Stock Market Viewpoint

Stock Market Viewpoint
Reading the Tea Leaves...

Friday, May 22, 2015

Analyzing the S&P Extension Chart

There has been considerable conversation recently that the market may be stalling without being overextended which in the past has been a necessary condition for the market to stall and rollover.  The extension chart of the S&P is the truest gauge of when a market is overextended and oddly enough both the bulls and the bears are currently touting this same chart as confirmation of their view.  

Taking a look at the extension chart I posted below:

click on image to enlarge

It's easy to see that the S&P starts becoming moderately overextended when it reaches approximately 200 points above its Day 324 EMA line, which represents midterm neutrality (shown with a green line).  The market reaches maximum over-extension when it is 225 points above the 324 line.  

Over the past two months the S&P has stopped at the pink resistance line shown, well below its normal peaking level.  The bulls argue that this is actually a good thing as the market has plenty of room to run, approximately 40 points before it reaches maximum over-extension.  The bears claim the same chart as support for their argument that the market is about to take a hard rollover.  Their view is that the market has been trying for two months to climb on up to its normal over-extension peak as it has done repeatedly in the past few years but there are simply too many sellers and no longer enough buyers willing to participate.  

It may be the case that both sides are right in their view of this chart and the outcome will be determined by which side starts suffering defectors to the opposing camp first.

Trade well my friends


Wednesday, May 20, 2015

S&P: Rising Wedge vs Ascending Triangle

Over the past two months, we have seen the choppiest sideways action than we have seen in years.  There are two clear camps of thought on where the market sits right now.  The first group composed primarily of bears and those who recently exited after bagging a triple on the S&P in six years are pointing to the ominous nine-month wide bearish rising wedge pattern or "exhaustion wedge" as many call it, as shown in the weekly bars chart of the S&P below.

(click on image to enlarge)

On the other side of the coin we have the bulls that are pointing at the daily chart bullish ascending triangle approximately four-months wide, shown in the following chart.

The bulls are pushing the theory that we are breaking out of the day ascending triangle right now but the bears won't buy into it, reminding us that this S&P breakout just stopped at the upper line of the weekly rising wedge pattern.

Taking a look now at the Bernanke/Yellen four-year breakout channel shown in red lines in the chart below, we see that the S&P is continuing to work its way farther out of that channel with the upper level of its current trading range clinging to the lower line of that four-year channel by its fingertips.  

Lastly, taking a look at the VIX (Volatility Index), we see that it has been shuffling sideways for the past couple of months around the 12.50 level, as shown in the chart below.  This level in the past has corresponded with tops in the S&P.  

The VIX could easily continue sideways for another few weeks until it gets to the huge blue downtrend line.  At that point, there will be some serious soul searching among traders and investors.

Trade well my friends


Wednesday, March 25, 2015

S&P and NASDAQ Lose March Channels

In the market Wednesday, the selling began accelerating as the indices followed through on slipping out of the March uphill green line channels from Tuesday.  Looking at the charts below, it is easy to see that the Nasdaq is in a lot better shape than the S&P as it is likely to catch support in its pink channel on Thursday.  However, the  S&P won't catch support on the lower line of its pink channel until it is nearly down to its lower line of  its long term blue channel line.  

Taking a look next at the VIX and VXX charts below, we see a fairly sizable reactionary move in the VIX but comparing it to the not so volatile move in the VXX, it looks as though traders are still convinced that Yellen's SPY and QQQ buying algorithms will save the day shortly as they always have.  I'm not sure that it is a good assumption to believe that Yellen will never, ever let this market have a substantial correction.

Trade well my friends


Monday, March 9, 2015

S&P and Nasdaq Diverging

In the market Monday, we had a modest up day as the key stock indices maneuvered to hold their twenty-day EMA lines, a token point for at least some sort of a bounce.  While both the S&P and Nasdaq bounced today, an interesting divergence has begun in their channel charts.  Looking at the sixty-minute charts below, we see that the newest channels shown in pink are affecting these two indices differently.  

In the first chart of the S&P, we see that the newly developed pink channel is trying to increase the rate of decline by forcing it out of the black line channel.  In the Nasdaq chart, the newly formed pink channel is doing just the opposite, it is trying to break the Nasdaq back up out of its black line channel.  This refusal by the Nasdaq so far to develop steeper declining channels is being helped by the fact that the Nasdaq found support Monday at the top of its long term blue line channel.  

Next, taking a look at the 120 minute VIX and VXX charts below:

The VIX, shown in the upper chart, is steadily climbing as more and more components of S&P 500 begin to roll over.  The VXX (VIX Futures ETF) has been moving sideways instead of up as VXX traders are taking a more cautious stance because they understand how easy it would be for the Nasdaq to bounce for several days here and lift the broad market with it.  If the Nasdaq slips down into its long term blue line channel, however, I expect the VXX to catch up with the VIX quickly.

Trade well my friends


Wednesday, March 4, 2015

S&P and Nasdaq Establish Declining Channels

In the market Wednesday, the stock indices suffered another modest loss as they continue to establish declining channels.  After peaking, the S&P and Nasdaq skipped the traditional two to three days of sideways movement and instead went directly into the black descending channels after leaving the secondary green line ascending channels shown in the charts below.

The selling that has materialized so far has not produced an equally comparable rise in the VIX and VXX.  The VIX & VXX moves remain somewhat subdued compared to the decline in the S&P and Nasdaq as shown in the charts below.  

Traders and investors remain complacent about the downward travel so far, likely assuming that the Fed's buying algos will be switched back on before any more damage is done to the S&P and Nasdaq.  This is probably a reasonable assumption but we will have to wait and see if they actually do step in and break the stock indices back up out of these descending channels for the purpose of building a second top.  If they don't we are likely to see a continued decline in the S&P and Nasdaq with a lot of bounces planned at every possible EMA pair and intraday channel to keep the shorts at a minimum.  

Trade well my friends


Monday, March 2, 2015

New S&P and Nasdaq Channels Come Into Play

In the market today, the S&P and Nasdaq bounced quickly from the open partly from a Nasdaq sixty-minute On Balance Volume divergence and partly from the new channels that have developed recently and have taken these two indices out of their four-week up channels.  These new channels are shown with green lines in the charts below.

Looking at these new green channels closely, we can see that the two indices started today at the lower line and finished the day at the upper green line.  The Nasdaq was watched closely today as it had room in its green channel to close above the 5000 mark and did.  The S&P will be watched most closely tomorrow as it closed right up under the upper line of its blue channel and up against the lower line of its February red line channel.  

It will be interesting to see if they can work the market higher to stop the heavy selling that was present in the market all through last week as is shown in the Trin chart below.

In the Trin Index chart, anytime its numerical value is above 1.00 there is light to modest selling pressure in the market.  When the red and green moving averages are also above 1.00 it indicates strong selling pressure.  When the red line is above the green line and above 1.00 it indicates there is very heavy selling taking place.  As can be seen above, there was heavy selling all through last week as the S&P maxed out at its upper blue long term channel line.  However, if you look closely in the final hour today the red EMA line did down cross through the green EMA line, a positive development but we will have to see if they can keep the momentum going tomorrow as the Nasdaq's sixty-minute On Balance Volume divergence has been resolved.

Trade well my friends


Sunday, March 1, 2015

S&P and Nasdaq Lose Their 4-Week Channels

The S&P and the Nasdaq indices have both enjoyed four week runs off of the triangles I focused on in my last article.  The S&P stopped at its blue upper long term channel line as it has been a pretty reliable line.  The Nasdaq got a little frothy as it got well above its blue upper long term channel line in an attempt to ring the bell at the 5000 mark.   Late this past week, however, these indices fell out of their red four-week ascension channels as seen in the charts below.

The extended move in the Nasdaq has turned sentiment very bullish but with it failing to break the 5000 mark sentiment will likely shift to neutral if the Nasdaq starts drifting downward.  The real test will be when the Nasdaq gets back down to the blue upper channel line in the 4900 area.  If the Nasdaq can stay above the upper blue channel line it will keep bullish sentiment going, however, if it slips through that line this breakout attempt to reach 5000 will have meant nothing and will be looked upon as a negative and likely weigh heavily on sentiment.  

If the S&P starts declining soon, I would expect it to be measured until traders see what the Nasdaq does when it reaches the 4900 blue line area.

Trade well my friends