Today's lead story is the market pullback today. In all honesty "pullback" is a stretch. Looking at the terminology and typical percentages for drawdowns, a Bear Market is a 20% or more decline, a Correction is a 10%-20% decline, a Pullback is 5%-10% and anything else is defined as "noise". The drawdown from the September top to today's closing price on the SPY is less than 5%.
The 5-month candlestick chart of the SPY looks dreadful. However, there are a few positives for bulls to cling to. The SPY managed to hold onto support at the August low after climbing out of its intraday lows. The RSI is negative but is very oversold compared to prior readings. You'll note very heavy Total Volume and a huge rise in the VIX reading; this is two of the earmarks of a market climax. Is it an initiation or exhaustion? Read on.
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
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.
We had a change to our DP Sector Scoreboard. Materials (XLB) had a negative 20/50-EMA crossover. The result is an IT Trend Model Neutral signal. Had this crossover occurred below the 200-EMA, it would've been a SELL signal. I was asked in today's trading room about what happened here. XLB was already displaying very negative indicators. Participation was falling, price was falling and relative strength against the SPY was already failing. Price did stay above the 200-EMA and critical support at the July low. The RSI is now oversold but we need a positive shift in momentum accompanied by improvement in participation of stocks > 20/50-EMAs.
RRG® Chart: XLE and XLY currently "lead" the other sectors.
CLICK HERE for an animated version of the RRG chart.
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: We now have oversold readings on the PMO, but it is continuing to spiral downward. The VIX rose significantly today, pushing it well below the lower Bollinger Band on our inverted scale. Typically we see a rebound from VIX readings that have punctured the lower Band.
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.
The SCI and GCI continue lower. The SCI is near-term oversold, but we have seen far lower readings. If this decline morphs into a correction, there is plenty of room for them to move lower.
Participation slumped. The %Stocks > 20-EMA is oversold and getting ready to hit extremes. The %Stocks > 50-EMA are also oversold, but we've seen them lower after the secular bear markets of late 2018 and 2020.
Climax Analysis: We had a very strong downside climax today. Carl and I agree that it is a downside "exhaustion" climax. More than likely we will see higher prices on a bounce tomorrow or even the next day. We expect to see a snapback. Whether that sees follow-through or not will depend on the reaction of our indicators tomorrow. We want to see an upside climax tomorrow. That could suggest follow-through ahead. We don't have enough information to know for sure.
NYSE Up/Down and Down/Up volume ratios are also climax detectors. The 9:1 ratio suggested by the late Dr. Martin Zweig in his book, Winning on Wall Street, is especially significant, but we also look for spikes outside the normal range to clarify a particular event. We have an NYSE and S&P 500 version of the ratios, and normally they will only be published when there is a notable reading.
Volume Ratios had very strong climactic readings above 9.0 and confirm what we are seeing on our climax chart above.
Short-Term Market Indicators: The short-term market trend is DOWN and the condition is OVERSOLD.
The STOs alluded to support being held at 440 as they were showing a positive divergence with price lows. Today they also spiked and sit in oversold territory. The October decline displayed readings much lower than our current readings. %Stocks with rising momentum is extremely oversold with only 9% of the SPX showing rising PMOs. 9 out of 10 stocks have declining momentum. Picking winners right now is extraordinarily difficult if your pool is the SPX.
Intermediate-Term Market Indicators: The intermediate-term market trend is UP and the condition is OVERSOLD.
IT indicators are continued lower and have entered oversold territory. What bothers me most about this chart is the loss of the rising trend. About a quarter of the SPX are still on BUY signal, but given only 9% of them have rising PMOs, that number will move much lower.
Bias Assessment: It occurred to us that one of the ways we can measure market bias is to compare the SCI to the percent of stocks above their 20/50-EMAs. When the percentages are lower than the SCI, the market bias is bearish and if they are higher, it is bullish. Any "mechanical" signal requires additional analysis to confirm the numbers.
The overall market bias in the short and intermediate terms is bearish. We have far fewer stocks above there 20/50-EMAs than stocks with a 20-EMA > 50-EMA or SCI percentage. The SCI cannot improve unless these stocks get price back above those key moving averages.
CONCLUSION: It was a painful one day decline, but the SPY has sustained a less than 5% decline from the all-time closing high. The Downside Exhaustion Climax does tell us to expect some sort of a bounce. Sentiment is very bearish based on the VIX. Sentiment being contrarian, this is good for the market in the very short term. I am 70% exposed to the market as stops were hit in my portfolio. I will likely sell into any short-term strength that is presented over the next day or two.
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Bitcoin fell heavily today by over 7%. The good news is that it is holding above support at the January and June/July tops as well as the 200-EMA. The RSI is negative and falling and the PMO has topped below the signal line, suggesting this support level is precarious.
Yields are moving mostly sideways since breaking out of their declining trend.
10-YEAR T-BOND YIELD
$TNX failed to breakout for a fourth time. This does form the top of a bullish ascending triangle. Given the close beneath the key moving averages, I would expect to see the short-term rising trend tested.
IT Trend Model: BUY as of 6/22/2021
LT Trend Model: BUY as of 8/19/2021
UUP Daily Chart: The Dollar rose slightly but set higher highs and high lows from Friday. The PMO just gave us a crossover BUY signal and the RSI is positive and not overbought. I would look for the Dollar to test overhead resistance at the August top.
IT Trend Model: NEUTRAL as of 6/24/2021
LT Trend Model: SELL as of 8/9/2021
GLD Daily Chart: Gold, a traditional safe haven in a market decline, was up on the day. This kept support intact at the June low and March highs. Carl noted in today's DecisionPoint Show that seeing price move below this level back in August, this support level may not be as sturdy as it appears.
(Full disclosure: I own GLD)
GOLD Daily Chart: The RSI is rising out of somewhat oversold territory and the PMO is decelerating. We also note that last Friday, discounts increased considerably and that often marks a reversal point for Gold. That said, we have seen much deeper discounts.
GOLD MINERS Golden and Silver Cross Indexes: Gold Miners continued to sell-off and are now continuing to make new annual lows. We do see a bullish falling wedge, but price may need to test the bottom of that wedge since it failed to breakout as expected. The indicators certainly tell us that is a distinct possibility. The RSI is negative and not in oversold territory. The PMO is on a new crossover SELL signal. Participation is dismal to non-existent.
CRUDE OIL (USO)
IT Trend Model: BUY as of 9/7/2021
LT Trend Model: BUY as of 3/9/2021
USO Daily Chart: USO tested support at the 20-EMA after failing to overcome resistance at the July top. However, the indicators are still fairly bullish. The RSI is positive and the PMO while flattening, hasn't sustained much damage.
The short-term rising trend was compromised today, but price settled within the rising trend.
IT Trend Model: BUY as of 6/10/2021
LT Trend Model: BUY as of 8/10/2021
TLT Daily Chart: TLT was higher on the day as yields dropped considerably. Price is preparing to test overhead resistance at the July top again. The RSI is rising in positive territory and the PMO is on a crossover BUY signal.
The last breakout from the symmetrical triangle failed, but price is now above the pattern again. The symmetrical triangle is a continuation pattern that suggests this rally will continue.
Technical Analysis is a windsock, not a crystal ball.
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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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