Danger Ahead? Sunday Smorgasbord – Week ending 19 Sept. 2014

  1. 8,865 Posts.
    lightbulb Created with Sketch. 2567
    Australian Market: Sector Relative Strengths.
    Australian Market: Sector Breakdown
    Australian Market. XJO – Monthly Chart
    Australian Market. XJO – Weekly Chart
    Australian Market. XJO – Daily Chart
    American Market: Sector Relative Strengths.
    American Market: SP500 Daily.
    American Market: Small Caps Daily
    American Market: Breadth, NYSE and Nasdaq
    American Market: Bullish Percent Indices
    Summary and Conclusion


    This week the broad market index (XJO) was down strongly -1.77%. Three out of five days were down.

    The chart/table above provides a medium term and a long term view of Market Sectors. Relative Strength provides information on how each Sector is travelling in the short to medium term. The Bull/Bear Status provides a longer term view of the Sectors.

    The three strongest S&P sectors, as measured by RS (the distance of the stock above/below its 100-Day MA) are: Telecoms (104.07), Health (105.66). Energy(101.94). Once again, Energy has slipped back into the Top 3 – its been sliding in and out now for a few weeks. Consistently, Telecoms and Health have held in the top positions. They are both Defensives. Property (an industry sub-sector) weakened significantly again this week. The weakest sector was Materials. But the Sector remains on Bull Status, so it might be getting to the lower end of its current down cycle.

    The Sector Structure (based on the overall Bull/Bear Statuses) remained static this week. Despite the overall market dropping strongly, all ten sectors remain on Bull Status. (That’s quite different from America. See below.) The Status is determined by the relative positions of the 50-Day and 100-Day Moving Averages. If the 50-Day MA is above the 100-Day MA, the Sector is on Bull Status.

    While the market had a poor week, this is a picture of a strong bull market currently undergoing a significant pullback. Just remember, this shows what is – and is not predictive. It’s a trend following tool. This information provides an antidote against knee-jerk reactions to short term market fluctuations. Until the majority of the Sectors are on Bear Status, probably the market isn’t in much trouble, and short term fluctuations are simply part of normal stock market flux.


    The XJO was down so far this month -3.43%. We now have a little over seven days trading to go in this month.

    The dominant pattern on the chart is the Rising Wedge.

    MACD Histogram is sloping down and has been since November 2013. This month’s Histogram is now at its lowest level since August, 2012 when it first went positive. That was a leading indicator at that time. The MACD Histogram is now marginally above zero at 4.5. If it goes below zero it might again be a leading indicator – this time to the downside. If we get a drop below zero, it might be worth taking some defensive action. At this stage, the trend remains up.

    We’ll know the very long term trend has changed to bearish when the Rising Wedge and 20-Month Moving Average are broken to the downside. That may be imminent. If it does happen, however, this bull market might be over. We’ll have to watch carefully. If we don’t get some sort of a rally in coming days, then we’ll have a three-candle reversal pattern on this monthly chart. Such reversals are fairly reliable. So, if this month does deteriorate, we could be seeing the end of this bull.

    But – at this stage – it’s just speculation – just a warning sign to be aware of.


    The XJO finished the week at 5433.1, down -1.77%.

    MACD Histogram. Below zero. Negative.
    MACD. Above zero – positive but flat.
    RSI.9 is at 41.4. Negative.
    CCI.14: -89.2. Negative.

    The medium term trend remains up despite four weeks of losses. Indicators have turned down and have plenty of air-space below for further falls.

    Momentum has slowed as indicated by the MACD flatlining. Slowed momentum usually means a big move is coming – but there’s no way of knowing for sure which way it will break. This is in serious danger of turning bearish.

    But … the chart is now down to triple support: oblique uptrend line, horizontal S/R line, and 50-Week MA. That’s powerful stuff. A break lower through that confluence and we’re probably going to see much lower XJO figures, possibly going back to the 4000 level (round figures). The probabilities, at this stage, lie to the upside – because of that powerful confluence of support.


    The big “needle” of 24 days ago marks a top in the market. Since then the chart more or less went sideways until early September, when it formed a three-candle reversal pattern. (I mentioned this pattern in the discussion on the monthly chart.)

    On Thursday, the chart bounced off a major horizontal support line. Friday saw some carry through buying, but it wasn’t very strong, up +0.32%. I would have liked to have seen a stronger day than that. It is now back to a horizontal R/S line. The past two days may have been a short term relief rally.

    MACD Histogram. Below zero. Negative.
    MACD. Below zero. Negative.
    RSI.9 is at 27.3. Very oversold.
    CCI.14: -101.2. Positive divergence.

    I’ll be surprised if we don’t get some more upside. This is very oversold, and bouncing off support. The bounce, so far, is not strong. That’s a concern. But, usually, the current conditions skew the probabilities to further upside.


    This is similar to the charts above for the Australian market. The SP500 was up strongly this week, +1.25%. The DJ Industrials was up +1.72%.

    The DJ30 was the strongest of the major American indices this week – that may have been influenced by Options Expiry Week – where a lot of bullish action is seen in the blue chips.

    Statistics in these tables have shown some deterioration in what was a very strong bull market. Now three out of nine Sectors are on Bear Status (Energy, Industrials, Utilities). The two biggest sectors, however, Technology and Financials, remain on Bull Status. (They represent about 35% of the American market, which is much more balanced than the Australian market where Financials alone represent about 40% of the market.) Recently, all four of the major indices were on Bull Status. Now two out of the four are on Bear Status. The Dow Jones Industrial Average is now on Bear Status. Care must be taken interpreting these rather crude assessments. The Chart of the Dow Jones Industrial Average is sitting well above the 50DMA and the 100DMA, and has now broken above its trading range. So it seems highly likely that it will now move back off Bear Status. Only two sectors are sitting below par (below 100) on the Relative Strength Readings. Those sectors are Energy and Utilities. This is still a bullish picture, but there are signs of deterioration, despite new highs this week on DJ30 and SP500.


    The SP500 had a good week up +1.25%. It was Options Expiry Week when the market is usually bullish and closes on OpEx Day little changed from the previous day on above average volume. SP500 down -0.05% on Friday. So this week went more or less to script.

    Technically this is looking weak. Although SP500 printed an all time high this week, usually bullish, it might just be an artefact of OpEx Week. We’ll see next week.

    Indicators are generally not as strong as the Index – so momentum is not strong. Money Flow Index is nudging on overbought. Friday’s candle reached the restraining line shown on the chart – this could signal a short term top – but we need to see a big down day to confirm. The indicator negative divergences on this daily chart are also clear on a weekly chart – thus confirming the weakness in momentum. Weakness in momentum often comes as an early warning sign of a pull-back – just don’t bet on it.


    IWM is the ETF for the Russell 2000 (R2K) – the smallest 2000 stocks in the Russell 3000.

    Weakness in the Small Caps suggests the broad base of the market is collapsing – the market is going up purely on momentum from the Blue Chips and Large Caps. If they start to fail, the market is in danger of a serious pull back.

    The Small Caps Index is also a guide to how the “real” market, apart from machinations of Market Makers and Arbitrageurs on Op Ex Day, has performed. IWM was particularly weak on Friday, down -1.26%, giving back most of the gains of the previous three days.

    So breadth was poor on Friday, that belies the flat finishes in the major indices, DJ30 and SP500. IWM is clearly negatively divergent from the SP500, The Index topped on 1 July, while the SP500 has gone on to new all time highs. As Marcellus says in “Hamlet”, "There is something rotten in the state of Denmark."

    Let’s look at some other breadth measures.


    These four graphs show the Cumulative Advance/Decline Lines and Cumulative AdvancingVolume/Declining Volume for the NYSE and Nasdaq. All four show negative divergences from the price charts for the two Exchanges. This imbalance is a concern. Let’s look at other measures of breadth.


    The BPI is a breadth indicator based on the % of stocks on Point and Figure “buy” signals within an index. These are somewhat different from other breadth indicators such as the Cumulative Advance/Decline Line.

    There is no ambiguity about “buy” signals on P&F Charts. BPI shows figures between 0-100%.

    One interpretation of these charts is that they are still bullish. All of the charts are above the 50% level. But five of the six are showing strong negative divergences. BPNDX is the only one which doesn’t – but it shows a sharp drop off this week while the Index rose 0.76%.

    It’s important to note that these BPIs cover blue chips, large caps and broad based indices. All are showing some degree of weakness to a larger or lesser extent – so the weakening of breadth showing up in the Small Caps is not isolated to that sector of the market. Even the Blue Chips and Large Caps are going up on fewer and fewer stocks. This is flashing big amber DANGER signals.

    I could go on and look at another market breadth indicator – New Lows – but that would be redundant. I think the point about weakening breadth has been sufficiently dealt with. The proviso here is that the BPIs, although weakening, are still confirming a bull market – as all are still above 50%. Watch out if we see more weakening.


    This is a daily chart of movements in the SP500 for September averaged over the period 1950-2011 (courtesy of Sentiment Trader). We have seven days left in September.

    Historically, the market has been down six of the last seven trading days in September. So we have historical precedence for falls in late September.

    Another factor suggesting that the market will fall is the coming actions of Fund Managers in America. Many of the largest funds in America have mandated allocations in Stocks and Bonds – typically 60/40 split. If they get out of kilter, Bond Managers must adjust their allocations. So, if Stocks have been rising faster than bonds, some stocks must be sold off and bonds purchsed to bring the allocations back into line.

    This is different from “window dressing” where managers sell “losers” in their portfolios and buy “winners” so that their final portfolios carry a high proportion of winning stocks. It makes them look good. That’s optional – not mandated.

    Stocks so far in the July-September quarter are up +2.56% in the SP500. TLT, 20-Year Treasuries ETF, is up 0.95%. IEF, 7-10 Year Treasuries ETF, is down -0.61%.

    So we have an historical bias to the downside for the SP500 and we can expect Fund Managers to be selling stocks to re-allocate funds to bonds to balance up their portfolios in the coming days. Go figure.


    First, a summary of major world markets: Australia down -1.77%. German DAX up +1.53%. London up +0.45% SP500 up +1.25%. Japan up +2.34%. China88 down -0.65%. Emerging Markets ETF down -0.75%%. GLD (ETF for US$ Gold) down -1.09%. Copper Futures down -0.48%.

    Indices from the developed world (except for Australia) were up. Australia went down along with China, other Emerging Markets, Gold and Copper. The AUD/USD was down -1.24%. The American Dollar Index was up +0.53%. A rising American dollar has a negative effect on commodities which are priced in US$. DBC (ETF tracking the American Commodities Index, CRB) was down -0.63%. While the American Dollar keeps rising, that will have a negative effect on commodities and have flow-on effects to the Australian stock market which is skewed to the performance of commodities.

    This report tends to focus on Australia (naturally) and America. What happens in America affects all other markets. It is difficult to imagine we can have a bull market without a bull market in the U.S. – and vice versa.

    There will be variations in the correlation. Our market has disconnected with the American market – to some extent a result of a weakening Ozzie Dollar and commodity prices.

    The commodity prices don’t include an Iron Ore price. Iron Ore had a big rise on Tuesday >3%, but gave most of that back later in the weak. I don’t have an up-to-date price for Spot Iron Ore, but Iron Ore in Dalian (China) on Friday was down -2.2%. That’s going to have an effect on our big Miners on Monday.

    Australia technically looks ready for a bounce after a big fall (-3.43%) this month.

    The iron ore price was weak on Friday, so that puts our miners in doubt on Monday.

    America looks likely to be weak from now into the end of the month. We have historical precedence – plus many Fund Managers will be selling stocks to buy bonds in order to bring their portfolios into kilter with mandated allocations.

    Breadth by any measure has been weakening in America, in most cases since early July – despite the new highs recorded in major indices like the DJ30 and SP500.

    It is possible, of course, for Australia to remain dislocated from America. In this case we’d need to see Australia moving to the upside while, presumably, according to my analysis, the American market moves to the downside.

    It is difficult to see Australia falling further here. It is seriously oversold, and at a major support level. It bounced on Thursday and Friday. Further upside looks likely. But, if America does turn down, and the Iron Ore price continues to falter, then it is quite conceivable that Australia will simply become more and more oversold. Or, perhaps, just move sideways and work off the oversold indicator readings. Then move down.

    From now to the end of the month, I think we’ll see the American market finish lower, and, probably, Australia will follow. That will print a very bearish monthly candle on the Australian XJO chart. October could get nasty. At this stage, however, the major trends, long term, on the Australian and American markets are up.

arrow-down-2 Created with Sketch. arrow-down-2 Created with Sketch.