One of my favorite sentiment readings is the relationship between a short term moving average and a longer term moving average of the Equity Only Put/Call Ratio (EOPCR).
Currently this relative ratio is at the highest level we’ve seen in more than a year. As you can see on the chart below the last 2 elevated readings indicated that we were quickly approaching a short term top in the S&P 500. We’re now beyond both of those levels!
TECHNICAL ANALYSIS:
PRICE/VOLUME COMBINATION:
I’d begin to take a different approach to equities. Money is flowing into key sectors and away from “risk off” types of assets, like treasuries. The bulls have already enjoyed a huge runup in price during October, so a bit of profit is to be expected at some point. The nature of any selling will be significant, but I fully expect bulls will support prices at critical areas like price support and 20 day EMAs.
Now that the S&P 500 has cleared 1256.88 price resistance (neckline) and done so on BIG volume (5 billion shares traded yesterday on the S&P 500), look first for support there on any pullback. Should that level fail to hold, the 20 day EMA, currently at 1220 and rising, will be become VERY important.
The biggest resistance across our major indices is the Russell 2000 at 773. There were multiple tests of that support level during 2011 prior to the early August meltdown. Small cap bulls would REALLY like to see 773 resistance taken out.
MACD DIVERGENCES:
Divergences really shouldn’t hold back the market action to the upside. Both 60 minute and daily MACDs will support higher prices near-term. While the weekly divergences have improved, they remain one of our more bearish technical indicators at present.
MOMENTUM OSCILLATORS:
The stochastics and RSI are as follows on our major indices:
Dow Jones: 92-66 S&P 500: 90-64 NASDAQ: 86-61 Russell 2000: 93-64
We’re a bit overbought on stochastics, but RSI has not yet touched 70, so there’s still room for more upside action before we become overbought on both oscillators.
SENTIMENT:
The VIX is near the flat line for today, but resting very close to 25, a far cry from the readings in the 40s from August, September and early October. The break below support is further support for the bulls as a falling VIX is generally synonomous with a rising equity market. Not only are we now trending lower on the VIX, but we’ve also closed below key support.
The equity only put call ratio (EOPCR) is at .58 as of 12:00pm EST and relative complacency has spiked back to 14.43%. Yesterday’s closing EOPCR was .51 and relative complacency was 17.47%. These are fairly extreme readings and will make much more upside action near-term problematic. If it does create a short-term pullback, other technicals suggest it will be a buying opportunity.
MAX PAIN:
We’ll revisit max pain the week before November options expire.
HISTORY:
The Bowley Trend is our historical indicator that alerts us to specific periods throughout the year when three of our key indices (S&P 500, NASDAQ and Russell 2000) tend to trend in one direction or the other.
All of our major indices have turned BULLISH and will remain that way through next week’s close.
We know there’s a tendency for rising prices this time of year, but as the earlier part of this week proved, tendencies are not always proven reliable. History simply provides us one other indicator that must be taken in context with other indicators.
SECTORS:
Most of our sectors are hovering near the flat line today, with consumer discretionary stocks a notable laggard. Part of that was the XHB (homebuilding ETF) touching big resistance in the 16.75-17.00 area and pulling back today. The XHB was down close to 3% at last check. The apparel retailers index is also down 2% after testing 2011 year-to-date highs yesterday. In my opinion, this is normal technical behavior. After pulling back a bit, another breakout above these key resistance areas would likely power consumer discretionary stocks to a relative leadership role vs. the S&P 500.
Semiconductors made a massive breakout on Thursday, easily clearing major price resistance at 385. The SOX gapped above this level at the open on Thursday and never looked back. 385 is now serious price support for this group, as is the rapidly rising 20 day EMA at 374.
After yesterday’s very poor technical showing, the U.S. dollar index appears poised to retest support in the 73.00-73.50 zone that was tested multiple times over the summer. A breakdown below 73.50 would likely lead to a flurry of buying in commodities.
ECONOMIC AND EARNINGS REPORTS:
September personal income was weaker than expected (0.1% vs. 0.3%), while personal spending matched consensus estimates at 0.6%. October Michigan sentiment rose approximately 6% to 60.9 while expectations were for little change from the prior month. So, economically, there was a little news to support both the bulls and bears.
INDIVIDUAL STOCK TRADES:
Two stories emerged during this quarterly earnings season thus far. Both Select Comfort (SCSS) and Unisys (UIS) posted excellent quarterly results recently and upped guidance. The market reacted quite favorably to both reports. I would expect we’ll see higher prices on both into year end. Therefore, I like entering both from current prices down to their respective gap support (top of the gap) levels, holding so long as their rising 20 day EMAs hold as closing support.
SUMMARY:
The market can move higher in a variety of different ways. The key is to determine if a move is sustainable or not. The only way to do that is to see how much money is flowing into the market and where that buying is being distributed. In April, we were very concerned about the market breaking to new highs because April was led in very large part by the three defensive sectors – healthcare, utilities and consumer staples. Those types of rallies are not sustainable because investors are showing no appetite for risk.
Thursday’s action, however, was VERY BULLISH. We saw wide participation, heavy volume and, most importantly, a MAJOR breakout in financials, especially banks. I know there’s a lot of deciphering that’s taking place right now regarding the European sovereign debt crisis, and the plan that was approved to attack it. But the bottom line is how our markets here in the U.S. reacted to the announcement.
In my opinion, the reaction could not have been much more positive. We always have to “play what we see”, not what we think we see or what we want to see. The action on Thursday was bullish enough that I believe we’ve put the lows in our rear view mirror. I believe we will see a much better stock market over the short- to intermediate-term because of the technical changes that have been taking place. While pullbacks will occur along the way, I’d tend to avoid trying to short stocks at this point. If that changes, I’ll be sure to pass it along to you. But given the positive developments, we will focus our attention into year end on the long side of stocks. The primary line of defense for the bulls will be the 20 day EMAs. Should we fall back beneath those key moving averages with a spike in volume, I may have to re-evaluate. Until then, I’m bullish.
I hope you have a GREAT weekend and are able to spend some quality time with family and friends!
Happy trading!
As part of our free fall preview of Tom Bowley’s Market Chatter, we’re going to be posting the Market Chatter on our website every day for the rest of the month. If you want to have it delivered via email every day, you can sign up here.
TECHNICAL ANALYSIS:
PRICE/VOLUME COMBINATION:
Raise your hand if you thought Apple (AAPL) would miss their numbers and the market would basically shrug it off? If you raised your hand, I’m sure you’re in the minority. When I saw the market’s reaction to AAPL’s results Tuesday afternoon, I figured today would be ugly. That really hasn’t been the case yet, at least there’s been no knee-jerk reaction to the downside in the early going. Yes, the NASDAQ 100 is underperforming, but given the weighting of AAPL in the index, that makes perfect sense.
Overall, the major indices are climbing the proverbial “wall of worry”. Spain was downgraded by Moody’s. So what, right? Moody’s and Standard & Poors seem to be taking turns going through all of Europe, downgrading one country at a time. The market clearly understands the debt issues in Europe. That uncertainty appears to be priced into our market. Obviously, if things get worse, we’ll take a hit. But the focus has shifted to earnings here in the U.S.
Technically, the action in recent days has been bullish – not just because the indices are higher, but also because pullbacks have held key support levels like the 20 day EMA. If those 20 day EMAs fail to hold, more downside action is likely. Until then, the short-term appears mildly bullish.
MACD DIVERGENCES:
Daily MACDs look superb, with all of our major indices sporting a MACD above the centerline and pointing higher. This tells us that the short-term 12 day EMA is “diverging” away from the longer-term 26 day EMA. In other words, bullish momentum is building.
The weekly MACDs look most suspicious on the Dow Jones and S&P 500 as both of these indices are barely above those key 20 week EMAs. With the weekly MACD pointing down at the most recent low, bounces on the longer-term weekly charts many times fail at these 20 week EMAs. This highlights the mixed technical picture of the market currently.
MOMENTUM OSCILLATORS:
The stochastics and RSI are as follows on our major indices:
Dow Jones: 91-58
S&P 500: 92-59
NASDAQ: 93-59
Russell 2000: 90-56
The momentum oscillators remain in very perilous position. Stokes in the 90s and RSIs in the upper 50s during a downtrend can be lethal. But if we continue to see positive developments in terms of key breakouts amongst our major indices, sectors and industry groups, the downtrend may well be over. We’re clearly at a key pivotal point technically.
SENTIMENT:
The VIX is stubbornly remaining high, despite the market’s decent reaction to a few disappointing earnings reports, namely Apple (AAPL). This is an indication that traders continue to expect wild swings in prices in the days ahead.
The equity only put call ratio (EOPCR) is at .69 as of 11:00am EST. Relative COMPLACENCY is at 9.80%. Relative complacency, now very close to the double digits, could begin to be problematic. From my experience, however, relative complacency is not nearly as reliable in marking tops as relative pessimism is in marking bottoms.
MAX PAIN:
This past weekend there was a max pain video done to highlight the possibilities. Directionally, it would appear we might see downward pressure this week, particularly on the NASDAQ. While the selling has been mild, the NASDAQ has definitely been underperforming.
HISTORY:
The Bowley Trend is our historical indicator that alerts us to specific periods throughout the year when three of our key indices (S&P 500, NASDAQ and Russell 2000) tend to trend in one direction or the other.
The major indices will be NEUTRAL all week, but will turn VERY BEARISH at Friday’s close as next week is the worst performing week of the year historically. More on that in tomorrow’s Market Chatter.
For those that are new to Invested Central and the Bowley Trend, the 19th calendar day of the month has been BY FAR the worst performing day. While that’s partly attributable to Black Monday, October 19th, during the 1987 market crash, we could exclude that day altogether and the 19th would still be the worst day of the month BY FAR. It’s just one of those odd facts to always keep in mind.
SECTORS:
Here’s a bearish development. Today’s advance is being led by utilities and healthcare, two defensive groups. The money is flowing into the wrong sectors to lead a sustained advance. This could definitely be a signal of a short-term top and is worth noting. Financials, which led the market yesterday, advancing strongly, is higher today but more subdued.
Materials and technology are the primary laggards, along with consumer discretionary. Technology and consumer discretionary led the market rally into earnings. Many of the stocks within these two sectors are finding it difficult to advance after earnings because a lot of good news was already built into prices. These two sectors continue to look to be among the best technically, however.
The dollar has tumbled in October, but does appear to be gaining support near its 50 day SMA. A move lower by 1% or more from the current level would break that 50 day SMA, putting more pressure on the dollar. For now, however, we’d expect this support to hold.
One of the best industry groups in the near-term appears to be (gasp!) HOMEBUILDERS! They are actually acting very bullish technically with their MACD above the centerline and pointing higher. Note yesterday’s low touched the rising 20 day EMA and bounced strongly. These are signs of a bull market, not bear market.
ECONOMIC AND EARNINGS REPORTS:
September CPI and core CPI both were basically in-line with consensus estimates. Core CPI managed to come in just slightly below expectations. September housing starts were much stronger than expected, rising 15% from August levels while the market was looking for a much more modest 4% rise. Building permits for September were a tad lighter than expected.
The Fed’s Beige Book will be out at 2pm this afternoon.
INDIVIDUAL STOCK TRADES:
While we are not proponents of overtrading the market, there are some stocks that are beginning to look much more bullish technically. Here are a few:
BRO – heavy volume breakout above the 50 day SMA on Tuesday. Thus far, we’re seeing some follow through in today’s action. The rising moving averages should be considered primary support on any pullbacks…
DPZ – broke out of an ascending triangle on Tuesday and is following through today. Volume confirms the pattern and DPZ ultimately measures up to 35.00…
EMC – still has a big price resistance test in the 25.25- 25.50 area, but Tuesday’s heavy volume push through 23.50 was a solid start. With a MACD above the centerline and pointing higher and an RSI that finally broke through 60, the odds appear to be turning in the bulls’ favor…
SUMMARY:
If you look back at history, you’ll see that a weakening housing market in 2006 preceded the worst bear market from 2007 to 2009 that I’ve personally experienced in my lifetime. I’ve said for the last few years that an improving housing market was essential for the market to be pulled out of the bearish state it’s been in ever since. We don’t know if this move is sustainable on the XHB, but at a minimum it appears as though a bottom could be forming in the group. If you look at a daily chart, you should be able to spot a possible bottoming reverse head & shoulders. That could lead to one more short-term leg lower. But if that shoulder holds and we print news highs, homebuilders may no longer be a drag on our major indices. That would be a VERY POSITIVE development for equities.
I’ll highlight the XHB chart in Thursday’s Chart of the Day.
Overall, mixed signals abound. I’ve looked at the market for a long time and I’ll be honest. Trying to determine where this market is heading over the next three months is difficult, let alone the wackiness of the day-to-day action. Eventually, we’ll have a market that can be swing traded with more confidence. In the meantime, we have to deal with what’s at hand – a market providing us no clear signs on its directional intentions.
Happy trading!
As part of our free fall preview of Tom Bowley’s Market Chatter, we’re going to be posting the Market Chatter on our website every day for the rest of the month. If you want to have it delivered via email every day, you can sign up here.
TECHNICAL ANALYSIS:
PRICE/VOLUME COMBINATION:
Volume is telling us little about the current state of the market. NASDAQ volume has been at or below 2 billion shares for the last six trading sessions. Prior to this weak volume trend, the NASDAQ had traded at or ABOVE 2 billion shares for 13 consecutive sessions. So it’s difficult to read too much into the recent rally as few are buying into it technically. That doesn’t mean the rally can’t continue, it’s just difficult to avoid being cautious.
The NASDAQ has set up quite interestingly in the near-term. If you look at a 60 minute chart, you’ll see a potential near-term head & shoulders top with the neckline established at the October 13th low and this morning’s low – both around 2585-2590. A potential right shoulder could form anywhere in the 2630-2640 area. Of course, a head & shoulder really isn’t a pattern to act on until the neckline breaks with force (volume). So for now, I’d just keep in mind that the pattern exists.
MACD DIVERGENCES:
Price action has been fairly predictable short-term as the bearish divergences on the 60 minute charts suggested a 50 hour SMA test. We’ve since seen those 50 hour tests to “reset” the 60 minute MACD back to its centerline. Therefore, the slowing momentum has now been accounted for and the reset takes the market to the next question. Is this simply a short-term pullback to reset that MACD or could the selling be much deeper? It’s hard to answer that question, but the daily MACDs are suggesting that we’ll bounce off 20 day EMA tests should we fall that far.
MOMENTUM OSCILLATORS:
The stochastics and RSI are as follows on our major indices:
Dow Jones: 88-55 S&P 500: 92-56 NASDAQ: 92-58 Russell 2000: 88-54
Volatility continues to make it very rough on traders, but the RSI and stochastics tell us that the bears are still in control of the action overall. A break on the RSI above 60 across the board would begin to change that thinking, however.
SENTIMENT:
The VIX approached 35 this morning, just two days after seeing a major breakdown beneath 29.50. Would the REAL direction in the VIX please stand up? This insane volatility really adds a layer of risk to trading that I simply don’t like. I know the thought process is to use these swings to make HUGE amounts of profits, but I want to remind everyone that this “potential” profit doesn’t come without an inordinate amount of risk. Apparently, the high volatility CRUSHED Citigroup (C) traders in the latest quarter, so if you’re struggling in this current environment, don’t feel alone. At Invested Central, we simply try to avoid overtrading and keep trading sizes smaller than usual.
The equity only put call ratio (EOPCR) is at .68 as of 11:30am EST. Relative COMPLACENCY is at 9.71%. Complacency is still “in the air”. But we’re still not at a level that would suggest a reversal is imminent.
MAX PAIN:
This past weekend there was a max pain video done to highlight the possibilities. I indicated that the market appeared susceptible to downside action this week, especially on the NASDAQ and S&P 500. We’ve already seen an initial push lower to confirm that belief. Is the market done selling off? We’ll soon find out.
HISTORY:
The Bowley Trend is our historical indicator that alerts us to specific periods throughout the year when three of our key indices (S&P 500, NASDAQ and Russell 2000) tend to trend in one direction or the other.
The major indices will be NEUTRAL all week, but will turn VERY BEARISH at Friday’s close as next week is the worst performing week of the year historically. More on that later this week.
SECTORS:
It’s great to see financials leading the action today. Bank of America (BAC) reported and while their numbers weren’t great, traders are excited. Industrials are also outperforming, while the defensive sectors – utilities, healthcare and consumer staples – are the primary laggards.
The 10 year treasury yield has fallen back to 2.12%. If you recall, it was the recent breakout above 2.11% that helped to fuel the equities rally. Therefore, it makes sense that we’d like to see the yield hold this 2.11% support. In addition, the 20 day EMA and 50 day SMA are at 2.06% and 2.07%, respectively. That combines for a LOT of support in the 2.06%-2.11% range. The bulls do not want to see the yield lose this support level because it would be an indication of a rush back into treasuries. More defensive posturing does not make for a bullish backdrop for equities, so keep an eye focused on treasuries.
Transportation issues are rallying again today, and are less than 1% from that key resistance level of 4700. CSX is set to report its Q3 results after the bell today. That could go a LONG way in determining which way transports are heading. A break above 4700 adds to the bullish case of the market, while another failure there would be bearish.
ECONOMIC AND EARNINGS REPORTS:
September PPI shot higher, rising 0.8% vs. 0.2% estimates, but the core PPI was only slightly higher, with an increase of 0.2%, just above consensus estimates of 0.1%.
In earnings news, BAC posted better-than-expected results, as did Johnson & Johnson (JNJ). IBM was beaten down this morning based mostly on top line results. Bottom line, IBM beat expectations and raised guidance. Thus far, traders are not impressed. Goldman Sachs (GS) has been downtrending for some time and this morning we found out why. GS posted only its 2nd quarterly loss in 12 years, steeper than expected. Much of that bad news appears to be priced in, however, as GS was actually ahead slightly today – at least at last check.
INDIVIDUAL STOCK TRADES:
The last two days really summarizes how difficult trading can be in this current environment. It appeared the bulls were being whipsawed after their Friday afternoon breakout and Monday failure. Then, this morning, the action was clearly bearish and suddenly buyers emerged and our major indices shot higher. It’s really difficult to trust anything we see from day-to-day. Therefore, we’ll continue to play it very cautiously for now and avoid any additional trades.
SUMMARY:
It’s a little interesting to see the NASDAQ 100 lag on a relative basis the day of Apple’s (AAPL) quarterly report. Normally, this is a stock that gets the market very excited. 420 seems to be an area of resistance. It’ll be very interesting to see where traders close this one before perhaps the biggest earnings report of Q3 is released after the bell. While I would certainly expect a very nice report tonight, especially since the 70 point run up off the early October lows, that line of thinking was proven incorrect for IBM, which had seen a similar run up in price.
Grab some popcorn and fasten your seatbelts!
Happy trading!
