Courtesy of Doug Short.
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The set-up coming into this past week was clean: SPX and NDX exhibited breadth extremes from which they usually bounce and April Opex is a seasonally strong week (post).
In the event, SPX rose nearly 3%. In the process it exhibited a familiar pattern: overnight gaps in the past 4 days accounted 60% of the week’s gain. Cash hours, when liquidity is greatest, was not where the meat of the gains took place. That was even more true for RUT and NDX which only posted cash hour gains during two of the four days.
After a sharp drop and a strong bounce, where does that leave the markets? Let’s run through each of our market indicators.
Trend
Long-story short: trend is a mess. There is still a 1-year uptrend but there is also a 6-week downtrend.
Start with NDX. The positives are that it is still in a larger uptrend channel and its MACD and 13-ema are setting up for bullish cross on further strength. The negatives are that it was the only one of the US indices to trade below its February low, it hasn’t made any net progress in four months, its under its 50-dma and there is a potential head and shoulders top being created.
RUT is not great either. The positives are that it held above its February low and the same MACD and 13-ema bullish cross may take place. The negatives are that it broke its larger uptrend channel and is now back-testing it; it’s below its 50-dma; it hasn’t made any net progress in six months; and it also has a potential head and shoulders pattern.
SPY is the most attractive of these three. Like NDX, SPY is still within it’s larger uptrend channel (good). Like RUT, it has not breached its February low (good). But like both NDX and RUT, it has made lower lows and lower highs in the past several weeks (not good).
In the past two months, SPY has failed to break above 188 and below 183; in the chart below, note that it is in the middle of its volume by price range. Exceeding 187 would amount to a higher high (good) but there is more resistance just above at 188. Failure to exceed 187 would create another lower high (not good) and target the lower end of the range. In other words, what happens near 187 is key in the week ahead.
The sector level is equally messy. None broke their February lows (good). The cyclicals, except energy, all have a pattern of lower highs and lows over the past month (not good); utilities and staples (defensives) have the cleanest uptrends in place. That is generally not encouraging for equities which are driven by cyclical growth.
Ex-US markets are an equal mess. Europe is treading sideways with Australia, but Japan is making new lows. The upside leader is now the most hated market of all: EEM.
Bottomline: trend is not very encouraging. Markets are either digesting the big gains from 2013 or setting up for a larger fall in 2014. We have markers in place to give us a clarifying read in the week ahead.
Breadth
NDX and SPX both hit breadth extremes a week ago, a pattern for a short-term bounce. That started to play out this week and may have further to go. The dominant pattern, however, is for the indices to make a longer base at the low. In other words, those lows should be retested.
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The remainder of the commentary, which includes a number of additional charts, is available on my website here.
(c) Urban Carmel
The Fat Pitch
