OVERBOUGHT S&P 500 IS PULLING BACK FROM ITS SUMMER HIGH -- THE FACT THAT THE VIX IS STARTING TO BOUNCE FROM CHART SUPPORT INCREASES THE RISK OF A STOCK PULLBACK
OVERBOUGHT S&P 500 PULLS BACK FROM SUMMER HIGH ... The stock market is due for a pullback and it appears one may be starting. Chart 1 shows the S&P 500 coming within a couple of points of its July intra-day high at 1256 (red circles). It's normal for a market uptrend to experience some profit-taking around a previous peak. In addition, the 14-day RSI line (above chart) has reached overbought territory (over 70) for the first time in nearly a year. On any pullback, initial chart support is likely around 1300 (green lines). The major trend is still positive and is supported by the recent "golden cross" where the 50-day average crossed above the 200-day (gold circle). Another indicator flashing a warning sign is the VIX Index.
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Chart 1
VIX STARTING TO BOUNCE OFF CHART SUPPORT... The position of the CBOE Volatility (VIX) Index is also potentially negative for stocks over the short run at least. The black bars in Chart 2 show the VIX having fallen close to previous chart support near 15. The red circles show four previous times over the last two years that the VIX has descended to that level and bounced off of it. Each red circle coincided with a pullback in the S&P 500 (green line). The VIX is up 10% today and is starting to rebound from that chart support (last circle). At the same time, the S&P 500 is starting to pullback from overhead resistance near its summer peak. That strengthens that idea that the stock market has come too far, too fast and is due for a pullback.
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Chart 2
CANADIAN MARKETS AND COMMODITY INDEX STALL AT 200-DAY LINES... A message written last week explained how important Canadian markets were to the global intermarket picture. For one thing, Canadian stocks are highly correlated to those in the U.S. It's also closely correlated to the Canadian Dollar, and both are tied to trends in the commodity markets. The next three charts show all three markets pulling back from resistance barriers. Chart 3 shows Canada iShares (EWC) backing off from its 200-day average (red line) and resistance at its October high. Chart 4 shows the Canadian Dollar doing exactly the same thing. Chart 5 shows the DB Commodities Tracking Fund (DBC) falling back below its 200-day (and its November high). The fact that all three markets are stalled at two resistance barriers (at the same time) strongly suggests that global stocks, commodities, and foreign currencies are due for some profit-taking.
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Chart 3
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Chart 4
