S&P Struggling Below Its 200-Day MA; Watch Those Financials!
Last week, I pointed out that the S&P Composite, despite the strong rally off the March low, had failed to touch an overbought condition. That presented a problem, since a security that is unable to reach an overstretched reading is usually suffering from some kind of a bear market disease. In this respect, Chart 1 shows that the most recent rally also failed to touch an overbought reading. That was true for both the 9- and 14-day time spans. Two other points are worth noting. First, the rally for the S&P failed just below its 200-day MA. Second, at its peak, the rally experienced a Fibonacci 61.8% retracement of the February/March decline. Consequently, it seems that now might be as good a time as any for expecting some kind of a test of the March low.
The NASDAQ (Chart 2) did very briefly touch the 70 overbought zone earlier in the week. That was certainly a hopeful sign, but the fact that it has since backed off sharply more than cancels out such a sign of a healthier market. An oscillator that is very sensitive to an overbought condition, we should remember, also hints of a bear market environment.
Chart 3 draws our attention to the fact that the NASDAQ rally halted at resistance provided by the lower area of the late February downside gap. Most gaps either get filled or have an attempt made to do so, and this week's action was certainly a worthwhile stab at it. Note the two red arrows, which also flag gaps, but are on the downside this time. Their upper and lower reaches provide indications of possible support, if prices ever get down towards those levels.
In last week's article, I mentioned that all these factors were indications of a possible reversal, but what was really needed was a violation of the up trendlines in Charts 1 and 2. Wednesday saw that happen, so we must now conclude that further price erosion lies ahead.
Additional negative evidence appears in Chart 4. In this respect, the NASDAQ bullish percent is helpful in forecasting corrections, doing so when it fails to confirm new highs in the Index itself and this is corroborated by some kind of a trend reversal signal. Chart 4 demonstrates four examples that have developed in the last 3 years. I have identified a fifth instance, where the bullish percent not only failed to confirm the May high but has started to trace out a declining peak/trough progression. Both series have violated up trendlines, which suggests the correction has further to run.
Financials vs. Staples
Generally speaking, when the financials are acting well, the market itself has a tendency to rally. It's also true that most of the major declines in the last 20 years have taken place when the long-term relative momentum of financials has been negative. That's a shame, because one of the weakest sectors in recent weeks has been financials, as represented by the SPDR ETF (XLF).
Chart 5 shows that the XLF has completed an upward-sloping head-and-shoulders. Moreover, the RS line has touched a new bottom. It looks set to go lower, as the RSI that monitors relative action has violated its up trendline. Moreover, the relative KST (in the bottom window) has just triggered a sell signal. For a timely analysis on banks, a key ingredient in the XLF, you might want to refer Greg Schnell's excellent articlepublished earlier in the week.
Compare that to the current position of the SPDR Consumer Staples (XLP). Here, we see that the relative line has broken to the upside. The relative RSI has also violated a down trendline of its own. The relative KST, though, has not yet confirmed. Note how the recent sharp sell-off was characterized by the XLP falling in price, but at a slower rate than the S&P, as witnessed by the sharply rising RS line. That combination is indicative of the fact that a move towards defensive stocks, such as staples, is a bear market characteristic.
Finally, Chart 7 shows the ratio between the two sectors (XLP/XLF). It's been forming a symmetrical triangle since the March lows and now appears to be breaking to the upside. The breakout has so far been anemic, but the reversal-type action of the KST, combined with the decisive RSI trendline break suggests that the defensive staples have just begun a new up leg in their relationship with the more aggressive financials.
If we put together the weak overall short-term market technicals discussed above, the probabilities of a meaningful decline are greatly increased. That said, I am still sticking with the idea that the extreme oversold readings seen last March will contain any near-term weakness.
Good luck and good charting,
Martin J. Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.
