$SPX BOUNCES OFF THE PRIMARY TREND ON THE MONTHLY CHARTS -- $SPX 30 WEEK MA HAS BEEN SOLID SUPPORT FOR 20 MONTHS -- CHANGE IN $SPX SLOPE DEFINES THE NEXT TEST -- $SPX TESTS BOTH THE 20 DMA AND 50 DMA FROM BELOW
$SPX BOUNCES OFF THE PRIMARY TREND ON THE MONTHLY CHARTS... With the bounce off last weeks lows, we have moved back above the monthly trend off the 2011-2012 lows on the S&P 500 ($SPX). This level also coincides with some moving averages on shorter time frames. The confluence of support from the monthly trend lines, the weekly moving average and the daily charts horizontal support is very supportive for a bounce. We can see on the monthly Chart 1, the price action had not been near this trend line throughout 2013. Recently it touched it in February and April. Last weeks low was the first dip below the 2011 trend line. Failure to hold and close above this 6-year, monthly line would be a big signal on the primary trend. That makes the next 2 weeks of August pretty important.
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Chart 1
$SPX 30 WEEK MA HAS BEEN SOLID SUPPORT FOR 20 MONTHS... On the weekly chart shown in Chart 2, the 30 Week Moving Average - 30 WMAhas been support all the way up. The last time the market closed under the 30 WMA was 2012, and even in that choppy year there were only 4 weeks meaningfully below the 30 WMA. Look at how smooth the MACD has been on the weekly chart. While the recent July high on the MACD was below the January high, and the price has moved higher causing divergence, we can see the MACD trend is intact until broken. The lower high makes us more cautious.
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Chart 2
CHANGE IN $SPX SLOPE DEFINES THE NEXT TEST... Obviously the lows for the $SPX are the same on all the charts, but the difference this time is the first break below the primary or monthly trend line for over 3 years shown in Chart 1. The change in slope on the daily is what is causing this test of support now. On Chart 3, we can see a major channel on the daily chart holding the price between it for a while. You can also see the top of the channel has not been relevant since mid 2013. Moving down to the MACD, the MACD appears to be turning back up from a typical momentum support level shown on the MACD plot as a blue line. By using the latest lows and highs to create a channel on the price plot, the slope has moderated somewhat. We'll compare this in Chart 4 below.
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Chart 3
You can see the dotted blue lines in Chart 4 showing the 2-year trend from Chart 3 and the most recent slope is in black solid lines. What is important about this change is that the price action has moved down toward the long term primary trend line on the monthly charts. If the price was to move down to the bottom of this channel, it would test the 200 Day Moving Average - 200 DMA around 1870. The concerning part of that test would be the move below the primary monthly trend.
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Chart 4
$SPX TESTS BOTH THE 20 DMA AND 50 DMA FROM BELOW... I wrote about the long term channels back on July 24th at the previous market high. The big picture was the major trend was up and up big with new highs. With a chink in the armor of the primary trend now, we need to remain vigilant on price action. That article can be seen here. Market Message July 24
This change in daily trend is bringing the monthly trend line into play as well as the moving averages on shorter time frames like weekly and daily. This confluence makes this area congested after a long period of separation. As we mentioned on the weekly, the 30-week has been support. The price was also at a horizontal support area on the daily and weekly at 1900 (not drawn to avoid clutter) shown in chart 5. Now the 20 DMA and 50 DMA sit directly at the price action today. The 20 DMA is often associated with short term trading between the Bollinger Bands. This 20 DMA can provide some resistance. When these trend lines and moving averages are all close to the price action and some longer term trends start to be violated, the technical opinion on the market starts to change between long term, intermediate term and short term technicians.
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Chart 5
$RUT RELATIVE STRENGTH LINES ARE TESTING THE TREND LINES... With Options Expiration tomorrow, and this bounce that has lifted the market for the last week, we want to make sure market breadth and leadership hold up. Today the Russell 2000 ($RUT) was the weakest performer of the major indexes as seen on Chart 6. The Russell 2000 was only up 0.14% while the rest of the US Indexes were up almost 3 times that around 0.4%. Usually we would expect the Russell to outperform on bullish reversals.
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Chart 6
This underperformance by the Russell can be valuable information at major turning points for the market. Lets use a ratio chart of the Russell 2000 compared to the S&P 500. To build a ratio chart seen in Chart 7, we use the expression $RUT:$SPX. When this line moves higher, the Russell 2000 is outperforming the S&P 500. What we can see by this ratio is the markets typically rollover after a period of underperformance by the Russell 2000 and we can also see that the Russell 2000 starts to outperform at market lows. 2009, 2011, and late 2012 are identifiable trend changes.
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Chart 7
Using the Dow Jones Industrial Average ($INDU), which is a selection of some of Americas largest and best companies, the pattern can be even clearer as shown below in chart 8. We can see at the transition zone at the top the ratio goes sideways and starts to oscillate rather than stay in trend as I have shown in the red boxes. When the blue trend lines break, this is pretty important. At the market top in 2007, less than 50% of the stocks were above the 200 DMA on the New York Stock Exchange. The first to fail were the $RUT stocks. The market is still staying in trend and has not broken down on this measure in 2014. But we are seeing this oscillation that typically occurs before the market tops. Another confirmation of this is the MACD stays below zero.
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Chart 8
$WTIC AND THE OIL SERVICES ARE BREAKING TREND LINES... Moving away from the main market indexes, the Oil Services Companies Index ($OSX) is also at a critical trend line on Chart 9 coinciding with the trend line on West Texas Intermediate Crude ($WTIC). When these trend lines break, the move is usually sudden. I would pay attention to the index here for the trend line rather than the tracking ETF. The Oil Services ETF (OIH) has separated from the trend line but if both crude and the index break, this ETF would start to move down rapidly from this level rather than a trend line break.
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Chart 9
THE REFINERS START TO MOVE... When Crude Oil prices weaken it can be good for refiners like TSO and WNR. Both are just moving into the top quartile on the SCTR over the last few weeks as shown on Chart 10 and 11.
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Chart 10
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Chart 11
$BRENT GOES FOR A DIP... Brent Crude ($BRENT) has broken to one-year lows on Chart 12. Part of the price breakdown is responding to the change in the US Dollar ($USD). With all the global conflict in the Middle East, the South China Seas and the absorption of land in the Ukraine by Russia, shorting oil would not be on the list of trade ideas for me. Brent bounced up $1.26 today after testing the November lows.
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Chart 12
KOL TURNS UP THE HEAT... Looking for some other areas turning higher, Coal has been beaten down for a long time and the Coal tracking ETF (KOL) has been pushing down for a while. Arthur has been discussing the breakout in Coal for the last 2 weeks and it is continuing to push higher as shown on Chart 13.
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Chart 13
CORN IS STILL SWIMMING... Corn (CORN) was widely discussed at Chartcon 2014 and we are all watching it closely for a breakout that works. It has not been able to break above just yet as shown on Chart 14. It is performing worse than 99.8 % of the ETF's. This is truly bottom fishing.
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Chart 14
XLY MOVES TO LEADERSHIP AT SEASONAL STRONG PERIOD... The Consumer Cyclicals Sector (XLY) is in a bright spot for seasonality and I covered it in last weeks Market Message with the new RRG Charts. Market Message August 7 2014
We are seeing the XLY start to outperform the $SPX as shown in the bottom panel on chart 15 .
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Chart 15
My conviction on the markets ability to make a new high is not huge. However, some segments of the markets are breaking to the upside. Investors may find it more profitable to stay in industry groups that are breaking out rather than the broad index ETF's.
Good trading,
Greg Schnell, CMT
