A Tale of 4 Indices

For some the S&P is the only index that matters.  Others take the mantle for the Q.   Occasionally the NYSE gets thrown into the mix.  When assessing risk tolerance the Russell tends to take the spotlight.  Some will say it's not about the indices, it's all about stocks, then bring up support and resistance levels on the indices and map out price points with little to no sense of irony.  There are times when I vacillate between viewing the indices as useful, actionable information, and times when I think they are not at all useful.


Recently there were two interesting tidbits I came across which I thought were useful and actionable information.  One is from @ukarlewitz on the Twits who posted the following. 

Analysis from @ukarlewitz

Another useful piece of information regarding breaking down market sell offs.  Market Sell Off Analysis from Alpha Architect.

When markets begin to sell off one of the first things I do is put up on a percentage basis where key levels are from the highs.  Knowing the frequencies of sell offs and the probability of them dragging an index down between 5 to 20 percent can help as a guidepost for zones where settling may occur and potential reversals begin to take root.  Upon looking at four heavily followed indices, what I noted is that on two of them, the NYSE and IWM, I have not had to adjust these levels since early 2018 for the NYSE and mid 2018 for the IWM.  Whether this in and of itself is useful or actionable is in the eye of the beholder.

SPY

COMPQ

NYSE

IWM

Weekly Chart 11/02

Lower low established.  With most major indices down ~10-15% this weeks low may be a key pivot establishing whether this is a reflexive bounce or has legs.

COMPQ Weekly

NYSE Weekly

IWM Weekly

SPY Weekly

A Tale of Two Index

While the SP hit a fresh high today and comes within 6 points of its all time high set in 2007, the Russell continues to lag and has gone 11 sessions without making a new high. In addition, after yesterdays 1%+ drop on the index there was follow through to the downside. Over the duration of the move off of the November lows both of these indexes have moved lock-step overall and have tended to dip below the 10MA during the same minor pullbacks until this week.

Russell

SP

Also of note today two ETFs of printed their highest volume over a years time, FAZ and TZA. I take this with a pinch of caution because both had reverse splits so this may have had some influence upon the days trading. The simplest confirmation of today's volume being significant from my perspective would be rising prices.

FAZ YHV

TZA

Looking at the SPY, the pattern over the past three years has been fairly consistent with a market correction in Q2 and usually starting around April. It remains to be seen if this pattern repeats but it's worth keeping in mind.

SPY

SPX and Probable Direction

It's well known there are three directions a market can move: up, down, or sideways.  How it moves and how it gets from point A to point B can have varying behaviors and characteristics and patterns.  Sometimes it's choppy and volatile, and other times smooth and trending, and often in between.  Looking at the SPX today I decided to break down what is now known and what is probable.

The information that is known as of now is that the SPX is in a down trend as defined by a series of lower lows and lower highs.  Additionally it's known that a key pivot low has now held for 6 days and a lower high has now been established as well.  This is basic information that can be witnessed from a chart.  Using this information, the next step is to determine the probable market direction which I admit is somewhat subjective.

The main reason this is subjective is that it's dependent upon one's beliefs of the market and their plan of action.  My prejudice is to trade in an up trending market. This is the market action that I believe gives an edge and is much more judicious when I make mistakes and errors.  So, given that market direction is divisible by 3 and the market is clearly not in an uptrend, I can remove this variable.  It's still too early to tell whether or not there will be a sideways move, but a range bound market can be just as deadly as a down trend --especially in a down trend --so these two stack the odds 66% against.  

SPX

One thing I'm keeping in mind is that if this market breaks to the down side it could renew fast and furious selling.  Each dip has been more severe than the previous and this bounce has brought relief like the last breath before Jaws pulls Chrissie down for good.

Triple Top and Confirmed Down Trend

It wasn't completely clear to me after Tuesday if this was the initial stage of a rally or a short term bounce but after the past two days action there is no longer much doubt.  The SP which looked the strongest through the majority of this pull back and was within range of a new break to a 52-WK high has put in a triple top pattern to close this week and the NASDAQ which was dragging confirmed a down trend.

SP Triple Top

COMP Confirms Down Trend

GMMA Perspective of Correction

Historically corrections of 5% occur on average of 3 times per year. Of the major indexes that I follow, only the NASDAQ-100 pulled back to this level on a closing basis and much of that has been erased with today's 1.41% up move.  Using GMMA charts of a few of the major indexes I follow shows that this has been an orderly pullback and although the major long term moving averages have squeezed, they've yet to roll over to the downside.  

GMMA NDX

GMMA COMP

GMMA RUT

GMMA SP

In general my current bias is still to the upside until the market confirms otherwise.  Besides retail showing sector strength there are a number of charts setting up nicely, something I typically don't see when there is an erosion in the overall market.  The one caveat I've had as of late hast been a breadth signal I use which has been neutral due to a lack of buyers or sellers.  Now that earnings season is gearing up this week I'll be looking to this indicator to support my views that there is a buying opportunity here on a swing term time frame.  Until then I'll take some shots with smaller positions and wider stops.

10 Day Buyng/Selling

Right in the Kisser

The small caps took it on the chin today.  While the SP dipped a modest .29%, the Russell dropped 2.01% like a stone and closed at the days low. This divergence is enough to be suspicious of the sustainability of the current rally.  When looking at the Russell, there was a failure to make a new lower high and now the higher low may be in play, whereas the S&P over the past three days looks like a modest pullback in comparison after a strong two day bounce.  For a broad market rally to sustain itself, the Russell must participate and under current light it looks like it's breaking down as it continues to underperform the S&P.

 
Perhaps this weakness is due to a risk off environment where money is flowing out of the smaller caps and into larger cap stocks as a flight to "safety", or perhaps this is portending of a larger flight out of equities in general. Regardless of the narrative, this is clearly a signal to be very cautious.

Up Trend In Tact

This week started off where Friday left off as selling hit the tape through Wednesday with the Russel taking the brunt of it and breaking the pivot low established on 07/12. Given the Russell's importance, being the first to break the sequence of higher lows and lower highs suggested that the rally was breaking down, however this didn't stick for more than a couple of days and as of today the Russell reclaimed that pivot with a strong 2.43% move.

$RUT

Although the Russell cracked this pivot briefly, the NASDAQ did not and the 07/12 pivot low has now held for 11 days. In addition, the volume on the positive days has been higher on average than the volume on the negative days.

$COMP

Additionally further strength has been shown in the SPX which held its pivot and closed today with a new lower high.

$SPX

On the indexes there has been continued strength evident by the sequence of higher lows and lower highs which is positive. Unfortunately this has not been achieved in a linear manner as of yet and there continues to be volatility and choppiness as the right side of the range is being carved out. With 3-5 up days followed by 3-5 down days with multiple gaps and range bars of 1-2% being the norm, as of now it has been difficult to choose a side –long or short, due to the whiplash nature. There also continues to be a mix of influence upon the market whether it be news from Europe, current weather conditions in the US and the effects of drought, as well as individual stock catalyst through this earnings season. This being said, the action over the past two days furthers the bullish case as the market continues to shrug off bad news and bad earnings.

Divergence

The indexes ended this week with some subtle divergences across the board.

First, the SP established a lower high on a closing basis:

SP 07/20/12

Secondly, the NASDAQ did not:

COMP 07/20/12

Third, the Russell which had a short period where it outperformed the other indexes failed to establish a lower high this week and lagged as well closing the week down 1.18% overall:

Russell 07/20/12

   This underperformance shows up more clearly when compared to the SP:

$RUT:$SPX

Additionally some of the long time IBD darling stocks have taken some clear hits this week as well.

So far a consistent theme has been the indexes getting some traction for 4-5 days before pulling back. Thus far the higher lows have held and as long as they do I'll view this as positive. It's becoming evident this earnings season that there is still some excess to flush out as indicated by the number of stocks that are getting their wings clipped, particularly the old guard IBD type leader stocks that have held their ground the longest. AAPL reports Tuesday and I suspect they'll be anything but stellar so it's my view that market reaction to this will be very important given the divergence that occurred this week during what has thus far been a muted rally.

$COMP

Bottoming Process Continued

On June 11^th I published a post “Bottoming Process” and noted a few of the common technical chart patterns along with a few of the poorer performing Russell 2000 stocks up to that date to be compared to. The primary point of the post was to be aware what components the indexes are comprised of and be aware of whether or not they were suggesting bottoming patterns in accordance to the model. Since the indexes are lagging, burrowing under to the individual stock will get one closer to the actual price action and behavior under the surface.

What I wanted to start this post with is comparing 6 of these charts then and now as a follow up. The premise at the time was that unless these charts began to put in floors and stabilize then the likelihood the market was putting in a bottom was the less probable scenario. Worth keeping in mind as well is that simply because these have floored is not enough, stocks behaving well should be monitored in addition to note topping behavior and a next wave of potential selling.

  

On occasion a market will sell off and put in a sharp V-Shaped bottom, but the more probable scenario is going to be action like that which has been occurring since the June 04 pivot low. Action reminiscent of trying to find one's footing on a sheet of ice as limbs flail akimbo until there is traction and stability. Something that stood out to me when analyzing the NASDAQ chart today is time and factors of it, particular mine. Through observation and empirical evidence I've decided upon a time frame of 5 days in which a stock has to prove itself to me or else I will stop myself out. In keeping with this theme I wondered why in turn I was not analyzing market action based upon this same time frame.

Eventually a market will reach a low that will be “the low” and when that is we can not determine with 100% precision, especially at that moment. But what we can use is time. The longer a low holds, the more probable that becomes the low of the move. So I broke down chunks of 5, 10 and 20 days price action from that low and a key higher low that followed thereafter. The underlying hypothesis for me and one I intend to use from this point forward is that: if it is a low it should be not be breached for a five to ten day period and thereafter any key higher low pivot should follow to confirm. This is just one piece of information however, the second is the pure statistics of market action.

Over the past 84 years there have been 294 pullbacks of 5% or more which averages out to 3.5 per year and of these at least one will be in the magnitude of 10%. A move of 15% occurs 14% of the time and 8.5% of the time a move of over 20% will occur. If a move is going to 15% it obviously has to punch clearly through 10 and this information helps formulate a belief about current market structure and time. Once a market hits 10%, a not uncommon pullback, the chance that it goes much further decreases, therefor the probability there may be a bottom forming increases. So by combining the magnitude of the move in addition to the the length of time a key pivot low goes unbroken can assist in getting on the correct side of the market move much earlier.

Another aspect of time to be aware of is the horizon. A move of 4-6% is a modest pullback and the horizon for the return to uptrend will be shorter than if there is a much more corrosive move of 10-15%. A move of this size will not bounce back swiftly so expectations of markets breaking to new highs rapidly should be muted. These types of moves need a longer span to unwind before commencing the next uptrend.   

Well Everybody Knows

There will always be people with better and more accurate information, and have the ability to process it quicker and act upon it faster than I can. There will also be people who get this information from the inside and sometimes from the bearded mouth himself. We know from documentation that the FED would talk their book to Goldman Sachs which allowed GS to in turn position themselves accordingly. We also know the back pockets of politicians hold a lot of greasy dollars and their not immune to passing off policy information before votes are cast.

We know that there are typically two times when a stock gets downgraded, after it has dropped from $100 to $8 is usually a good time, and the other time is when a stock is clipping new highs; not that the stock is too expensive mind you, it's just that someone else wants it cheaper. This is how the game is played so there's no use crying about it. However, that doesn't mean there isn't something we can do about it and yesterday was a good example of what to pay attention to.

Going into yesterday the major indexes had strong moves of over 1% with many closing near their highs. It looked at the time like constructive action as price action was firming and the higher low was being confirmed. Then the gap down hit the open and the markets began to hemorrhage clipping that higher low and at one point being down as much as 1.5%. Clearly this looked ominous and suggested to me at the time the June 04 pivot low would be in play over the near term. But a funny thing happened.

Buy Buy Buy

Going into the close the buy button was hit and the indexes back tracked and the Russell actually closed higher for the day and near the previous day's close. Now I can't know for sure if someone in the EU was talking their book or not, but if I was Merkel I might want to put on a little hedge position and make sure some were positioned to take advantage of the situation in a manner that was beneficial for Germany (especially after that poor performance!). Knowing this or not is not important to me, but what is important and a valuable lesson from yesterday is improving my awareness of these little nuances when the indexes flip intraday from blood on the streets to just a flesh wound.  It might take me a day later to get the picture, especially when I was too busy watching the German back field get shredded like Parm, but I'm a bit slow at times at times anyways.