S&P 500 STILL ON SHORT-TERM SELL SIGNAL -- SMALL CAPS AND NASDAQ ARE LEADING MARKET LOWER -- SO IS THE SEMICONDUCTOR INDEX -- FALLING BOND YIELDS CONTINUE TO PULL STOCKS AND MOST COMMODITIES (EXCEPT FOR GOLD) LOWER
S&P 500 STILL ON SHORT-TERM SELL SIGNAL ... The last chart I showed on Tuesday was an hourly bar chart of the S&P 500 with Fibonacci lines drawn over the price. The point of the chart was to show where overhead resistance was likely to appear. [That's because a market will often bounce a third to a half of its previous decline before resuming its downtrend]. The hourly bars in Chart 1 show the S&P failing right at 1100 which was its 50% retracement line. The daily bars in Chart 2 show the SPX also falling back below its 50-day average in today's trading. A close below that line would be another negative turn (in addition to the fact that the 50-day line remains below the 200-day). Chart 3 shows the 13-day EMA (blue line) about to cross back below the 34-day EMA (red line). A downside crossing would negate the short-term buy signal given nearly a month ago. Chart 4 shows the point & figure sell signal that I reported last Thursday. [A p&f sell signal takes place when a O column falls below a previous O column]. Today's selling has pushed the SPX back into the down column (red zeros). The SPX would now have to close at 1105 or higher to reverse the August sell signal on the p&f chart. In other words, it would have to close above this week's intra-day high.
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Chart 1
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Chart 2
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Chart 3
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Chart 4
SMALL CAPS AND NASDAQ SHOW RELATIVE WEAKNESS... It's usually a bad omen for the market when small caps and technology stocks are underperforming -- as they're doing at present. Chart 5 shows the Russell 2000 Small Cap Index trading closer to its July low than its July high. Its falling relative strength line also shows small-cap weakness. The same is true for the technology-dominated Nasdaq market. Chart 6 shows the Nasdaq Composite meeting resistance at its (blue) 50-day average (having never closed the overhead resistance gap formed last week). It's also dangerously close to breaking support near 2150. Its falling relative strength shows it leading the S&P 500 lower. A big reason for the Nasdaq underperformance can be seen in Chart 7 which shows the Semiconductor (SOX) Index having already broken its summer low. Notice the steep drop in its RS line since mid-August. Semiconductor weakness is usually bad for the Nasdaq which is bad for the rest of the market. That increases the odds for more stock selling.
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Chart 5
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Chart 6
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Chart 7
ECONOMIC WEAKNESS PUSHES BOND YIELDS LOWER ... We've been writing for months that falling bond yields are symptomatic of economic weakness which is bad for stocks. Today's report of the first drop in a year for the Philly manufacturing index, combined with a jump in unemployment claims, combined to push the 10-Year Treasury Note Yield (price bars) to the lowest levels in seventeen months (Chart 8). As has been the case since April, falling bond yields are pulling the stock market lower (green line). The weekly bars in Chart 9 show next potential support for the 10-Year Yield at 24.64 which was the low hit last March (when stocks bottomed). That will be an important test because It's unlikely that stocks will do much on the upside as long as bond yields keep dropping. Falling bond yields (and falling stock prices) are also weighing on economically-sensitive commodities like oil and copper. Gold prices continue to rise along with bond prices.
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Chart 8
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Chart 9
FOREIGN CURRENCIES WEAKEN ... Another sign of global weakness is the August drop in most foreign currencies (except for the yen). Chart 10 shows the Euro peaking in August along with most other risk assets, including stocks and commodities. The Australian Dollar has also peaked and fallen back below its 200-day line (Chart 11). I've explained before that the Aussie Dollar is often closely tied to industrial commodity prices. Notice the close correlation between Chart 11 and the Power Shares Industrial Metal ETF (DBB) in Chart 12. The DBB also appears to have failed at its 200-day line. That may be a positive sign for the U.S. Dollar (a safe haven currency), but the drop in the XAD and industrial commodities is another sign of global weakness. Until that situation changes, current trends still favor bonds, gold, the dollar, and defensive stocks that pay dividends. That situation may continue into the autumn when things should start to improve.
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Chart 10
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Chart 11
