THE INDEXES HAVE A WEAK DAY WHILE TESTING NEW HIGHS -- CHECKING FOR A SHORT TERM TOP ON THE INDEXES -- $SPXA50R COULD BE POINTING TO A SHORT TERM TOP -- $SPXA200R POINTS TO A MORE SIGNIFICANT CORRECTION -- XLF WORKING TO STAY ABOVE THE 50 DMA
THE INDEXES HAVE A WEAK DAY WHILE TESTING NEW HIGHS - ... Chart 1 shows a tight 4 day view of the indexes in a 30 minute time frame. The $SPX tried to take out the yearend high close of 1848.38 on Wednesday. It could not quite make it back to unchanged on the year. The $SPX traded to 1847.50 before the Fed minutes. It was almost a perfect doji candle sitting at the morning open level with 10 minutes to go before the Fed minutes. Doji's represent indecision, and the market was watching for the Fed minutes to get any clues on the dynamics with Ms. Yellen in the chair. After trying to break through 1842 on Tuesday, testing higher and failing earlier on Wednesday morning, and then failing to hold above the lows. So the $SPX looks weak here. The $INDU had a downward sloping trendline on Tuesday, but the $INDU moved above Tuesday and then reversed.
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Chart 1
Still on Chart 1, the $COMPQ never got above Tuesday's highs which is a potential signal for weakness as the $COMPQ usually leads. The $RUT was a mix of all three but closed the weakest of the pack. The blue up-sloping lines are from the recent up trend. We do not know if the top is in. Only hindsight can tell us that. However, there are lots of market signals blinking that usually appear at market tops. I'll review some of the indicators below.
CHECKING FOR A SHORT TERM TOP ON THE INDEXES... Chart 2 shows a wider view. The $SPX has failed at this level multiple times now. 3 things are important here. The highs of the year have not been broken after multiple attempts. The market turned back just below unchanged on the year Wednesday. The 1842 area shown with a blue dash line is also important resistance. Tops are formed when the market cannot break out to higher highs and hold above. After testing levels of 1842,1847 and the 1850 market top multiple times, the bulls appear to be running out of fuel to move higher. The $INDU failed at the support level for the high (shown in blue) and is nowhere near the 2013 closing level. Support has become resistance so far. The Nasdaq has a broadening formation, which is usually a sign of indecision. The fact that the indexes vary so much at this important time (testing market highs) shows weakness in the market structure. The $COMPQ was only able to close above the previous highs for one day and has now closed back below on a weak day as shown in Chart 1. This requires close watching to see if there is further strength in the market. The $RUT experienced resistance at the left shoulder level. All the indexes made a lower low on February 5, but only one index has been able to make a higher high. That higher high has been rejected with the price action on Wednesday.
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Chart 2
$SPXA50R COULD BE POINTING TO A SHORT TERM TOP.... The $SPX contains some of the world's largest greatest companies. One of the interesting tools technicians have is keeping track of how many stocks are trading above the 50 DMA. As a market moves closer and closer to a short-term top, the $SPXA50R shown in Chart 3 can alert us that this is getting to a weak area. When less than 70% are able to stay above the 50 DMA, we can usually expect some sort of pull back. I have also shown the $NAA50R which is for the wider Nasdaq composite. You can see the level is only 60% on that chart. Both of these charts indicate short-term weakness especially as we were testing market highs yesterday and these have failed to move back up. Probably the bigger clue is after suffering a deeper pull back, the Nasdaq Composite has over 40% of the stocks below the 50 DMA or only 60% above after a straight up rally. It gets harder to make new highs.
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Chart 3
$SPXA200R POINTS TO A MORE SIGNIFICANT CORRECTION... If the market is unable to push higher right away, it would appear the number of stocks above the 200 DMA is waning decisively and this is usually more indicative of an intermediate top. It is the noticeable decline in the number of stocks holding above their 200 DMA on Chart 4 that suggests more trouble. This is a 10 year chart. After having more than 94% of the stocks above the 200 DMA, we currently have less than 80%. While that still sounds strong, it is very important to look at history. In 2007, 2010 and 2011, when bounces were unable to retrace back above 80, caution was warranted. It is the trending down from a higher level that gives us concern. As we tested the market highs only yesterday, we had less than 80 % close above the 200 DMA. This does not tell us if the final high is in. It only tells us that over 100 stocks in the $SPX are now below the 200 DMA after our rally, wherein the 2nd quarter of 2013 only 30 were below.
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Chart 4
XLF WORKING TO STAY ABOVE THE 50 DMA ... As one of the market leaders through the QE cycles, this ETF usually holds up well. With QE tapering, the XLF will be an important clue to market leadership. After recently bouncing below the trend line on Chart 5, the XLF has rallied back up. It is well behind the $SPX index as it is not threatening the highs. On Wednesday it slipped back below the 50 DMA. While not earth shattering, it may be a clue to broader market weakness. We can see the Regional Banking shares and brokerage houses have similar patterns.
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Chart 5
$TRAN STUCK BELOW THE 50 DMA FOR THE FIRST TIME IN 6 MONTHS.... The Dow Theory comes into play here. When both the Transports and the Dow Industrials cannot make higher highs together and start making lower lows and highs together, your market has topped according to Dow Theory. We are watching the transports closely on Chart 6 because the $INDU chart has already made lower lows but the Transports have not. They both have made lower highs if this current rally is over. This will be important in the coming weeks to help decipher the markets next major move.
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Chart 6
$GOLD FINALLY TESTS THE 200 EMA.... The $USD bounced yesterday on the Fed statement. The Euro is approaching the top of the range to test the highs. As demonstrated many times, as the Euro moves, it seems $GOLD does too. Should the Euro start to fail here, $GOLD traders may find protecting profits an important part of the plan. It is not uncommon for the 200 EMA or 200 DMA (not shown) to become resistance on the way back up, so this may be timely for investors in the precious metals. Equal move traders will be closing trades after an equal move higher here as well. I had noted the various resistance levels on Chart 7, and we can see that $GOLD is at the 3rd with another sitting a little higher up at 1360. (3 and 4 reversed from our original count).
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Chart 7
IS THE EURO FORMING A HEAD AND SHOULDERS TOP?... The Euro / $USD is at a very important juncture on Chart 8 as mentioned in the $GOLD discussion. The rally in The Euro and the drop in the dollar coincided with the Feb lows on the $SPX. If the $SPX changes direction here, we may see the dollar bounce. That would put downward pressure on the commodity structure. It currently looks like the Euro has a head/shoulder structure, with a neckline at 134.75 (not drawn).
