These charts reflect stocks in uptrends with clearly defined trend lines that represent good stop-loss reference points:
Federal Reserve Chairpersons never reveal very much about the Board’s economic policy between formal board meetings. Chairman Powell may break that tradition when he speaks at 1:00 PM today. The markets will wait and whatever they are given in the way of new, or regurgitated information, they will attempt to use to further reiforce their either bullish or bearish thesis.
Good will be good, or good will be bad; or bad will be good or bad will be bad. Right now good and bad are in superposition, that is like in quantum physics they occupy the same space. “Powell’s cat” is alive (bullish) or dead (bearish) until 1:00 PM.
But take a look at the recent individual candles on the daily index charts. They are clearly reflecting weakness and have rolled over in the last several days. This could be expected after they have approached or made new highs, and the Fibonacci retracement levels on the S&P 500 chart are modest potential pullback levels.
What is becoming a growing concern however is the combination of the continued call for lower interest rates against a back drop of higher equity prices, low inflation numbers, and low unemployment. The market must think at least one of three things: equity prices are headed lower, or inflation is about to surge, or the employment figures are not accurate.
Employment figures would seem the least volatile over the intermediate term, and do interest rates first have to go negative before a sudden bout of inflation can be adjusted for? It looks to me like the primary concern is asset prices readjusting. But while lowering interest rates will temporarily spark equity prices higher, they will only worsen that eventual downside adjustment when it does come. Market forces should almost always be allowed to play out naturally.
Right now the market needs a 10% pullback more than it needs a 10% rally.
The medical devices and scientific instrument and research companies are showing strength this month. Several in the space like Danaher (DHR) and EXACT Sciences (EXAS) look like they are ready to break out.
One way to take advantage of the broad sector strength is to trade the iShares US Medical Devices ETF (IHI). The daily chart of the fund shows it breaking our of a symmetrical triangle-like consolidation. A successful breakout projects a pattern target price that makes new highs.
The RSI indicator is tracking above its center line confirming the positive price momentum, and the Chaikin Oscillator is above its center line reflecting improving buying interest.
The trade offers a good risk-reward ratio at its current position.
The iPath Short-Term Futures ETN (VXX) tracks an index with exposure to futures contracts on the CBOE Volatility Index with average 1-month maturity. It resets daily so traders should use it as a short term and not a long term trading vehicle.
That said, a bullish morningstar reversal pattern has developed on the VXX weekly chart. The pattern formed just above the $26 level which correlates with the 15 level on the Volatility Index (VIX). Monitoring how this pattern plays out on the weekly time frame can provide context to analyzing the daily time frame.
A morningstar, as regular readers know, is a bullish three-day reversal candle formation. It consists of a large range down-day candle, followed by a narrow opening and closing range doji type candle, and completed by a large up-day candle. It suggests a transition in trader sentiment from bearishness, to uncertainty, to bullishness. The morningstar has been rated as a reliable candle pattern.
This morningstar comes after a period of trader complacency but that attitude may be about to change. A corroborating technical development is the bullish crossover in the MacD. It reflects a turn in upside price momentum. Upside volume has also been increasing over the last month.
The VXX needs to continue higher from here to confirm the legitimacy of the morningstar pattern, and any potential reversal in sentiment. But, concern may be replacing complacency.
Bond yields continue to reflect a risk-off environment. It has been that way for a long time but when that docile dynamic starts to reverse, it could accelerate quickly. Traders should be prepared to profit from the machinations of the “bond vigilantes,” and higher yields.
Jeffrey Gundlach, of DoubleLine Capital has been warning about corporate debt in particular for years. The “bond king” calls it an “ocean of debt,” that will create a problem for the stock market.
It is impossible to say when the reversal will come and the degree of havoc that will be wrought, but traders should be prepared to profit from it.
One way would be to buy the ProShares Short High Yield (SJB) fund. The fund seeks daily investment results that correspond to the inverse of the daily performance of the Markit iBoxx $ Liquid High Yield Index.
Let’s go to the weekly chart.
At the top of the page is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). It is up about 10% from its December 2018 low, but several warning signs have appeared in the price action.
Note the recent doji star candles. A doji is a candle with narrow opening and closing range. It suggests indecision and after a long uptrend or downtrend, the possibility of a shift in investor sentiment. It is a potential reversal candle.
When multiple dojis form after a strong move they increase the likihood of a reversal. Three consecutive doji candles are called a “tri-star” pattern which is a strong reversal signal. That is not currently the case because we’re looking at a weekly chart and the last candle is not completely formed. But keep a careful eye on this week’s candle.
Below the HYG chart is the ProShares Short High Yield (SJB) chart. Remember it corresponds to the inverse of the high yield corporate index. It correctly looks like a mirror image of the HYG. The previous dojis on this chart suggest the potential for a low of some duration, and an eventual shift in the trend.
The moving average convergence/divergence indicator for the SJB is making a bullish crossover. The crossovers on this chart have, in the past, been infrequent and generally last over the intermediate term to long term.
The bottom line is that the level of corporate debt remains high. When rates inevitably begin to rise and prices start to fall, the SJB will head higher, potentially much higher. Be vigilant and be prepared to profit.
On Friday the DJIA went from being down 400 points to closing up 100 points. The broad based reversal formed what looked like hammer candles on the daily charts of all the indices. The hammer candle is usually a bullish indication, but context and confirmation are required before price patterns or indicators can be traded.
Regarding context, we noted Friday on Twitter that large spinning top candles formed on the weekly charts. The spinning top is a candle with a narrow opening and closing range situated at the center of a candle with large upper and lower wicks.
It represents an attempt by a stock or index to move higher which is followed by failure to hold higher levels, and an attempt to move lower followed by a failure to hold lower levels. The close ultimately returns to and closes in the area where it opened, suggesting basically, indecision.
The market appears, however, to have made a decision, at least, in the early going of Monday’s session.
All the significant highs that were made on the Russell 2000 (RUT) chart, going back to October 2018 have been signaled by an eveningstar candle pattern.
Most readers know what a candlestick pattern is and what it suggests about trader sentiment. The eveningstar is a three day reversal pattern that starts with a large up-day candle, is followed by a narrow opening and closing range”doji” candle, and is completed by a large down-day candle. This sequence suggests a transition in trader sentiment from bullishness, to a neutral stance, to finally bearishness.
Note the eveningstar formations on the daily Russell 2000 chart. They have marked highs in October and November last year and high in February this year. Another eveningstar has formed this week just below horizontal resistance in the 1607 area.
If there is a repeat of the price action that has followed the formation of these patterns in the past, then the small caps are headed lower.
Caterpillar (CAT) is a component of the Dow Jones Industrial Average (DJIA) and, as such, is a good measure of the condition of the traditional industrial sector. It’s machinery is used in mining, agriculture, infrastructure rebuilding, and many other areas of heavy construction.
Another aspect of Caterpillar’s importance is as a measure of the world economy, particularly, the China and emerging market connection. The use of its equipment to power the growth in those developing areas.
So, the direction and momentum of Cat’s stock price is an important analogue to the health of the US industrial market and the world economy.
On the weekly Caterpillar chart, the stock can be seen making a series of higher highs and higher lows this year. The MacD reflects the positive price momentum and trend and Chaikin money flow suggests continued buying interest.
Shares were rejected last month after reaching a downtrend line drawn off an early 2018 high and another important high later in the year. This week the uptrend line that held the advance this year is undergoing a hard test.
The rally this year can be seen in more detail on the daily chart. Note the price action over the last month. A head and shoulders top has formed with the neckline intersecting with the uptrend line, and the 200 day moving average.
On this time frame price momentum as measured by the RSI is declining and money flow is neutral. The $133.50 level appears to be critical support at this point in time.
The measured downside move of the head and shoulders pattern projects a retracement to the $123 area, which would erase a good portion of the 2019 rally.
The S&P 500 index is back to its September 2018 high. It has managed to retrace all of that late year decline. This means that traders who held on and rode out the volatility of the last five months are back to even. The adroit traders who sold near the highs last year and were prescient enough to time the low and re-enter the market, those folks are sitting on a pile of profit. Ironically, both of these traders will look took book their positions at the current highs.
It is basic market dynamics. The harrowed holders are relieved to be back to even, and the agile traders are proud to take profits. Old highs which are potential resistance seems like a good level to close out positions.
Yes, there will be those who may have missed out by selling at the lows. Some of those folks will buy the new highs because of fear of missing any more, but that strategy, at this point in a market cycle, often fails.
Mentioned in the video pinned at the head of this page, we expect the market to pullback, possibly significantly, from its current level. As Jim Cramer explained when RightView Trading was featured, once again, on the “Off the Charts” segment of Mad Money, we also expected this run.
At the time, which was early February this year, most traders were fixated on the 2800 resistance level, but we thought it would be broken and the 2018 highs would be revisited.
But, we also stated at the time that after the return to the new highs there would be a pullback, a potentially deep one that could over time, revisit the December lows. Why? Because of past consolidation patterns after long term rallies.
The weekly logarithmic chart of the NASDAQ Composite shows 12 and 15 month consolidation periods in 2011 and 2015-16 respectively. Currently, the market may only be 9 months into a similar process. This leaves plenty of time for erosion. If new highs are not made, traders and investors will lose confidence. Market sentiment and momentum can shift suddenly.
Time will tell. As we noted on Off the Charts the lines of support and resistance on the S&P 500 index chart should remain valuable technical levels to monitor.
A nearly seven month inverse head and shoulders pattern has formed on the Financial Select Sector SPDR Fund (XLF) weekly chart. This bottoming process began in October last year and was completed by a neckline breakout this month.
The left shoulder formed after the XLF made a low in October in the $25 area, and the low that followed in December marked the head of the formation. A bounce in the beginning of 2019 took the XLF back above the $25 level, where it consolidated and formed the right shoulder.
The $27 neckline was broken earlier this month and the fund price has continued to track higher. This week it is attempting to move above a multiple year downtrend line delineated by the major 2018 highs.
The inverse head and shoulders pattern projects a measured move calculated by taking the height of the pattern and adding it to the breakout level. This projects a target price of $32 or an 18% increase in the fund price.