It's now or never

Stocks were mostly higher on Friday, ending another week of back and forth action as the Dow and S&P 500 continue to hold on and consolidate. The Dow gained 32-points, while the Nasdaq, and more so the small caps, led the way. Bonds were down, and the I-fund lagged after a spike higher in the dollar.
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The I-fund was down 0.63% on Friday and as you can see on this chart, the dollar was up 0.6% accounting for the loss in the I-fund. The UUP managed to move back above that support line it had broken earlier in the week, and now there is a battle between the 50-day EMA on the upside, and the open gap that will want to get filled on the downside. The trend is still down and this will favor the I-fund going forward - unless we're witnessing a bottom in the dollar.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The SPY (S&P 500 / C-fund) seems to be completing an inverted head and shoulders pattern, which is bullish. It is above the 20 and 50-day EMAs and the two-month long consolidation looks ripe for a breakout. But it's going to need some help.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

That help has to come from the Nasdaq and / or the small caps. The Nasdaq 100 (QQQ) has been in a downtrend since the high in early March. Have you heard that enough from me yet?

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

It had moved back above the 50-day EMA, but has since fallen back below it. It is nearing the apex of a pennant formation and something is going to have to give. The recent trend, since the low in April, has been up. The intermediate-term trend, since early March, has been down. The long-term trend is up. Pennants tend to break in the direction of the larger trend but whether that will be influenced by the intermediate or longer term trend remains to be seen. If the Dow and S&P are going to breakout with any conviction, this chart needs to break to the upside of the pennant.

Same for the small caps. The Russell 2000 had closed below the 200-day EMA for the first time in a couple of years on Thursday, but Friday's gains pulled it back above it. The 3 to 5 day closing rule was in affect and this close above it gives it some life.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The trend is clearly down and of course we have a similar situation in our S-fund (Wilshire 4500). If you are using the S-fund in your TSP account, you better hope that the short-term rising support line holds.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

I wanted to point out that while we are looking at the daily charts as if they can go either way, the weekly chart of the S&P 500 still looks quite bullish. So, taking out some of the short-term noise, we can probably lean to the bullish side as long as this rising trading channel is intact. It would take about a 30-point loss, or almost 2%, before it would break so that is the downside wiggle room.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

Bonds pulled back from their recent push to new highs, although the shorter bonds (IEF) have held up better.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

Stocks and bonds can move up together, but if stocks move to new highs - and it may be premature to say that - I would expect money to move out of bonds. If the stock indices fail to breakout, then the money will stay in, and possibly move into, bonds.

This chart of the 10-year yield makes the argument that bonds may be moving higher. That bear flag is hinting that yields could go lower, which means bond prices would go higher, and that would probably mean stocks would go lower. So if you are bullish on stocks, you should be routing for this chart to move back above the 200-day EMA.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk


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Tom Crowley


Posted daily at TSP Talk Market Commentary

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[CallMeIshmael]

As always, thanks for your helpful analysis.

I see an ambiguity about the rverse head-and-shoulders in the SPY, however. Couldn't it as well be a rightside-up head-and-shoulders, with the neckline at 184, the left and right shoulders the same (double shoulders, both) and the little April Fools fake-out above 188 being the head? That'd match the H&S you already pointed out in the Russell 2000, and the nearly completed H&S in the NASDAQ. The MACD/PMO of the SPY also shows successively lower highs, which may show an underlying weakness despite prices hanging around 185-188.

If there were no NASDAQ and small caps, I'd consider the SP-500 and Dow quite bullish, both consolidating with a strong base (sort of a cup-and-handle, with Feb 1 being the bottom of the cup). But they do exist, and are supposed to be the leaderws, and are in a definite downtrend.

I like your comment that we need to watch the NASDAQ pennant closely. Once something clear happens there, we'll be able to see whether the NASDAQ drags the S&P down, or both finish their respective consolidations and continue the long-term rise. For myself, I'd like to wait until the ambiguity resolves one way or the other.

 

[tsptalk]

The interesting thing about head and shoulders patterns, inverted or not, is that they are continuation patterns. I learned this a few years ago from another trader.

In a bull market a regular H&S and an inverted H&S might both break to the upside. Head and shoulders patterns are most dangerous in a downtrend and inverted H&S patterns are most bullish in a rising trend. So I see this as bullish, and even if not inverted, could break to the upside. But like you mentioned, the Nasdaq nay need to help.

I'll look for an example and post it.

Thanks.

 

[tsptalk]

I had to draw it since it is not widely known / used just as a continuation pattern. The one I was talking about was the top left inverted H&S in an uptrend, but even the one you see, the bottom right H&S in uptrend, can result in a break to the upside as a continuation pattern.

When it does happen, the H&S breakout takes traders by surprise because it is generally known as a bearish pattern, but not necessarily while in an uptrend.

 

[tsptalk]

Also, there is an important point on these H&S patterns. If the neckline holds, there can be a test near the middle of the head and that tends to be a pivot point. That may be what we're looking for now on the S&P, although the head is not well defined in the current situation.

 

[CallMeIshmael]

Thanks, Tom. This is much more info about H&S than I knew -- more complicated than I thought. Looks like guessing what will happen next is more an art than a science!

Still, what I've been comparing is the possible H&S forming on the weekly NASDAQ (and Russell 2000 and Wilshire 4500) since about November and a similar pattern with NASDAQ, S&P and Dow in Jan-Aug. 2011. The patterns are quite similar. Back then the head was about 10% above the neckline, and after the right shoulder the market fell another 10%. This didn't start a bear market, but it was a major correction. That's what I'm concerned may happen now. On the NASDAQ (and $RUT and W4500) the possible "head" is also about 10% above the "neckline." More important is a comparison of the respective weekly MACD's -- their new peaks were successively much lower in 2011 despite the price's new climbs to the head and right shoulder. The same thing is happening now -- to such an extent that there's barely a bump yet on the MACD of the current RS (on all three charts). Also, the low between H & RS reached the 50-week (one-year) MA then and it does again now. And, the price at that same low (between H & RS) stayed below the 12-week MA for several weeks then, as it has now.

(As you said when the DOW showed that intricate pattern a few months ago similar to the one before the 1929 crash, past similarities still make no guarantees about the future, and indeed the similarity broke down. But what I'm suggesting here is that at a minimum the lower weekly MACD indicates an underlying weakness in the present price movement.)

A correction would not be a catastrophe in the larger scheme of things. The weekly charts show an extraordinarily steep price rise over the past year, as people who invested in the S-fund realize. A correction following a head and shoulders breakdown could bring about another 10% drop from the neckline (same as August 2011), pulling the NASDAQ down to about 3600, $RUT to 1000, and Wilshire 4500 to 860. While that would put their prices at where they were in July and August last year, it would still mean a very respectable 20% increase in the NASDAQ from Jan. 2013 through the time of the correction -- not a bad performance at all over a year and a half, in the larger picture.

Finally, if today's big climb (on low volume) portends a new rise, then even if the climb ends in a right shoulder, I'd like to get back in for the ride up. But I'll be cautious the whole trip as long as the MACD seems to indicate an underlying weakness.

(PS -- I'd like to include a chart here, but haven't figured out how to add it to a post...)