FLIGHT TO SAFETY CONTINUES AS STOCKS REMAIN WEAK - YEN, DOLLAR, BONDS AND GOLD ATTRACT BUYING INTEREST - WEEKLY UPTREND IS WOUNDED, BUT NOT YET BROKEN - SPY HITS POTENTIAL RETRACEMENT SUPPORT - DISSECTING AND DEFINING TIMEFRAMES
FLIGHT TO SAFETY CONTINUES AS STOCKS REMAIN WEAK... Link for todays video. Stocks were down sharply in early trading on Friday as money continued its move to relative safety. Despite German approval for the Greek bailout and a much better-than-expected employment report, stocks moved lower and remained under pressure. The sectors were, however, mixed with finance, utilities, and materials showing some relative strength. Chart 1 shows the Dow Industrials down over 100 points around 11:30AM. The senior average is trading in the 50-62% retracement zone and short-term oversold after a 700+ point decline in four days. Volume surged on Thursday and will probably be high again today. It may take a selling climax and big hammer to end this decline. We may be seeing this today as the Dow dipped below 10300 intraday and was trading back near 10500 in the late morning.
Chart 1
YEN, DOLLAR, BONDS AND GOLD ATTRACT BUYING INTEREST... Perfchart 1 covers the performance of nine assets over the last nine days (not including today). The left shows the losers: S&P 500, Euro, Oil, High-Yield Bonds and Investment-Grade Bonds. Money is moving out of riskier assets. This can be see by the relative performance of high-yield bonds (junk) to investment-grade bonds. The High-Yield Bond ETF is down around 5% and the Investment-Grade Bond ETF is down only 1.04%. Money is sticking with quality and shunning risk. On the other side, the 20+ Year Treasury ETF (TLT) is the best performing asset over the last nine days (+7.67%). This is clearly a flight to safety. Money is likely moving from Europe to the US. We are also seeing gains in the Dollar, Yen and Gold. Yes, notice that gold and the Dollar are both up, which happens during a crisis situation. Chart 3 shows the Gold ETF (GLD) and the DB Dollar Bullish ETF (UUP) advancing from mid December 2008 until the end of February (yellow area). Chart 4 shows the Yen ETF (FXY) surging as the market fell sharply this week.
Chart 2
Chart 3
Chart 4
WEEKLY UPTREND IS WOUNDED, BUT NOT YET BROKEN... As of Friday morning, the S&P 500 was down around 7.5% over the last 10 days. This is clearly not a small decline. In fact, it was the sharpest 10-day decline since March 2009. Also of note, the Commodity Channel Index (CCI) moved to its lowest level in over 20 years (-396.82). Below -100 is considered oversold. After such drastic moves, it helps to take a step back and look at the bigger picture. This can be done with weekly or monthly charts, depending on your desired timeframe. Chart 5 shows the S&P 500 over the last three years. There was a spike bottom in March 2009 and the index has been trending higher for over a year. This weeks sharp decline did some damage, but it was not enough to reverse the uptrend. First, lets look at the three negatives. One: the S&P 500 hit resistance near the 62% retracement. Two: the advance from March 2009 to April 2010 traced out five waves, which John Murphy pointed out on Thursday. Three: Weekly MACD formed a bearish divergence and moved below its signal line for the second time this year. These predictive indications are certainly flashing warning signs. Dont forget that similar indications were flashing warning signs in July 2009 and February 2010, scenes of the last two important lows.
Chart 5
So, what are the positives? First: the overall trend remains up as the S&P 500 closed right at channel support on Thursday. Friday is starting out on the wild side so it is unclear where the week will finish. Second: the index remains above its February low. A downtrend requires a lower high and a lower low. The index recorded a higher high in April and has yet to record a lower low. By definition, the uptrend from March 2009 to May 2010 remains in place. Third: MACD remains in positive territory. Even though MACD formed a bearish divergence from January to April, it remains in positive territory. Upside momentum is not as strong as before, but positive MACD indicates that upside momentum is still stronger than downside momentum. These identification indicators suggest that the uptrend on the weekly chart has yet to reverse. Identification indicators wait for proof or confirmation of a trend reversal. These indicators will not pick tops or bottoms. Predictive indicators are designed for that. Chart 6 shows the weekly Nasdaq for reference.
Chart 6
DISSECTING AND DEFINING THE TIMEFRAME... Short-term, medium-term and long-term mean different things to different people. In general, I would characterize short-term as 1-10 weeks, medium-term as 2-6 months and long-term as anything over 6 months. Timeframe also depends on the charts period settings. Weekly charts are good for the long-term picture. Daily charts are good for the medium-term. 30-60 minute charts capture the short-term. These timeframe/period matchups are not set in stone. Chartists must move up one level to distinguish between primary (impulse) and corrective (reactionary) moves. A primary move is in harmony with the bigger trend. A corrective trend runs counter to the bigger trend. In Elliott terms, waves 1, 3 and 5 are impulse (primary). Waves 2 and 4 are reactionary (corrective). To distinguish between primary and corrective moves on the daily chart, we must move up one level and analyze the weekly charts. If the trend is up on the weekly chart, a downtrend on the daily chart would be considered a correction on the weekly chart. As the chart now stands, this is what appears to be happening now. Chart 7 shows daily candlesticks for the S&P 500 over the last five months. The index clearly broke support at 1080 and this is bearish. Is it short-term or medium-term bearish? The prior uptrend extends from February 5th to April 26th, about 2 1/2 months, so it could be considered a medium-term trend change. This weeks decline to 1120 retraced 50-62% of the prior decline, which would be a normal retracement, except that it happened so fast. Perhaps a 4 week decline was condensed into four days. Also notice that volume surged to its highest level of the year. Such a sharp decline on huge volume smacks of a selling climax or capitulation.
Chart 7
Chart 8
SENTIMENT INDICATOR SHOWS EXCESSIVE BEARISHNESS ... There was enough news in the last few weeks to fill an entire year. It aint boring, thats for sure. The S&P 500 hit a new high on April 26th and was up some 20% in less than three months. Stocks were clearly overbought and ripe for a correction or a consolidation. Bullish sentiment was also at an extreme as the Put-Call Ratio dipped to relatively low levels in late April. This indicator was featured in the Market Message on Monday, April 26th. And then the news flow started. Even though we focus mainly on the technicals, consider the news that the stock market absorbed over the last few weeks. It is pretty amazing.
- Gulf of Mexico oil disaster on April 22nd
- S&P 500 peaks after 20% gain on April 26th
- Times Square bomb attempt on May 1st
- UK elections on Thursday, May 6th
- Financial reform in the US Senate
- Greek bailout and contagion in Europe
- Earnings season since April 12th
- Sharp decline in the Euro since April 14th
- Stock market trading glitch on Thursday, May 6th.
- Employment report on Friday, May 7th.
Turning back to sentiment, chart 9 shows the CBOE Put/Call Ratio ($CPC) swinging from excessive bullishness to excessive bearishness in a few weeks. This indicator is another one of those predictive indicators that warns of a potential trend change, but is not ideal for timing. I applied the Percentage Price Oscillator (10,200,1) to smooth and normalize the Put-Call ratio. This makes it easier to identify and compare extreme levels across a timeframe. A move below -10 indicates excessive bullishness (red dotted lines), while a move above +10 indicates excessive bearishness (green dotted lines). The surge to excessive bearishness suggests that a bounce may be sooner rather than later.
Chart 9
