(This is a reprint of the article Carl published this morning.)
Intermediate-Term Participation Levels Are Very Overbought, and They Are Weak Long-Term
By Carl Swenlin
When we discuss participation we are referring to the more specific and accurate assessment of breadth available with the Golden Cross and Silver Cross Indexes. The venerable and widely known Golden Cross is when the 50-day moving average of a price index crosses up through the 200-day moving average, which signals a shift from long-term bearishness to long-term bullishness for the price index. (Note: We use exponential moving averages - EMAs.)
Taking this one step further, we have developed the Golden Cross Index, which is the percentage of stocks in a given index that have a Golden Cross. The chart below shows the ETFs for the S&P 500 Large-Cap, S&P 400 Mid-Cap, and S&P 600 Small-Cap Indexes with their respective Golden Cross Indexes (GCI). While the GCIs are all well above the bull market level of 50%, they are well below their bull market levels in 2021 of above 90%, even though their price indexes are at or near new, all-time highs. While they could continue to improve, we must take it as a negative sign that long-term participation is so poor.
Being a long-term indicator, the slower, more deliberate pace of the GCI does not apply well to shorter time frames. To help with this we developed the Silver Cross Index (SCI), which is the percentage of stocks in a given index whose 20-day moving average has crossed up through their 50-day moving average (which we named the Silver Cross). The SCI shows the level of participation in the intermediate-term.
Here is a chart of the three S&P Indexes with their respective SCIs. We note that all the SCIs are in the mid to high eighties, which is near the top of their range, and is the overbought level for the last three years. As a general rule SCIs do not linger at these levels, and we should expect to see them turn down soon. We can observe that prices don't always follow the SCIs down, but it is risky to assume otherwise.
Conclusion: Participation in the long term is weak, and it is overbought in the intermediate term. In our opinion the market is vulnerable for a correction.
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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MARKET/INDUSTRY GROUP/SECTOR INDEXES
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THE MARKET (S&P 500)
IT Trend Model: BUY as of 11/14/2023
LT Trend Model: BUY as of 3/29/2023
SPY Daily Chart: Price continues to climb, but it is highly overbought based on the RSI which is reading above 70. The PMO is healthy but also overbought. While overbought conditions can persist in a bull market, it doesn't happen forever.
The VIX tells us that investors are very complacent and as we've often said, why shouldn't they be given the rally out of the October low. Stochastics are rising above 80 which displays internal strength when placed against a low reading VIX.
Here is the latest recording from 12/18 (no recordings on 12/25 or 1/1):
S&P 500 New 52-Week Highs/Lows: New Highs did not expand on today's rally, but the rally was negligible so it isn't overly surprising. We note that the 10-DMA of the High-Low Differential continues to decline after topping yesterday. Tops on this indicator typically warn of lower prices ahead.
Climax* Analysis: There were no climax readings today.
*A climax is a one-day event when market action generates very high readings in, primarily, breadth and volume indicators. We also include the VIX, watching for it to penetrate outside the Bollinger Band envelope. The vertical dotted lines mark climax days -- red for downside climaxes, and green for upside. Climaxes are at their core exhaustion events; however, at price pivots they may be initiating a change of trend.
Short-Term Market Indicators: The short-term market trend is UP and the condition is OVERBOUGHT.
Swenlin Trading Oscillators (STOs) both accelerated higher. This has pushed them right into overbought territory. We are really seeing weakness given there is only 56% of stocks showing rising PMOs. This shouldn't be the case after so many days of rally. This has set up a stark negative divergence.
Intermediate-Term Market Indicators: The intermediate-term market trend is UP and the condition is EXTREMELY OVERBOUGHT.
The ITBM and ITVM have hit overbought extremes. They are begging to top right now. Tops on these indicators often precede price declines. %PMO Xover BUY Signals will see a big decline soon given only 56% have rising PMOs. This is yet another negative divergence.
PARTICIPATION: The following chart objectively shows the depth and trend of participation in two time frames.
- Intermediate-Term - the Silver Cross Index (SCI) shows the percentage of SPX stocks on IT Trend Model BUY signals (20-EMA > 50-EMA). The opposite of the Silver Cross is a "Dark Cross" -- those stocks are, at the very least, in a correction.
- Long-Term - the Golden Cross Index (GCI) shows the percentage of SPX stocks on LT Trend Model BUY signals (50-EMA > 200-EMA). The opposite of a Golden Cross is the "Death Cross" -- those stocks are in a bear market.
The market bias is BULLISH in all three timeframes:
As discussed in the opening, the GCI has a bearish negative divergence with price. The rest of the chart is healthy minus overbought conditions. We have a strong number of stocks above key moving averages, quite a bit more than our 50% bullish threshold. Given we still have higher percentages of stocks above the 20/50-day EMAs versus the SCI, we know that the SCI should continue to rise a bit further. Both the SCI and GCI are above their signal lines which gives us a bullish bias in the intermediate and long terms.
BIAS Assessment: The following table expresses the current BIAS of various price indexes based upon the relationship of the Silver Cross Index to its 10-day EMA (intermediate-term), and of the Golden Cross Index to its 20-day EMA (long-term). When the Index is above the EMA it is bullish, and it is bearish when the Index is below the EMA. The BIAS does not imply that any particular action should be taken. It is information to be used in the decision process.
The items with highlighted borders indicate that the BIAS changed today.
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CONCLUSION: It could be said that it is very positive that STOs accelerated higher today and the ITBM/ITVM continue rising. However, they are overbought and in the case of IT indicators, extremely overbought. The lack of rising PMOs cuts at internal strength. That is a foundational problem, as are the negative divergences. We should continue to experience higher prices tomorrow, but we expect a big holiday hangover given the deterioration of internal momentum and negative divergences. It is time to consider profit taking or consider tightening stops. We sensed that we would be okay in the intermediate term, but this is beginning to line up as a precursor to a correction.
Erin is 85% long, 0% short.
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BITCOIN
Bitcoin indicators continue to waffle. We suspect price will continue to waffle sideways. Stochastics are looking bearish again, but the PMO is essentially flat and the RSI is positive.
INTEREST RATES
Rates reversed higher on the day, but declining trends are intact. We are expecting rates to continue down toward strong horizontal support at 2023 lows.
The Yield Curve Chart from StockCharts.com shows us the inversions taking place. The red line should move higher from left to right. Inversions are occurring where it moves downward.
10-YEAR T-BOND YIELD
Yesterday's comments still apply:
"We decided to adjust the annotations to show a declining trend channel. You could very carefully draw the lines into a bullish falling wedge, but we aren't expecting the yield to reverse, we expect it will continue even lower. The RSI is very negative and falling. Stochastics have topped below 20 and most importantly, the PMO continues to decline well beneath the zero line."
BONDS (TLT)
IT Trend Model: BUY as of 11/28/2023
LT Trend Model: SELL as of 1/19/2022
TLT Daily Chart: TLT saw a pullback today as the 20-year yield moved higher. The RSI was able to move out of overbought territory with today's decline. The PMO appears to be surging above the signal line and Stochastics are holding strong above 80. We believe the rally in Bonds will continue.
DOLLAR (UUP)
IT Trend Model: NEUTRAL as of 11/27/2023
LT Trend Model: BUY as of 5/25/2023
UUP Daily Chart: Yesterday's comments still apply:
"The Dollar just dropped below the bullish falling wedge. A bearish conclusion to a bullish chart pattern is especially bearish. The indicators are configured very negatively. Price did hit support at the late August low, but this drop is likely to set up a new declining trend channel just like $TNX. "
GOLD
IT Trend Model: BUY as of 10/23/2023
LT Trend Model: BUY as of 10/20/2023
GLD Daily Chart: Gold pulled back on the Dollar's rally today. The PMO looks a little suspect as it flattens, but Stochastics are comfortably above 80 and rising so we expect Gold prices to move higher from here.
GLD Daily Chart: The pullback in Gold kept price above the May top. Relative strength is rising for Gold against the Dollar. Discounts are elevated so despite the recent rally investors are bearish. That should work in Gold's favor. October is a good example of what elevated discounts can do.
GOLD MINERS Golden and Silver Cross Indexes: The rally ran hot on Gold Miners and today they pulled back strongly. This did damage to %Stocks > 20EMA. We are keeping a close eye on the Silver Cross Index which is acting toppy. We believe the market will begin moving lower next week. That will put some downside pressure on Gold Miners. If Gold can continue rising, that could prevent GDX from giving up too much ground on a market decline. Regardless we think they are vulnerable right now. Tighten stops.
CRUDE OIL (USO)
IT Trend Model: NEUTRAL as of 11/7/2023
LT Trend Model: SELL as of 12/18/2023
USO Daily Chart: We were right yesterday when we discussed the last PMO Crossover BUY Signal as an indication of diminishing weakness, not new strength. The PMO is now topping well below the zero line which implies pure weakness. Stochastics have topped and the RSI has hit negative territory. We suspect the rally is now over in Crude Oil.
Good Luck & Good Trading!
Erin Swenlin and Carl Swenlin
Technical Analysis is a windsock, not a crystal ball. --Carl Swenlin
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