The State of the Market

We entered this past week with the market being in a nice rally (the S&P had moved up 4 consecutive days and 7 of the previous 10, and the Russell had moved up 9 of 10 days), but the indexes were in no-man’s land. Support and resistance were a couple % away, and the risk/reward was no longer favorable for new longs (despite there being some good long set ups to consider). What did we get? A pause day Monday which did not take out the previous day’s high and then semi intense selling Tuesday and Thursday. Rallies Wednesday and late Thursday recovered most of the losses, and by Friday’s closing bell, the indexes were down less than 1% for the week. Not bad considering the situation when the week began. The index charts told us to lay low. They told us the risk/reward wasn’t favorable. We just needed to listen.
Trading is so much more than just picking good stocks. It has much to do with knowing when to trade and when to sit. You’ve heard me say many times the same pattern appearing in two different markets will produce two different results. Said another way, a breakout at the beginning of a rally has very high odds of doing well, but that very same breakout after the market has already rallied several percent has much lower odds of playing out.
Two weeks ago we had some average set ups (HPQ for example) that did great. This past week we had much better set ups that didn’t fare as well. Recognizing the market conditions is half the battle because trading is a game of odds. We never know what is definitely going to happen, but we can determine if the conditions are conducive to aggressive trading of if we should lay low.
After a week of trendless movement, let’s see what the charts now reveal.
The Monthlies: February is in the books. It was a decent up month – especially considering the first week was very weak. For what it’s worth, the Dow successfully tested 10K, and it doesn’t seem to have much resistance until 11K. But the Nas and Russell are both under trendlines that have proven tough to conquer. The move off the Mar low is steep; 10 of 12 up months will be tough to build on; how much longer can it last?

The Weeklies: The weeklies weren’t very telling last weekend, and since last week was a below-average range week with very little net change, nothing changed. The Dow may have resistance just above 10.5K; the Nas is sitting between two trendlines; the SPX may have resistance at the recent high, but much stiffer resistance doesn’t come into play until 1200; the Russell will have a tough time with 650. In all, other than the Dow, there is no front-and-center resistance to deal with early next week.

The Dailies: After a nice run up from no-man’s land, the indexes chopped in place last week. Losses Tuesday and early Thursday got recaptured, and all the trendlines from the previous week remain in place. Focusing on the S&P, I see potential resistance at 1120, 1130 and the high. That’s what happens after a stiff sell-off – several resistance levels are put in place. But you can see the previous rallies (early Sept, early Oct, early Nov, late Nov) – each went up and up and up and paid no attention to previous trading.

The 60-min Charts: They give a better picture of last week’s movement. In all cases we have falling patterns within short term uptrends. These are bullish, but you can see the rising patterns within the downtrends (Feb 8-16) which did not resolve down. When I stand back and look at these charts, I see indexes trading at approximately the midpoint of their most recent high and low. This is neutral.

S&P 500 and Nasdaq vs. 10-day MA of Put/Call: Three weeks ago the put/call moved to a level that has signaled bottoms of pullbacks, and as of now, the market is acting exactly the same as it did the previous four such occurrences. Failure to at least test the highs would imply a change in character for the market. For now, all is good, but the market still can’t rest.

S&P 500 vs. 32-MA of TICK: This indicator suggests we have some downside or at the very least, more sideways trading to work off an overbought condition. When the 32-MA of the TICK on the 60-min chart reaches an elevated level as shown and rolls over, the market tends to correct temporarily.

S&P 500 vs. the 10-day MA of NYSE New Highs and New Lows: When new highs rally and then roll over, the market rolls over too. When new lows rally and roll over, the market reverses its correction. Right now we don’t have a spike in either, so we can’t depend on extreme sentiment in one direction or the other helping us determine the market’s most likely next move.

S&P 500 vs. the 10-day MA of NYSE Advancers-Decliners: This indicator also suggests more downside or at least some sideways movement is needed to work off the overbought condition. When the NYSE AD moves to an elevated level and then rolls over, the market corrects.

Banks and Crude Oil: These are two charts I’ll be watching next week. They both consolidated last week, and their next move – whether it confirms or contradicts the overall market – will be telling.

The Bottom Line:
The index charts are in decent shape. The longer term time frames (going back many months) suggest the uptrends are firmly in place while the shorter term time frames are a little more neutral. We got a decent move off Jan high and now a pretty good move off the Feb low. Currently the market is resting. My bias remains to the upside.
But there are a few breadth indicators which are neutral and are not going to help rally the market from here. Off the lows, it’s easy to rally because sentiment gets so stretch in one direction. But that sentiment has neutralized, so it’ll take real buying – not just short covering – to move the indexes up from here. And several other breadth indicators tell us a little downside or at least some sideways movement is needed to further work off the recent overbought condition.
Overall the market is in good shape, but I’d prefer a little more time before the next leg up is attempted.
Have a great week.
Jason Leavitt