We are always on the lookout for chart patterns. We found a bearish head and shoulders developing on Semiconductors (SMH).
Looking at the daily chart below we can see the pattern developing. However, we do have to point out participation. Note the very low percentages on %Stocks > 20/50EMAs. These are clearly oversold readings and if we look back at the vertical green lines that mark cardinal price bottoms, you'll note they were at these levels. One thing to keep in mind is that oversold conditions can persist in a bear market. SMH is down over 20% from the July top so we could see low readings for some time.
The Silver Cross Index is about to see a Bearish Shift across the signal line and that would give us a Bearish Bias in the intermediate term. It is already at a very low 36% reading suggesting how unhealthy this group is.
This head and shoulders pattern looks dangerous. Textbooks tell us that a break below the neckline would imply a downside move that is the height of the pattern. That would take price back down to 120.00. We doubt that will happen, but 160.00 doesn't seem out of the question if this pattern executes.
Conclusion: Semiconductors (SMH) are in a bear market and are now forming a bearish head and shoulders pattern that would imply a drop well below 160.00. Given participation readings are very oversold, we aren't so sure it will see that kind of devastation, but we definitely should be prepared for more downside from this group.
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MARKET/INDUSTRY GROUP/SECTOR INDEXES
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THE MARKET (S&P 500)
IT Trend Model: BUY as of 8/14/2024
LT Trend Model: BUY as of 3/29/2023
SPY 10-Minute Chart: The market again tried to rally to start the day, but bearish forces worked against it, preserving the declining trend.
SPY Daily Chart: Support barely held up with the intraday low below that level. The 50-day EMA is here for support, but we have a PMO Crossover SELL Signal about to execute.
We've identified a bearish double top. The VIX didn't penetrate the bottom Bollinger Band so we shouldn't necessarily look for an upside reversal here. Stochastics have tumbled lower and suggest internal weakness.
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S&P 500 New 52-Week Highs/Lows: New Highs dropped back, but are still quite visible. We note that the High-Low Differential topped today. New Lows are also gaining.
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 DOWN and the condition is NEUTRAL.
Interesting that today the STO-V turned back up in negative territory. The STO-B is still headed lower. Given the STO-V is still in negative territory, we aren't going to put much stock in its upside reversal. Participation has been hit with another drop although the reading of stocks above their 20-day EMA is still above our bullish 50% threshold. %PMOs Rising is not reading above that threshold and it has moved down significantly.
Intermediate-Term Market Indicators: The intermediate-term market trend is UP and the condition is OVERBOUGHT.
The ITBM and ITVM are falling out of overbought territory, but ultimately they are still overbought and require more decompression. PMO BUY Signals continue to lose ground.
PARTICIPATION CHART (S&P 500): The following chart objectively shows the depth and trend of participation for the SPX 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 the intermediate and long term timeframes.
Both the Silver Cross Index and Golden Cross Index topped today and based on falling participation, we expect they will continue to move lower. For now they are above their signal lines so the IT and LT Biases are still BULLISH.
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: Our Bias Table above is now showing signs of stress with the SP600 (IJR) moving to a Bearish Bias. This tells us the broad market is not going to be able to keep the indexes elevated. The High-Low Differential topped today in overbought territory. Add that to the already declining STO-B and ITBM/ITVM and we have a recipe for more decline. The Employment Report will be issued tomorrow. The Fed is watching this report closely to determine the degree they will cut rates. The market response to the data could go either way so we should take our cue from the open. We suspect we will see another decline tomorrow. Weakness appears to be building not subsiding.
Erin is 40% long, 0% short.
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CALENDAR
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BITCOIN
Bitcoin lost support today, although it could still reverse from this level based on the prior low from August that could provide another line of support. However, the rising trend was broken and indicators are not favorable. We would look for more downside.
BITCOIN ETFs
INTEREST RATES
Yields are dropping quickly and we expect this will continue as they make their way down to the next support level.
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
$TNX lost near-term support and given the nearing PMO Crossover SELL Signal, we expect it to move even lower and test the August low. Stochastics also dipped below 20.
BONDS (TLT)
IT Trend Model: BUY as of 6/5/2024
LT Trend Model: BUY as of 7/17/2024
TLT Daily Chart: The rally is on for TLT and we expect to see a breakout soon. Yields are falling fast and that should keep Bond funds happy. The PMO is nearing a Crossover BUY Signal and Stochastics just moved above 80 so indicators are certainly behind a breakout.
DOLLAR (UUP)
IT Trend Model: NEUTRAL as of 8/5/2024
LT Trend Model: BUY as of 5/25/2023
UUP Daily Chart: The Dollar struggled today, but did form a bullish hollow red candlestick. We do note that price was turned away at resistance so it may be time for another test of support. The PMO is still configured bullishly, but it is well below the zero line so it is signaling diminishing weakness right now not new strength. Stochastics topped in negative territory. We're short-term bearish on the Dollar for that reason.
GOLD
IT Trend Model: BUY as of 10/23/2023
LT Trend Model: BUY as of 10/20/2023
GLD Daily Chart: Gold definitely took advantage of a weak Dollar. It did so with gusto as it was up far more than the Dollar was down. We're starting to see relative strength pick up against the Dollar. Stochastics also turned up in positive territory. We'd like to see a breakout to new all-time highs, but Gold has a tendency to disappoint. Still, with the Dollar looking short-term bearish, we could see at least a try for new all-time highs.
GOLD MINERS (GDX): GDX managed a rally on Gold's rally. It is still in a solid declining trend and participation hasn't improved much. We are cautiously optimistic on Gold right now and that could turn things around for the group. Until then we would be very careful with this industry group.
CRUDE OIL (USO)
IT Trend Model: BUY as of 6/21/2024
LT Trend Model: BUY as of 2/27/2024
USO Daily Chart: USO did rally today but formed a bearish filled black candlestick that implies the decline will resume. The PMO looks very negative and so do Stochastics given their very low 2.73 reading. $OVX, the Oil volatility index, is penetrating the lower Bollinger Band so we could see a little more rally before it likely resumes its decline.
We don't see much support below the current price level. We should start looking toward 64.00.
Good Luck & Good Trading!
Erin Swenlin and Carl Swenlin
Technical Analysis is a windsock, not a crystal ball. --Carl Swenlin
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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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