Comparing the S&P To the NASDAQ

The Santa rally that had a last minute start has shown to be a success even more so than many might have thought.  It's time to take a look to see how high the S&P and the Nasdaq have climbed over the past week and a half.

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The S&P chart shown above has a reading of 202 points above its 324 EMA line at Friday's close.  Anytime the S&P gets above the +200 level it is living on borrowed time.  While Friday's 202 is still one typical up day from its 219 point average extension of the past twenty-four months, it is already at the peak over-extension trend line shown in red.  Considering both the red over-extension line and the current numerical distance from the green 324 line enables us to get the best read on when the current market run is done.  The S&P may be able to get a little higher in the next few days but we are very close to a maximum over-extension.  

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Looking now at the NASDAQ chart shown just above, the most noticeable difference is that in the past eight months the maximum over-extension of the NASDAQ has been reduced considerably from the over-extensions of last January and March.  The market is only allowing approximately 600 points of extension in the past eight months, reduced from the approximately 700 points from last January and March.  Friday's close on the NASDAQ was +595 which is also very close to its max and the NASDAQ is also above its red over-extension line which is the frothiness that the NASDAQ develops sometimes before it starts a decline.  

While the Santa rally could float us up a few more points on both indices over the next several days, having both so close to their  maximum extension is definitely a heads up at least for those who go in and out of the market every couple of months or so.

Trade well my friends

Alan

Examining the 35-Year S&P Chart

As traders and investors begin thinking about the new year and what may come, it's critical to thoroughly examine where the S&P is at now and in previous multi-year runs.  

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In the chart above showing thirty-five years of trading in the S&P using yearly candles, I have recorded how overextended the 1999 internet bubble got above its twenty-year EMA line and fifty-year EMA line.  I have also recorded where the S&P is at now relative to its twenty-year and fifty-year EMA line.  It's not difficult to see that we are at the long term over-extension again.  The small chart to left above shows the same thirty-five year view.  

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In the monthly bars chart above,  the S&P shows that it has maxed out in both its six-year bull run channel shown with red lines and its twenty-year incline channel shown with blue lines.

For the time being the Fed's all powerful buying algorithm is keeping the market up and continuing to inch out new highs.  How long they can continue to do so is what everyone wishes they knew.  

Trade well my friends

Alan

Yellen On A Roll

Fed chief, Janet Yellen, continues to prove she can turn a falling market back up as well as any of her predecessors.  Through her mastery of linguistic acrobatics she gave the market a pass on Wednesday and then followed through with gifts for all on Thursday with a 48 point rally in the S&P .  We now know just how powerful their new stock buying algorithm really is. 

When they were testing it on Monday it nearly broke the VIX meter, causing it to jump in 4 point spikes every few minutes all afternoon.  From the time they turned it on Wednesday, the market has rocketed up more in two days than it did in four days from the October "v" bottom and that October short squeeze has been declared the mother of all short squeezes by bulls and bears alike.  Which creates a conundrum, what are we going to call this short squeeze?

Yellen may need to tone down their new algorithm just a bit though.  As the market approached the final minute of trading Thursday the algorithm was pushing the SPY a little too hard and in the last minute of trading it drove the SPY up $6 all the way up to 213 / 2130 on S&P before reversing back down to the 207 area before the market closed.

There were 1,147 trades during that minute for a total of 610k shares, roughly $200 million.  This was not a "bad tick".  The exchanges have issued a ruling that the trades will stand.  All traders chasing the short squeeze with market orders that were filled up at 213 were burned as they lost $6 on the SPY in seconds.  In the Daily chart below, you can see how high the algorithm drove the SPY before they could get it under control.  

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Trade well my friends

Alan

S&P: Analyzing Multiple Views

Tuesday's market action was yet another extreme roller coaster ride that ended with the S&P substantially in the red.  On Wednesday, Yellen's Fed statement will be released and there has been discussion that this will be the most important Fed statement to date.  To really understand how critical it is for Yellen's speech to please the market we need to take a look at multiple views of where the S&P is at now.  

Taking a look at the 6-month chart above of two-hour bars, we see that the S&P closed right at the lower line of its short term channel.  It would be reasonable to expect that failing that line again would have the same consequences as when it failed in early October.  We got just as overextended with this last run up and now the market has geopolitical pressures and plunging oil that weren't there to any degree when we failed the line in October.  

The weekly bar chart of the S&P chart above shows the three-year midterm channel with blue lines and the two-year midterm channel with green lines.  Tuesday's close has the S&P barely hanging on to the lower line of the green channel whereby just a 1 point move lower will put it back into the blue channel which is still a very bullish channel.  The danger of resuming trading in the blue channel is that there is about 165 points down to the lower line and a visit to the lower line would be normal if the S&P uses that channel to continue higher next year.    

In the next chart above, we see the entire 6-year bull run shown with the red channel and also the 20-year incline channel shown with the black lines.  Last month the S&P reached the upper line of both the 6-year bull run channel and 20-year incline channels.  

The last chart above is actually the previous chart but zoomed out considerably to really see the big picture.  This chart shows the entire 20-year incline channel.

Considering where the S&P is at right now on all of these charts, Yellen's statement tomorrow could truly be a historical marker.  If she keeps the "considerable time" phrase the market might react favorably and turn bullish for a while as it is fairly oversold short term and has a lot of trend lines to push up from.  If the phrase is removed and is not replaced with a new favorable perspective on current economic conditions, the market could easily slip through all the trend lines in the top two charts above and a sustained fall could develop quickly.  As usual the two hours after the monthly Fed speech are ruled by the the Fed's FOMC day algorithm buying program and we normally don't see the true reaction until the next day's trading.  

Trade well my friends

Alan

VIX: 4-Hour Bare Knuckle Street Brawl

In the market Monday we saw a unique event take place.  From the opening bell the market started falling and by 11 AM C.S.T. the S&P had sliced through all the key support levels that it had closed at Friday afternoon.  The market was moments from a freefall when the Fed turned on what is obviously a brand new algorithm buying program that made the intraday VIX (volatility index) meter shake in four-point spikes every few minutes the rest of the day.  Big sell orders continued coming through causing the VIX to spike repeatedly but the Fed's program bought the sell orders relentlessly pulling the VIX back down as fast as it went up.  This happened continuously through the rest of the day as can be seen in the chart below.

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The fierce battle stopped at the bell with the S&P downtrending into the bell.  This "line drawn in the sand" battle is easy to see but the question is, who won?  With the S&P drifting down into the bell, you might think that the sellers won but just as soon as the market closed they came in and bought the SPY back up fifty-cents quickly.  The S&P futures are well into the green in the early evening hours Monday night.  It's ridiculous that such a conflict took place with an unclear winner but that is where we are at.  

To throw a wild card into the situation Yellen's speech is Tuesday and Wednesday and she always turns the buying program on during her speech days to prep the market with the desired reaction to the Fed speech.  With the speech coming, the next move in the market may be muddled by the two-day event where little trading takes place and then normal trading resumes Thursday.  This is a very frustrating situation for investors who are trying to figure out if they will pump the market one more time before year end to give the traditional Santa rally at least to some degree or if there will be more selling to come soon.

The charts below show the key levels that the S&P fell through on Monday.  I discussed the situation in each of these charts in detail in my article this morning on Investing.com under Opinions / Analysis / Stock Markets.

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Trade well my friends,

Alan

The Big Picture: 20 Year Index Charts

The following are the 20 year charts of the key Indices.  Long term channels and current midterm channels are both shown on each chart.

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S&P & VIX End Week At Key Levels

It's probably time to stand back and take a look at where the S&P and VIX are at now after the market's first bad week it has had since the early October plunge.  Both the S&P and the VIX closed out the week at key levels in the moving averages and trend lines.  

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Looking at the chart above, the S&P closed right at its 50 day simple moving average line.  The 2002 closing number is also the center line of the midterm channel (shown with fine green line) and also, 2002 is essentially the big round 2000 level benchmark.  Dropping through any of these three on Monday could bring in another wave of selling.  One would think, however, that there would be support for at least a couple of days of sideways trading here but it's a risk to bet either way just yet.  

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In chart 2 above, the two year Fed bubble channel is shown and today's 2002 S&P closing is right at the lower line of this channel.  If we breach that line Monday, once again another wave of selling could be triggered because of this chart.  As in the daily chart it would be reasonable to think that there would be at least temporary support here but we will just have to see.  

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The above chart is of the VIX (Volatility Index) showing that the VIX closed at the key 21 level which is the center line of the long term slightly downhill channel (shown in black) and also the center line of the newly forming uphill red line channel.  The S&P did pop across both center lines in the last hour Friday but returned back to the center lines for the close.  That little blip was actually triggered off of intraday technicals on the VXX (VIX Short Term Futures ETF).  I don't think too much meaning should be read into it as far as if it might be looked at a hard test of the center line, it looks like closing right at the lines is a truly neutral pivot with a move Monday either way being capable of swaying the crowd.  

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Finally, taking a look at chart 4, the S&P over-extension chart, we see that it put in a double top at the maximum extension level.  Normally, they prop the market up in a sideways trend for a minimum of four weeks after first reaching the maximum extension level and then the fall begins.  This time it was different, however, because it has only been propped against the maximum extension level for barely two weeks before the fall began which can be attributed to the bearish catalyst of plunging oil prices and its implications of  a slowing global economy. 

Trade well  my friends

Alan

Once Again...

Stock Market Technical Analysis

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Over the past several years, every time the S&P has reached maximum extension from its 324 EMA line there has been a 75 to 200 point pull back happen within 4 to 8 weeks of reaching the maximum extension.  During that 4 to 8 weeks of propping the market at the maximum extension level bonds always make a nice run and the S&P scratches out only a few more points.  This has happened over and over.  All an investor has to do is to sell out of stocks when the S&P first reaches the maximum extension level, switch over to bonds and make money on bonds during this propping period and then the fall.  Once the market gets oversold and a decent signal sets up, switch back over to stocks for the ride back up to maximum over extension.  

How many investors do it?  Maybe one out of a thousand switch from stocks to bonds at the arrival of S&P maxiumum extension.  

Trade well my friends

Alan

Fed Withdraws Liquidity

Stock Market Technical Analysis

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Taking a look today at what our good friends at the Fed have been doing.  The chart above shows the weekly reported numbers of the Fed's balance sheet.  The new balances are above each weekly bar with the net change from the previous week below each bar.  The notable items are the September 17th 28 billion injection to try to stop the sell off that had already begun.  They stepped in again with a 19 billion injection on October 15th to start the global short squeeze that ensued.  Over the following five weeks they continued to inject liquidity long past the official end of QE.

Things changed last Wednesday, however, when they removed liquidity for the first time since October 1st, right before the market took the big dive.  This past Monday's opening drop was a reaction to the Fed actually removing liquidity.  After Monday's drop, it looks like they couldn't accept that kind of reaction and turned on the all powerful tractor program on the SPY which has kept running right up through Wednesday's close and is shown in the chart below.

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This tractor program tightly controlling trading the past two days has pulled the S&P back up above the week 5 EMA line which it dropped down through on Monday as shown in the top chart with the red line.  This tractor program has also pulled the S&P back up close to its maximum extension again as shown in the chart below.

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Looking at this over-extension chart we see that Wednesday's close is 212 points above the 324 day EMA line with the average over-extension being +219 points over the past two years.  If they keep the tractor program running they could grind the S&P another 10-15 points higher until the tether line is stretched absolutely as far as it can be from the 324 line.

This situation of having the market this over extended but not quite to its absolute max has produced a low volume environment where no one wants to buy but no one wants to short either.  

Trade well my friends

Alan