Comparing price to a moving average is an objective way to measure its strength, objective because it is easy to understand. When price is below its moving average, it is displaying weakness. Measuring the percentage of S&P 500 component stocks above the 20EMA, 50EMA, and 200EMA gives us an unambiguous assessment of participation (stocks actually helping to move a market index higher) in the short, intermediate and long term.
For about a month I have been pointing out the deterioration of participation in the face of the market making new highs, and this week the erosion accelerated. It is very unusual to see these indicators dip to this extent before a price top is actually put in, but this week they really fell apart. Yes, sharp moves like this are common, but what is uncommon is the fact that the drop occurred while the market was still heading higher.
Let's quantify it by measuring indicator (participation) decline since the June price top:
Stocks > 20EMA: -45%
Stocks > 50EMA: -35%
Stocks > 200EMA: -26%
This occurred while the market advanced over five percent. Now, let's see how this fits in with our normal analysis.
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BROAD MARKET INDEXES
Each S&P 500 Index component stock is assigned to one, and only one, of 11 major sectors. This is a snapshot of the Intermediate-Term (Silver Cross) and Long-Term (Golden Cross) Trend Model signal status for those sectors.
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Top 10 . . .
. . . and bottom 10:
This chart is included so we can monitor rate inversions. In normal circumstances the longer money is borrowed the higher the interest rate that must be paid. When rates are inverted, the reverse is true.
IT Trend Model: BUY as of 5/8/2020
LT Trend Model: BUY as of 6/8/2020
SPY Daily Chart: Options expiration was this week, and last week I said, "we should expect low volatility toward the end of the week." As it turned out, the whole week was quiet, with a range of less than 1.5%. The low volatility is choking the VIX between the Bollinger Bands, and that hints that high volatility is in the near future. The daily PMO has crossed down through the signal line, but that is only observable in the magnification of the thumbnail chart.
While investors seem complacent, the VIX is well below its levels prior to the February top.
SPY Weekly Chart: This is kind of the definition of overbought: a vertical climb and the weekly PMO at the top of a five-year range.
Participation: The following chart uses different methodologies for objectively showing the depth and trend of participation for intermediate- and long-term time frames.
- The Silver Cross Index (SCI) shows the percentage of SPX stocks on IT Trend Model BUY signals (20-EMA > 50-EMA).
- The Golden Cross Index (GCI) shows the percentage of SPX stocks on LT Trend Model BUY signals (50-EMA > 200-EMA).
- The Bullish Percent Index (BPI shows the percentage of SPX stocks on Point & Figure BUY signals.
As with our lead chart, this chart shows significant negative divergences in the intermediate-term, and the long-term Golden Cross Index is 30% lower than it was at the February market top.
Climactic Market Indicators: As the market climbed this week, Net A-D and A-D Volume were negative every day this week. That is really unusual. New Highs contracted. SPX Total Volume was only about 75% of one-year average daily volume.
Short-Term Market Indicators: The short-term market trend is UP and the condition is OVERSOLD. Wait . . . oversold? Well, that's what the indicators say, even though SPY has gone to new highs this week. The market bias in this time frame is NEUTRAL, based upon the STOs evenly straddling the zero line for almost three months.
Intermediate-Term Market Indicators: The intermediate-term market trend is UP and the condition is NEUTRAL. The market bias in this time frame is BULLISH, based upon positive ITBM and ITVM readings since the end of April. Again we see significant negative divergences.
CONCLUSION: I have a theory about options expiration week, that the "powers that be" keep the market calm to facilitate the orderly transition from expiring contracts to the next position. It certainly looks like the case this week -- the market held its own in spite of technical indications that a pullback is badly needed. I began this article with a demonstration of just how thin participation has become since the June price top, and this was confirmed again and again as we worked through our other indicators. A bullish interpretation of this situation would be that we have witnessed an internal correction, and that the oversold conditions will soon spark a new rally. A bearish interpretation would be that ever-narrowing participation is about to bite the market on the butt. As you can probably guess, I take the bearish position, and I think the correction is immanent.
Parting Note: We see evidence of many stocks leaving the party, but how do we reconcile the new market highs? Easy. We just look at AAPL. Since the March low, it has rallied +135%. It is representative of a small number of mega-cap stocks that are driving the market higher. I don't know when it ends, but this kind of advance cannot be sustained. A -30% to -50% correction is not out of the question.
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IT Trend Model: NEUTRAL as of 5/28/2020
LT Trend Model: SELL as of 7/10/2020
UUP Daily Chart: UUP started lower this week, but recovered that lost ground.
UUP Weekly Chart: We can still see an island forming in the down trend. Possible reversal?
IT Trend Model: BUY as of 3/24/2020
LT Trend Model: BUY as of 1/8/2019
GOLD Daily Chart: After correcting the much too steep advance from mid-July, gold remains above the long-term support line drawn across the 2011 top. This is healthy activity needed to digest, rather than reverse, the rally. Virtually everyone favors gold now, but sentiment as reflected by the premium/discount on closed-end fund PHYS, still reflects that the public is not excited with gold yet. It is possible that gold has had a successful retest of this month's lows.
GOLD Weekly Chart: Thanks to the correction, the rising trend line is less accelerated.
GOLD MINERS Golden and Silver Cross Indexes: The miners are taking a breather, but the still look healthy.
CRUDE OIL (USO)
IT Trend Model: BUY as of 8/13/2020
LT Trend Model: SELL as of 2/3/2020
USO Daily Chart: Crude has really gotten quiet.
USO/$WTIC Weekly Chart: The very oversold weekly PMO is rising, but that is a function of the math. If price remains flat, the PMO will default back to the zero line.
IT Trend Model: BUY as of 6/26/2020
LT Trend Model: BUY as of 1/2/2019
TLT Daily Chart: Not much to say here. Looks like a trading range between 161 and 171 is the dominant feature.
TLT Weekly Chart: The rising trend line has been broken, but the more significant support is at the line drawn across the June low (152.50).
Technical Analysis is a windsock, not a crystal ball.
Happy Charting! - Carl
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
NOTE: The signal status reported herein is based upon mechanical trading model signals, specifically, the DecisionPoint Trend Model. They define the implied bias of the price index based upon moving average relationships, but they do not necessarily call for a specific action. They are information flags that should prompt chart review. Further, they do not call for continuous buying or selling during the life of the signal. For example, a BUY signal will probably (but not necessarily) return the best results if action is taken soon after the signal is generated. Additional opportunities for buying may be found as price zigzags higher, but the trader must look for optimum entry points. Conversely, exit points to preserve gains (or minimize losses) may be evident before the model mechanically closes the signal.
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