Monthly Archives: November 2014

Black Friday

Happy Black Friday. The OPEC decision to leave oil output unchanged yesterday is having its reverberations throughout world markets this morning. For the S&P 500, the near term direct impact will likely be a drag, given the heavy energy weighting in the index.

The remainder of the S&P sectors have remained surprisingly resilient. As a result, the overall index has maintained movement in the direction of the near term trend originating from the early November inflection point.

S&P 500, 10 minute bars

S&P 500, 10 minute bars

Looking at the 10 minute chart above, we can see two significant resistance levels overhead still loom large in the 2082-2083 range. Below, support levels currently fall around 2069 initially, and further below at 2053. Trading today during the shortened holiday session will be thin, and any major breaks from trend will still be subject to confirmation once normal volume returns next week.

This will be a shorter post today, but we’ll be back next week with a more in depth preview of the coming trading week.

 

Nearing Resistance

On Monday, the S&P 500 broke back out above its recent channel resistance, and has now begun to treat it as new support, almost as if we’ve jumped up into a higher parallel track. We’ll see if the pattern holds; this band resistance-turned-support currently falls around 2067.50. After a positive US GDP read this morning, showing annualized 3rd quarter growth of 3.9%, it looks like this tentative breakout will hold.

S&P 500, 5 minute bars

S&P 500, 5 minute bars

Stepping back a bit, though, its clear on both the 5 minute and 30 minute charts that multi-year resistance (the orange line on the top of the charts), stretching back to the 2010 tops, looms menacingly overhead. I won’t go into too much depth about it now, since we’ll have cause to talk about it in coming days and weeks. No doubt, a retest of this level is a major event, and will yield plenty of insight into how the market will proceed in the near future.

S&P 500, 30 minute bars

S&P 500, 30 minute bars

Looking at the daily chart, we can see the S&P tested this level back in early July, pulled back, traded sideways for a week or so, and promptly retreated. This subsequent selloff took the index very nearly back to the 125 day moving average (a level which has nearly always provided a great buying opportunity, October of this year not withstanding), from which we bounced back.

S&P 500, daily bars

S&P 500, daily bars

The index has yet to retest this level again after July. The big question at this point though is if and when we do retest it, do we get a breakout? The long term rising wedge we’ve moved in since the 2009 lows (represented by the red and orange upward sloping lines on the daily chart) gets narrower and narrower all the time, and a break from this pattern is inevitable at some point. We nearly broke down in October, but long term support held up well, as we can see on the daily. So, if not a break down, perhaps a break out? We won’t know until it happens, and a continuation within this range for the time being is just as likely, frankly, as a break out or break down.

So we’re left to watch and wait. If we fail to get a breakout, it would be a cause to take a cautious stance with your positions. We’ve seen the market fail at this level many times before. A breakout would take us into territory that remains uncharted territory post-financial crisis. It would be an exciting but daunting development.

In the meantime, we’ll trade the tape as it comes. Good luck out there.

 

Outlook for the Coming Week

We’re beginning the week this week at the top of a rising range in which the S&P 500 has traded for nearly the entire month of November. On Friday, we registered a breach to the upside, though it was quickly followed by a retrenchment, back down into the channel. The market, as yet, isn’t happy outside its recent comfort zone.

S&P 500, 3 minute bars

S&P 500, 3 minute bars

The big question for now is whether Friday was a harbinger of a re-acceleration in the pace of the uptrend, an upward inflection in the pace of gains, or if we simply continue in the vein of the November status-quo, still generally moving higher, but at a more modest pace. Each scenario has its own set of trading implications. However, in either case, a significant potential obstacle looms, one that we’ve had little reason to pay attention to until now: major multi-year resistance looms overhead, currently around 2082.

Lets consider the latter case first. I’ve prepared an unusual 10 minute chart below just for this purpose, with recent trend lines projected out into the future for reference (caveat: these are only projections, not predictions, and are subject to revision at any time should market conditions warrant). The rising orange line on top of the chart is the significant multi-year resistance level I mentioned. Should we continue on the current track, we will be meeting it head on between December 5th and 22nd somewhere in the S&P 2090-2100 range.

So in the not too distant future, we will need to consider how we position if and when the market meets resistance and falls, or if we get a breakout. Should the former case above play out and we get an acceleration in the current trend, we could be facing major resistance much sooner. We’ll keep our eyes peeled.

S&P 500, 10 minute bars

S&P 500, 10 minute bars

Looking at the 3 day chart below, its clear that a test of this long term resistance doesn’t necessarily mean a major selloff is near at hand. Its entirely possible we move along higher, directly below it for some time, essentially moving parallel with the longer term trend for a time. That said, at least moderate weakness is inevitable eventually once we test a major resistance line for long enough without breaking out. Not an earth shattering crash, but weakness worth protecting against. In any scenario, the market will be flashing technical indications of a breakdown well in advance of any major downdraft.

S&P 500, 3 day bars

S&P 500, 3 day bars

However, should we get a breakout, there is a lot of room to run before reaching what I call secular, or very long term, resistance. The secular trend channel is represented by the white upward sloping lines on both the monthly and quarterly charts. Secular resistance currently falls around 2500, a very long way off; we haven’t tested this level since 2007. On the downside, secular support comes in around 1000. It would take a crash of epic proportions to test this level any time soon, but we tested it in 2009; crazier things have happened. Realistically, though, both these levels will be out of play for the foreseeable future. The secular range is just too big for these levels to be of any imminent value.

S&P 500, quarterly bars

S&P 500, quarterly bars

These levels can be violated, though. We saw just such an event during the tech bubble in the late 1990’s, culminating in the 2000 peak. By that point, we had move so far above secular resistance, even the 45 month moving average had moved well above it. I consider this event to be an aberration, though, not representative of the broader long term trend.

For now, though, we’ll stay focused on the levels near at hand. Range support and resistance of 2046/2069 and long term resistance at 2082. Good luck out there.

Clearing Obstacles

Locked in a wedge yesterday, the S&P 500 looked ready for a break. Wound up for a break out, or possibly a break down, no one was really expecting much in the way of major catalysts that could help this market clear the technical obstacles in the 2050 range.

S&P 500, 3 minute bars, 2014.11.20

S&P 500, 3 minute bars, 2014.11.20

Sometimes, though, we get reminded of why one should always expect the unexpected. After the Chinese and Europeans both pledged additional monetary stimulus, the markets responded predictably: A knee-jerk pop on the open. What followed was a remarkable orderly sell-off into the afternoon that took the S&P right back down into the channel from whence it came.

S&P 500, 3 minute bars, 2014.11.21

S&P 500, 3 minute bars, 2014.11.21

A false breakout, it would seem. Still, no technical damage apparent. As far as I can tell, its an aberration that may have  very little significance beyond setting a new all-time intraday high mark that will become the bulls-eye target for rallies in the coming days and weeks. Only time will tell.

S&P 500, 3 day bars

S&P 500, 3 day bars

Looking at the 3 day chart, we see a continuing rally that off the October lows that shows no signs of ending. This run in now nine candles straight in the green, which is the 2nd longest stretch since the 2009 lows. How long it can continue is anybody’s guess, but we’re clearly not pushing against any major long term technical resistance. Absent a major shock, this run could potentially make the post-crisis record books (12 consecutive green 3 day candles in March and April 2010!), but its got a ways yet to go until it reaches that goal.

 

BNO, 4 hour bars

BNO, 4 hour bars

Beyond the continued tidal wave of global monetary stimulus, there are a number of potential tailwinds for US equities, most notably oil. Falling prices could potentially buoy the economy at a critical time of year, which may provide further fuel for an end of year rally. Brent crude, as can be seen represented by the etf BNO in the chart above, shows few signs of bottoming out after its precipitous fall. Easily one of the most stunning charts for any major commodity in the markets today, BNO is down around 30% from its highs in June. As a major oil consuming market, this bodes very well for continued US economic growth.

 

Well Defined

Today we’re looking at the charts from a different angle. Below are plots of the S&P from longest to shortest perspective, as opposed to the other way round as I usually present them. They all show a market that has followed sets of well-defined trends for some time. The challenge is just a matter of identifying them, whether they are short, medium or long term, and tracking how they break and shift over time. These points often make for great high percentage trade setups.

Taking a multi-frame perspective, from near term to long term or vice versa, is something I find very helpful in my trading day to day in identifying these setups. It helps me analyze the condition of the index, finding important lines of support and resistance, and put seemingly random day to day moves into a more systematic context. Put simply, it allows the story behind the data to come through more clearly.

S&P 500, daily bars, 2014.11.19

S&P 500, daily bars, 2014.11.19

The daily chart illustrates best just how strong the bull market has been in the past two years.

S&P 500, hourly bars, 2014.11.19

S&P 500, hourly bars, 2014.11.19

On the hourly, note the three phases of the move from the October 15th low that I’ve written about a number of times in recent posts.

S&P 500, 10 minute bars, 2014.11.19

S&P 500, 10 minute bars, 2014.11.19

The most recent phase is still well intact and developing nicely.

S&P 500, 3 minute bars, 2014.11.19

S&P 500, 3 minute bars, 2014.11.19

Right now, despite remaining fundamentally bullish, I’m a little uneasy with how calm this market has been lately, and the frequency with which the market has been testing rising lower trend channel support. Seasonality also favors caution in the coming week; the days leading up to Thanksgiving have a tended to see pullbacks in the past. Black Friday is often a better day to buy stocks than it is to buy discounted merchandise.

History is never gospel, and the trend doesn’t lie, but the listlessness in the market in recent weeks makes now as good a time as any to pare back any long exposure that may be keeping you up at night.

I’ll be back with an update tomorrow.

Correcting Through Time

Good morning. I’ve been on the road for the past few days, but I at least want to get out a quick update. We’ve seen some activity in the past couple days following a week of relative calm. The S&P 500 and most major indices made new intraday and closing highs yesterday. After the pop at the open, the markets climbed higher in an orderly fashion into the afternoon.

The close was surprisingly weak however, with a break below the channel that defined trade for most of the day. While there are no firm conclusions to draw from this EOD weakness, it was nonetheless an anticlimax, which left me somewhat suspicious of how trade might develop the following day.

S&P 500, 1 minute plot

S&P 500, 1 minute plot, 2014.11.18

Not surprisingly, the weakness has carried though into today, bring the S&P 500 back down to support around 2040.

S&P 500, 1 minute plot, 2014.11.19

S&P 500, 1 minute plot, 2014.11.19

The close today becomes an important indicator of the strength of the most recent leg of the move originating from October 15th. We may very well just be looking at normal give and take price action here, but how the market closes today will be a clue as to whether this may or may not be the start of a more significant retracement.

S&P 500, 10 minute plot

S&P 500, 10 minute plot

Looking at the 10 minute chart from yesterday post close, its clear that despite the sideways price action over the past week, the market held up well, and registered no breaks out or down from the bounds of the recent trend path originating November 3rd. This is a healthy and constructive development. For now, there is every indication that the market will trend higher within this channel.

Still, we should remain wary as always for breaks from these levels. Currently, the most significant of these near term levels fall around 2033, 2040 and 2059.

S&P 500, daily plot

S&P 500, daily plot

Beyond those levels, we can refer to the daily chart for major moving average levels to the downside, and multi-year resistance to the upside. Longer term resistance overhead currently falls around 2078, likely not to be in play for the next week or so, but not really that far off either. Below, the 25, 50 and 125 day moving averages currently fall around 1986, 1977 and 1967, respectively; far enough below to be effectively out of play for the time being, but good to keep in mind just in case. One never know what will happen in these market.

We’ll keep you posted as trends continue to develop. Good luck out there.

 

Random, Or Not?

Lots of people get frustrated with markets for seemingly random behavior. The reputation is not completely undeserved. However, sometimes events in the market trace out patterns that seems anything but random.

Case in point: The sell-off and subsequent rebound in October. It takes the cake for symmetry. The pattern traced out in the past two months is truly amazing, an almost perfect “V” shape low, with proportions that almost make it look deliberate, like somebody drew it by hand. Well, maybe not THAT deliberate, but amazingly close, considering this is the stock market.

S&P 500, hourly bars

S&P 500, hourly bars

Maybe it is just random. Maybe it is just coincidence. Its striking nonetheless. What is also striking is how the market bounced off of the long term lower channel boundary (the lightly upward sloping red line on the bottom of the chart) after violating it, almost like it was a trampoline. This is the multi-year rising lower trend-line that goes all the way back to the 2009 and 2011 lows. This was an important level to hold; the fact that it did hold was both a very bullish signal, and a fantastic early indicator of a buyable bottom after the scary decline in early October.

Its also a vindication of the technical approach to stock market analysis, particularly for indices. Indices and asset classes that move based more on macro-level, systematic drivers, such as growth, interest rates and trade flows, lend themselves to technical analysis much more so than individual stocks, which involve more individual business risk. Its the systematic price drivers that technicals help model, and there’s decades of research to back this up. Basically, indices and macro level assets do tend to behave in certain ways at technically identifiable levels.

This is far from breaking news. Still, when you see it working in action like we did in October, its worth mention. It never fails to blow me away.