S&P 500 DECLINES FURTHER WITH A DANGEROUS DIVERGENCE -- BREAKING DOWN THE HEAD-AND-SHOULDERS IN THE S&P 500 -- AN ALTERNATIVE FALLING WEDGE FOR THE S&P 500 -- YEN AND SWISSY RISE IN THE FACE OF UNCERTAINTY
S&P 500 DECLINES FURTHER WITH A DANGEROUS DIVERGENCE ... Link for todays video. After a hair-raising decline on Tuesday, the S&P 500 continued lower on Wednesday. Buyers are simply nowhere to be found ahead of Fridays employment report and the three day weekend. Chart 1 shows the index closing below 1040, which is below the lows from late May and early June. At this point, the ETF clearly formed a lower high around 1130 and closed below its prior closing lows. A lower high and lower lows make for a downtrend. After a 7.77% decline in 8 days, the index is getting oversold and ripe for a bounce. However, the knife is still falling with the blade pointing down. It reminds me of the 1970s Life cereal commercial with Mikey. Just substitute words buy before employment report with the word cereal. Those looking for a refresher can search Mikey likes it Life cereal at youtube.
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Chart 1
Momentum followers probably notice a positive divergence brewing with MACD over the last few weeks. While the S&P 500 closed below its late May and early June closing lows (red dotted lines), MACD formed a higher low in early June and remains above this low (green dotted line). This is a potentially bullish divergence. As the name implies, bullish divergences are allegedly bullish setups for momentum indicators. However, in reality, the bigger downtrend trumps the bullish divergence. In fact, bullish divergences are the norm, not the exception, in downtrends. Most of them fail to produce good buy signals, but they sometimes foreshadow weak bounces that will lead to a lower high. Just the opposite is true in uptrends, where bearish divergences are the norm, not the exception. Chart 2 shows MACD forming several bearish divergences during the 2009 rally (May-June, August-September, September-October, October-November). One will ultimately work, but there are usually a few bad signals before a good one.
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Chart 2
BREAKING DOWN THE HEAD-AND-SHOULDERS IN THE S&P 500 ... By now, the whole world is probably aware of the head-and-shoulders pattern at work on the S&P 500. Chart 3 shows the S&P 500 breaking neckline support to confirm the pattern. Based on traditional technical analysis, this would target a move to around 887. The height of the pattern is subtracted from the neckline break. John Murphy showed retracement targets yesterday with the 62% retracement target coming in around 880. Should the S&P 500 continue lower, broken support around 1040-1060 would turn into a resistance zone. There is sometimes a throwback rally to broken support. For now, the index is still within spitting distance of the neckline and has not declined enough to consider this area as resistance just yet.
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Chart 3
Volume plays an important part in confirming a head-and-shoulders pattern. I am showing a close-only daily chart to make the most of On Balance Volume (OBV). The indicator window shows OBV moving lower in May and then drifting lower the last five weeks (blue dotted line). OBV is currently at its lowest level of the month. I would have expected a bigger decline, but OBV remains in a downtrend and needs to break above the June high to revive its uptrend.
AN ALTERNATIVE FALLING WEDGE FOR THE S&P 500 ... There are two sides to every story. I am not about to present a bullish case for the S&P 500, but rather a less bearish cased based on a potential falling wedge. The right half of the head-and-shoulders pattern is a falling wedge. With the whole world turning bearish after the neckline support break, we should at least be prepared for the market to make fools of the most people possible. That is, after all, Mr Markets specialty. Chart 4 confirms a downtrend since early May with the falling wedge lines. Drawing the Fibonacci Retracements Tool from the July low to the April high shows a 50-62% retracement zone around 1000-1050. The index entered this zone this week. A decline to the 62% retracement around 1000 is still possible. 1000 is also a round number that might grab some attention for support. This may be the first area to watch for a bounce. Technically, the trend remains down as long as the wedge falls with lower lows and lower highs. At this point, a close above the June high is needed to reverse this downtrend. We can lower resistance should another lower high form in the coming weeks.
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Chart 4
YEN AND SWISSY RISE IN THE FACE OF UNCERTAINTY... International macro themes continue to dominate the US stock market. Equity markets in Europe and China are weak. US bonds are surging in a flight to safety. Gold remains strong as one of the few currency alternatives. Currency dynamics are also shaping the appetite for risk in global equities. Relative strength in the Yen and relative weakness in the Euro has been a common theme in the risk-off trade. The Swiss Franc also came alive in June with a big surge, especially against the Euro. I heard one analyst refer to currencies as dirty shirts. All the dirty shirts in the laundry basket stink, but some stink less than others. Over the last two weeks, the Yen and Swiss Franc show big gains. The Swissy, as it is called sometimes, was considered a safe-haven currency, but its banking woes and close ties to Europe kept it down. This seems to be changing. Chart 5 shows the Swiss Franc ETF (FXF) surging higher over the last four weeks. Most of these gains are at the expense of the Euro. Chart 6 shows the Yen ETF (FXY) breaking wedge resistance over the last few weeks. The pattern over the last 20 months looks like a large cup-with-handle. Rim resistance resides around 115 and a breakout would be bullish for the Yen, but bearish for just about everything else.
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Chart 5
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Chart 6
DOLLAR AND EURO STALL AFTER COUNTER-TREND MOVES... The DB Dollar Bullish ETF (UUP) and the Euro ETF (FXE) are closely correlated due to the construction of the US Dollar Index ($USD). The Euro accounts for over 50% of the US Dollar Index and the DB Dollar Bullish ETF. As such, the Dollar Index and Dollar ETF move pretty much opposite the Euro. Chart 7 shows the DB Dollar Bullish ETF (UUP) stalling around 25. The overall trend remains up, but the ETF has yet to recover from the sharp decline three weeks ago. Look for a move above 25.20 to revive the uptrend in the Dollar. Chart 8 shows the Euro ETF (FXE) stalling just below broken support. This is no ordinary support level though. This break forged multi-year lows in the Euro ETF and now turns into resistance. After becoming oversold, the ETF bounced above 122.5, but fell back again this week. Follow through above the June highs is needed to spark a rally in the Euro. As the chart now stands, the Euro failed and the bears are still in control.
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Chart 7
