A subscriber wrote to us and noted that we have the highest bull reading since 2018 on the American Association of Individual Investors (AAII) poll. Sentiment is contrarian, meaning when everyone is very bullish, it is likely time for a reversal or market top. We've annotated cardinal tops and you can see that they do tend to occur after very overbought bullish readings. However, I have marked the last time we got an historically high bull reading at the end of 2020 and you can see that no damage occurred. It appears to have been an upside initiation. Indeed, check out the end of 2016 when we had very high bullish readings, it preceded a market rally.
More often than not these high bullish readings precede market tops so we should exercise caution moving into next week.
The DecisionPoint Alert Weekly Wrap presents an end-of-week assessment of the trend and condition of the Stock Market, the U.S. Dollar, Gold, Crude Oil, and Bonds. The DecisionPoint Alert daily report (Monday through Thursday) is abbreviated and gives updates on the Weekly Wrap assessments.
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MAJOR MARKET INDEXES
For the week:
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.
For the Week:
CLICK HERE for Carl's annotated Sector charts.
THE MARKET (S&P 500)
IT Trend Model: BUY as of 5/8/2020
LT Trend Model: BUY as of 6/8/2020
SPY Daily Chart: The market moved swiftly higher this week, finishing with a fresh set of all-time highs. The PMO continues to rise nicely, but Total Volume continues to be weak. We'll talk about the VIX shortly.
The RSI has moved into overbought territory. A quick review tells us that the market doesn't tend to hold that condition very long. The bearish rising wedge has been removed from the 1-year daily chart and a new rising trend channel has been added. Price is getting uncomfortably close to the top of that channel.
SPY Weekly Chart: We've added another broadening top or megaphone pattern in the shorter term. Price is pressing against the top of that bearish pattern. On the bullish side, we do have a weekly PMO bottom above the signal line which is bullish. However, we do note that the weekly PMO is very overbought.
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.
We're still seeing rising participation as far as IT Trend Model "Silver Cross" BUY signals and LT Trend Model "Golden Cross" BUY signals. The BPI is rising, but is beginning to decelerate. Negative divergences have cleared this week.
Price support at the 20/50/200-EMAs for SPX components is rising and negative divergences have cleared. However, these readings continue to be very overbought.
Climax Analysis: On Monday we had a climax day, but we haven't seen any since. While readings were elevated today, they don't qualify as a climax. The VIX is the star of this chart. This is the third day we've seen the upper Bollinger Band on the inverted scale punctured. This condition nearly always precedes a decline with the exception of the early August punctures. The current VIX readings are highly overbought.
Short-Term Market Indicators: The short-term market trend is UP and the condition is OVERBOUGHT.
STOs topped today which tells us to expect a possible decline early next week. However, these indicators are not at overbought extremes and could accommodate more upside. The problem overall with these indicators are the negative divergences that are still in play.
Intermediate-Term Market Indicators: The intermediate-term market trend is UP and the condition is NEUTRAL to OVERBOUGHT. The market bias is BULLISH.
Both the ITBM and ITVM continue to rise higher. The ITBM is overbought. The ITVM is not overbought, but carries a strong negative divergence on new all-time highs. %PMO Crossover BUY signals was mostly flat this week and holds a negative divergence with price.
CONCLUSION: The overall market condition is overbought so despite fewer negative divergences, we should expect a pullback next week. The short term has STOs in decline and negative divergences. The intermediate term shows rising indicators and fewer negative divergences. This tells us that a short-term decline should be expected but with mostly bullish intermediate-term indicators, that decline shouldn't turn into a correction. Added evidence for a short-term decline is AAII sentiment at bullish extremes and a very overbought VIX. We should expect a pullback next week.
Note: Options expire next week, so we should expect low volatility toward the end of the week.
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The PMO is trying to bottom and the double-top that has recently formed could disappear should Bitcoin continue to rise. The RSI is positive and with a possible PMO bottom ahead, we should look for a test of 60,000.
Longer-term interest rates have topped and appear to have entered a period of consolidation. Support continues to hold.
MORTGAGE INTEREST RATES (30-Yr)
With long-term interest rates on the rise, we want to watch the 30-Year Fixed Mortgage Interest Rate. For the most part, people buy homes based upon the maximum monthly payment they can afford. As rates rise, a fixed monthly payment will carry a smaller mortgage amount. (See table.) As mortgages are forced to shrink, real estate prices will have to fall, and many sellers will increasingly find that they are upside down with their mortgage.
This week rates ticked down for the first time since early-February. We presume that they will follow the lead of bonds (above) and consolidate.
IT Trend Model: BUY as of 3/5/2021
LT Trend Model: SELL as of 7/10/2020
UUP Daily Chart: After breaking down below support and the 20-EMA, price rebounded somewhat today. Overhead resistance is still going to be a problem for UUP and the PMO SELL signal suggests price will move lower and likely test the 50-EMA.
We can see that a drop to the 50-EMA would still keep price above the confirmation line of the double-bottom, but we don't expect that to hold.
UUP Weekly Chart: The weekly RSI has moved into negative territory below net neutral (50). We can see that this area of support needs to hold, otherwise the weekly picture will turn. The PMO is still rising, but it is well below the zero line.
IT Trend Model: NEUTRAL as of 1/13/2021
LT Trend Model: SELL as of 3/4/2021
GOLD Daily Chart: Gold is looking very bullish despite today's pullback. The PMO is rising and we do have a positive RSI. The double-bottom is trying to disintegrate as today's decline did take price below the confirmation line. Discount remain high and that usually means higher Gold prices as extreme bearish sentiment is bullish for price.
Admittedly seeing Gold stopped at the 50-EMA and overhead resistance at the November low doesn't inspire confidence.
GOLD Weekly Chart: The weekly chart has a very large bullish falling wedge. Notice that price didn't have to test the bottom of the pattern before heading higher. That's very bullish and suggests we will see the expected upside resolution of the pattern. The PMO is decelerating somewhat, but it remains below the zero line. Overall we are bullish on Gold.
GOLD MINERS Golden and Silver Cross Indexes: With Gold experiences a pullback today, Gold Miners struggled somewhat. However, this group looks very bullish going into next week. The OBV rising bottoms are confirming the price rally. The SCI is rising and is not overbought. The BPI has flattened, but is not overbought. Participation is strong and the GCI positive crossover is very encouraging.
CRUDE OIL (USO)
IT Trend Model: BUY as of 11/23/2020
LT Trend Model: BUY as of 3/9/2021
USO Daily Chart: Crude Oil has been in a holding pattern for a few weeks now. There is a bullish ascending triangle forming which keeps us from being bearish. The RSI is negative, but hasn't fallen this week. The PMO is negative, but notice it was able to decompress on the consolidation of USO. This leaves room for it to rise before getting overbought. Notice also the contraction in volume on the declines.
We've been watching the development of a complex head and shoulders on the one-year chart. The 50-EMA is holding, as is support. This suggests we will see a turnaround on crude very soon.
USO/$WTIC Weekly Chart: Looking at $WTIC, there is room for more decline before hitting support, this could indicate we will see a breakdown on USO. However, we are about to see a positive 17/43-week EMA crossover and the weekly RSI is positive. The weekly PMO is still rising.
IT Trend Model: NEUTRAL as of 8/27/2020
LT Trend Model: SELL as of 1/8/2021
TLT Daily Chart: Yields have not broken support so consequently, Bonds haven't been able to break above resistance. The PMO is rising nicely out of oversold extremes.
With the double-top developing on yields, we expect to see them fall which will assist TLT in breaking out.
TLT Weekly Chart: The weekly chart is showing improvement with the RSI rising out of oversold extremes and a PMO that is beginning to decelerate in oversold territory. This looks like a promising bottom for TLT.
Technical Analysis is a windsock, not a crystal ball.
-- Carl and Erin Swenlin
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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