Consistent with the comments above, the fact that Brent Crude is exhibiting much better relative strength than WTI and our Energy team’s emphasis on Brent Crude, shown below is a chart, which is now bullish short-term, of Brent Crude (I don’t know a symbol for Market Q; you can try the following website: futures.trading charts.com).

The bullish near-term chart configuration of RBOB New York Harbor Gasoline ($2.92) is also of interest.

Charts courtesy of Thomson Reuters.

Monday Morning 02/06

Following no immediate and sustainable downside follow through from the negative one-day reversal registered by the DJIA on 1/26/12, last Friday’s employment report created enough euphoria to push the DJIA (12862.23) right up to its intraday high (resistance) recorded last May at 12876. Consistent with this, the “senior index” has established an important initial underlying support level at 12529, defined by its intraday low from 1/30/12. I find it humorous, given the stock market’s gains last week (for the week the DJIA gained 1.5%, the S&P 500 Index rose just over 2% and the NASDAQ outperformed, adding over 3% and at an 11-year high – please refer to 1/19/12 report), stock market prognosticators are now jumping on the bullish bandwagon, based on what I read yesterday. It’s similar to how the sports world is now treating Eli Manning. Last week he was still “Peyton’s brother.” Now he is the “end all” of quarterbacks. So I ask, in both instances, “where were you before last week?” Eli had already won a Super Bowl and beat both the heavily favored Packers and 49’ers while the DJIA has been in a positive mode as early as last October and as recently as just before Christmas.

In light of last week’s tape action, which carried the DJIA up to resistance and following a good topside move, the DJIA could easily consolidate and/or pullback once again. Consistent with this, I would not be buying stocks that are extended more than 3% above their multi-week base breakout points as they would be considered “extended.” I prefer buying either pullbacks closer to a rising 50-day moving average or something that is just emerging from a multi-week basing pattern. I would also continue to sanitize portfolios of technically and/or fundamentally unhealthy/weak positions. From a trading perspective, based on an account’s tolerance for risk, I’d either tighten stops and/or scale sell.

However, in light of my comments last week about "Four Percent Januarys” (please refer to 2/1/12 report), the current trend of many advance-decline lines (see below) and the consistent pattern of “higher troughs and higher peaks” being registered by “stocks,” the ingredients of a major decline aren’t yet present. Therefore, from a non-trading perspective, I remain “bullishly inclined” but a lot less willing to chase new positions versus the past one to four months.

Chart courtesy of Thomson Reuters.

Data and chart courtesy of FactSet and Raymond James research.

The S&P 500 Advance-Decline Line and NYSE traditional A-D Line are at new recovery highs!

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Notes: Prices are as of the most recent close on the indicated exchange and may not be in US$. See Disclosure section for rating definitions. Stocks that do not trade on a U.S. national exchange may not be approved for sale in all U.S. states. NC=not covered.

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