Monthly Archives: December 2018

Stock Charts Of Interest – Part One

Here are three charts with interesting technical patterns, that may be telling us something about the economy:

A simple cup and handle pattern has formed on the SPDR Gold Shares ETF (GLD) weekly chart. The measured move off the C&H pattern projects to the $123 level and it takes the fund back up through its 40 week (~200 dma) moving average.
Chaikin money flow has advanced into positive territory, suggesting new buying interest. Moving average convergence/divergence has made a bullish crossover reflecting positive price momentum.

The US Dollar Index has broken above the neckline of a large inverse head and shoulders formation on its weekly chart. This basing pattern projects a target price that would take the greenback to its former 2017 highs.

The problems in the financial space are well known. But arguably the best-in-breed name in the banking sector is breaking long term support. J.P. Morgan Chase (JPM) shares are trading below the $102.50 level and briefly moved below $100 in Tuesday’s session.
Moving average convergence/divergence has made a lower low in bearish divergence to price, and Chaikin money flow is in negative territory.

A long term downtrend line is being tested on the iShares Barclays 20+ Yr Treasury Bond (TLT) weekly chart. It is part of a very large triangle pattern. A breakout suggests much higher prices which would reflect a moderation in the 20-year treasury bond yield.

I’ll leave the fundamental interpretation and the economic implications to others.

Shift In S&P 500 Seasonality – Santa Rally Has Left The Building

There has been an interesting shift in an old and treasured seasonality pattern. The fabled “Santa Claus” rally period has seemingly disappeared over the last five years.

Take a look at these two seasonality charts.

The first includes data from the 10 year period between 1999 and 2018. It shows the percent of months that the S&P 500 index closed higher than it opened. The index closed higher in December 70% of the time. The typical Santa rally effect.

The second chart highlights the most recent 5 year period. Now the percent of months that the S&P closed higher than it opened in December has dropped down to just 40%.

It appears that over the near term, the market has been naughty, not nice.

The Market Indices Are 4% Above Support And 4% Below Resistance – These Are The Breakout and Breakdown Levels

Tuesday’s sell-off was in sharp contrast to the rally traders had enjoyed just 24 hours earlier. Monday market elation over what was initially thought to be a positive G-20 outcome, had evaporated overnight.

On Tuesday morning it was clear that the specifics of the supposed trade truce were unclear. Markets started off the session lower and continued lower. The downtrend accelerated into the close.

There have been a number of
reasons posited for the drop. The foremost being the rise of the machines. Algorithmic trading platforms have come to dominate their human counterparts. And the similarities in the programs will often initiate a progressive collapse or an explosive rally.

Where does that leave us at this point in time and space?

In our opinion, right in the middle of a zone denoted by the volatile action seen over the last six weeks. Take a look at the weekly charts of the Dow Jones Industrial average (DJIS), the S&P 500 Index (SPX), and the NASDAQ Composite Index (COMPQ).

(chart updated since article was written last night and published before market open this morning)

This week these indices opened up near their November highs. The quick 24 hour reversal in investor sentiment took them down about 4% off those highs. Coincidentally, they are also situated about 4% above their February and April lows. This puts their current location in the dead center of the six week zone.

The only exception is the Russell which is also down 4% so far this week, but the decline has already taken it back to its 2018 lows. It sits at the bottom of its six week range. Small-caps often lead the broader market, so action in the Russell should be monitored carefully.

So, for the broader market indices well-tested and seemingly solid support is 4% lower, and equally defined resistance is 4% higher. Specifically, resistance on the Dow is located around 2600, it’s 2820 on the S&P, and 7500 on the NASDAQ; as we said, the February/April lows are support on all of these charts.

Of course, it’s impossible to predict precisely how the market will close out the week. A presidential tweet, an interview on CNBC, or a fat finger error could trigger an algo rally or another mechanized slide.

But watch the support and resistance lines we outlined on the weekly charts.

The S&P 500 Chart – Base Breakout Or Another 100 Day Moving Average Rejection

The week started off with a bang. The Dow Jones Industrial Average was up 287.87 points, the S&P 500 Index jumped 30.20 points, and the NASDAQ Composite was higher by 110.98 points.

Stocks saw a gap higher at the open on the G-20 news that President Trump and China’s President Xi had reached a compromise on trade issues. But the euphoria faded during the session. Conflicting reports from both sides on the details of trade negotiations caused the market to stall. It was unable to build on the sharp opening gap momentum. The indices closed off their highs but at or near their opening levels.

What this action did was create a doji star on the daily S&P 500 chart. A doji is a candle with an opening and closing range that is virtually the same or very narrow. It looks like a cross, although there are variations on the doji depending on where the open and close are situated in the overall range of the candle. These candles suggest investor uncertainty and are sometimes seen before shifts in trend, either at tops or bottoms.

There is a near perfect doji star candle on the daily S&P 500 daily chart. The index opened at 2790.50 and closed at 2790.37. It formed right above the 50 day moving average after the Monday opening gap higher.

The action of the last two months has formed a well-defined “W” base pattern on the daily S&P chart. Pattern resistance at 2816 is delineated by the horizontal line drawn off the October and November highs. That line is currently being reinforced by the 100 day moving average. A break above this confluence of resistance would power a measured move higher that could see the S&P make new highs.

The attractive quality of a new high can have a strong influence on the market behavior.

The question is can the rally off the November low do what the rally off the October low failed to do? That is penetrate the 100 day average and 2816 resistance?

We should know the answer to that question in a few days.

Volatility Opportunity – Potential Return To Strong Support Levels

We were neutral about the market going into this weekend. The G-20 outcome seemed, in our opinion, skewed to the risk rather than the reward side.

As it has turned out, some compromise was reached and the futures market is implying a very strong open this morning. We will not be chasing this move. As it appears now we probably will be doing very little today, but of course we will be vigilant for opportunity.

One such opportunity may be in the Volatility Index (VIX). Take a look at the weekly chart.

The Volatility Index (VIX) is in the upper panel and the iPath S&P 500 VIX ST Futures ETN (VXX) is in the lower panel. The VIX was relatively quiet during 2017 and found a firm floor in the 10 to 9 area.

The incredible surge in volatility in February this year saw the index leap higher and then spend the next several months moderating. This time it found a higher base in the 11 area and it has been firm footing for 2018.

A second less volatile move came in October as equity prices dropped and the VIX rallied. The index moderated above its 40 week (~200 day) moving average, and it looked like a third higher base at the 16 level was in place.

The Monday open will negate that premise and penetrate 16 level support.

Now take a look at how the recent action correlated with the iPath S&P 500 VIX ST Futures ETN (VXX) chart. The $32 level on the VXX correlates to the 16 level on the VIX. That is where support for the ETN has been since October.

Monday’s strong open in equities suggests that the VXX will open near the $32 area. That is a 6.8% drop from Friday’s close, and right on support. The unlikely potential over the next several days for the VXX to continue down lower or spike down to the $26 level (correlates to the 11 level on the VIX) bears close monitoring.

The point of this analysis is that declines in these volatility measures could be an opportunity to enter at levels that haven’t been visited in a long time and have proven in the past to be solid support. This adds affords protection or presents trading opportunity in a economic and market backdrop that seems to be in flux, and vulnerable to sudden shifts in sentiment.

(Check for updates today on the VXX and $VIX charts, and percent figures on implied ranges.)