It was a day of strong selling and that tipped us off that we could see a market climax day. To our surprise, we only saw elevated Total Volume, our other climax indicators were silent. We will address this in the section on Climax Analysis.
Before I proceed, I wanted to bring in the Silver Cross Index (SCI) chart of the SP400, SP600 and SP500. We have continued to see relative strength in the small- and mid-cap indexes as they travel mostly sideways while the SPX is in a declining trend. The SCI quantifies this relative strength. Notice that the SCI for SPX is pointed firmly downward and is now showing that only 44% of stocks within the index have a 20-EMA > 50-EMA. The SP400 has a similar reading and the SP600 is higher than both. What is most relevant on this chart is the directions the SCIs are traveling. The SCI is getting weaker and weaker on the SPX. In the case of IJR and IJH, we see rising SCIs and in the case of IJH, there are also rising bottoms. Mega-caps are continue to weaken in the cap-weighted SPX; the SCIs illustrate the point.
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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.
RRG® Chart: XLE continues to outperform. XLF shows RRG strength, but the sector is seeing weakness. Of particular interest are XLB and XLI which are making their way toward Leading. XLU is showing improvement, but we are not fans of this area of the market given rising costs in energy. They will have to foot the bill and likely that will pressure those stocks lower.
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: Price closed below support, but it is now traveling in a bullish falling wedge. The RSI and PMO are not giving us any indication that this will be a solid bottom, but at least there is hope. Of course, this is with the backdrop of a new IT Trend Model Neutral signal on the SPY. The 20-EMA crossed below the 50-EMA, losing its "silver cross".
The last IT Trend Model Neutral signal occurred as the bear market began to gain strength. This signal is a big deal, but as with most models built on EMAs, it tends to come late to the party (or wake in this case). There is a large bearish head and shoulders pattern on the SPY that also doesn't inspire confidence, particularly in the intermediate term.
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 GCI remained at the same reading as Friday, so it is no longer declining per se. It is certainly not oversold, but that is function of prices moving so far above the 200-EMA out of the bear market bottom. The SCI continues to decline which is unhealthy.
Participation ticked lower, but we do note there is a positive divergence in the short term as %Stocks > 20-EMA has rising bottoms and price has declining bottoms.
Climax Analysis: Carl and I both figured we would see a climax day. To the contrary, the only indicator that would suggest a climax is the high Total Volume. Net A-D and Net A-D Volume are well within the normal range and the Down/Up Volume Ratios did not display readings above 3.0 which is our climax day threshold. The VIX is a problem. I was hoping to see it puncture the lower Bollinger Band on the inverted scale, instead it continues to oscillate below its EMA. When the VIX oscillates below its EMA, the market is internally weak. Additionally, we want to see highly bearish sentiment going into a short-term price bottom. On the bright side, if we did see a climax today it would likely have been a selling initiation.
Short-Term Market Indicators: The short-term market trend is DOWN and the condition is OVERSOLD.
STOs continue to slide lower. However, I look at this chart as bullish. We have oversold readings and every indicator sports a positive divergence with price lows.
Intermediate-Term Market Indicators: The intermediate-term rising market trend is DOWN and the condition is OVERSOLD.
These indicators are oversold which is positive for the intermediate term. Additionally, we have two positive divergences on this chart.
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 bearish bias continues as participation percentages are below the SCI. The SCI cannot rise until a higher percentage of stocks are above their 20-EMA.
CONCLUSION: The market should have rebounded or moved sideways based on Friday's upside initiation. Climax days many times will need a day or two to gel. Sentiment is very bearish, but not bearish enough to ensure a market bottom; however, our indicators are now seeing many positive divergences sitting alongside a bullish falling wedge. Be careful with inverse ETFs right now. More than likely we are in for a pause in the decline, but we could see a more significant bottom based on the indicators. This doesn't mean that we should consider conditions healthy enough to open new longs. We expect to see the decline soften or pause, but the foundation isn't solid given the demise of the mega-cap stocks that usually provide sturdy support.
I'm 70% exposed to the market, but have rotated out of aggressive positions and into more energy and materials stocks.
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Bitcoin continued to rally, but I don't like the broadening pattern that is attached to the flag pole. It suggests more volatility ahead. Volatility is rarely our friend. We are seeing positive indicators as the RSI is not overbought and the PMO just triggered a crossover BUY signal. Additionally, Bitcoin had an IT Trend Model "Silver Cross" BUY signal. I'm bullish on Bitcoin, but we may have to endure more sideways volatility before the next leg up.
Yields pulled back at the end of last week, but ticked higher on the day.
10-YEAR T-BOND YIELD
The 10-year yield popped over a week ago but is pausing. It looked like we had a nice flag on a flagpole, but Friday's decline makes that less likely. At this point we believe this is a natural pullback to the breakout point. Given the RSI is positive and the PMO is still rising even after Friday's breakdown, we expect yields to resume their march higher.
IT Trend Model: BUY as of 6/22/2021
LT Trend Model: BUY as of 8/19/2021
UUP Daily Chart: Like $TNX, UUP is pulling back to prior resistance or the breakout point. The RSI is falling and the PMO is trying to tip over. We will much better insight tomorrow when we see how price reacts to reaching support.
IT Trend Model: NEUTRAL as of 6/24/2021
LT Trend Model: SELL as of 8/9/2021
GLD Daily Chart: It might finally be time for Gold to shine. It is bouncing off support at the August low on the 6-month candlestick chart. Today saw a bullish engulfing candlestick that suggests the rally will continue tomorrow. The RSI has almost reached positive territory and the PMO is bottoming in oversold territory. The Dollar looks suspect right now and that will work in Gold's favor.
(Full disclosure: I own GLD as a long-term buy and hold position.)
GOLD Daily Chart: Discounts have deepened and are now reaching oversold territory. We've certainly see more oversold conditions on discounts, but they are now deep enough to consider Gold will finally breakout above its EMAs.
GOLD MINERS Golden and Silver Cross Indexes: With Gold in favor, Gold Miners are enjoying a small rally themselves. Conditions are ripe for Gold Miners to finally execute the bullish falling wedge, but we've been burned before. I like the newly rising PMO and RSI, but I still have heartburn with the lack of participation. At least now we have a slight pulse given we are seeing %Stocks > 20/50-EMAs rising.
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 broke out last week and then pulled back to the breakout point. It rallying within a rising trend channel which is good. However, it's now testing the top of the trend channel, meaning there is a distinct possibility we will see price pullback to the bottom of the trend channel. This would not be terrible given the RSI is now in overbought territory and we are still bullish on Energy and Oil.
USO on the 1-year bar chart reveals what could be a reverse island formation, meaning we could see a gap down in the near future and another test at $52.
IT Trend Model: BUY as of 6/10/2021
LT Trend Model: BUY as of 8/10/2021
TLT Daily Chart: TLT continues to cling to support as it is trapped between support at the July low and resistance at the 200-EMA and August low. Yields have pulled back somewhat but we expect them to begin rising again. This is likely a reverse flag set up. The RSI has turned back down in negative territory and the PMO is still in decline. Add to that last week's IT Trend Model Neutral signal (20-EMA cross below the 50-EMA) which leaves us bearish on Bonds.
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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