Monthly Archives: December 2014

Outlook For The Coming Week

The S&P 500 is at an interesting technical juncture, having crossed back into a major resistance band I’ve taken to calling “the Death Zone” because of the frequency with which rallies peter out in this range. The upper end of this band currently falls around 2100, but is rising fast.

S&P 500, 10 minute bars

S&P 500, 10 minute bars

S&P 500, 30 minute bars

S&P 500, 30 minute bars

S&P 500, daily bars

S&P 500, daily bars

I wouldn’t expect a breakout from this resistance range too soon, despite the speed of the bounce last week. The market is likely to run into major issues moving above 2100-2110 before the new year.

That said, anything is possible, and a breakout from the post 2009 wedge is inevitable, eventually. It’s just a matter of when. For now, though, we can enjoy the rally.

Santa’s Sleigh

The S&P 500 has staged a very sharp, very rapid snapback rally after the Fed rate decision. It’s possible this could be the start of the highly anticipated Santa Claus rally.

S&P 500, daily bars

S&P 500, daily bars

S&P 500, 30 minute bars

S&P 500, 30 minute bars

S&P 500, 5 minute bars

S&P 500, 5 minute bars

It only remains to be seen that this move can develop into an orderly consistent trend channel that had the potential for follow through to the upside. That remains to be seen. Weakness in oil, geopolitical risks and economic deceleration in Europe, China and Japan all have the potential to send Santa’s sleigh right back to the north pole.

For now, though, we can sit back and enjoy the ride, wild as it may be. This is a great time seasonally to be long. Good luck out there.

Outlook For Fed Day

Happy Fed Day. Markets have been rocky since peaking just after Thanksgiving from overstretched levels. Oil and the energy complex have been leading the market lower of late. Despite a few violent spikes to the upside that quickly dissipated, the market has trended lower with consistency, forming a well defined downward trending channel.

S&P 500, 3 minute bars

S&P 500, 3 minute bars

In retrospect, which is always 20/20 of course, the distinct head and shoulders formation in the S&P in the first week of December proved to be a timely indicator of an impending breakdown. The break below the lower orange trendline on December 9th provided confirmation of the breakdown which was unable to recover and move above the support turned new resistance level.

S&P 500, 10 minute bars

S&P 500, 10 minute bars

As the downward move has developed, its taken us back below the psychologically important 2000 level.

S&P 500, hourly bars

S&P 500, hourly bars

2000 was significant not only for its big round number value, but also as the current level of the 50 day moving average. As of the close of trade yesterday, the 125 day moving average at 1984.50 has been broken as well, opening up the way to the closely watched 200 day moving average at 1947.

S&P 500, daily bars

S&P 500, daily bars

While oil and the Russian ruble will be closely watched in coming trade, the most significant market moving event will be the Fed rate decision and Fed Chair Janet Yellen’s first press conference since September. The market will be looking for clues as regards the highly anticipated rate hike. While no major Fed action is anticipated, the language of the announcements and market’s perception of Fed forward guidance still remain unknown and a major wild card. Its impossible to know how the markets will react.

In the meantime, we have to watch our levels and wait. Good luck out there.

Breaking Down

In recent days, markets have seen the energy driven sell off spread out into a more broad based selling pressure. After reaching a technically stretched area of the post crisis rising range (the “Death Zone” as I referred to it before), the S&P 500 was left in a precarious position, ripe for a pullback, and vulnerable to external shocks, which the sell off in oil provided. Since then, equities have been breaking down.

On the 3 minute chart, its clear that a nascent downtrend has been developing, which has pulled us down significantly from recent highs.

S&P 500, 3 minute bars

S&P 500, 3 minute bars

The selling intensified mid-morning, breaking below developing support, now turned resistance.

S&P 500, 30 minute bars

S&P 500, 30 minute bars

From the perspective of the daily chart, the nearest downside support is the 50 day moving average, coming in around 2000, and below that, the 125 day moving average around 1984. Both of these levels are now in play on a continuation of today’s breakdown. These are levels that have been significant for the past few years, but haven’t been tested outright since the September-October sell off, when after repeated tests, they finally gave way.

S&P 500, daily bars

S&P 500, daily bars

The tail wagging the SPX dog lately has of course been the energy sector, represented below by the XLE. The sell off in the crude oil complex shows no signs technically yet of forming a bottom, and the breakdown below $60 on WTI crude has opened up a whole new round of selling pressure that could potentially take it below the $50 mark. The bearish supply/demand dynamics in the market are being compounded by persistent US dollar strength, and until those conditions abate, any calls for a bottom in oil should be treated with skepticism.

XLE, 30 minute bars

XLE, 30 minute bars

So, to summarize the weakness in markets, we have:

  1. Breakdowns in the major equity benchmarks
  2. Utilities outperforming other sectors
  3. Weak commodity markets generally, led by crashing oil
  4. Strength in US treasuries, Bunds, Gilts, JGBs, etc…
  5. Strength in the US dollar vs nearly every other major currency.

Despite this bearish backdrop for stocks and risk assets generally, December is usually a strong seasonal period for risk.  We may still see a Santa Claus rally, though the odds are falling dramatically. Should the market continue to exhibit weakness though the balance of the year, it would bode very poorly for 2015.

 

In The Death Zone

Happy jobs day. On Mt Everest, there is a area of the mountain near the top that reaches above the 8000 meter level. At elevations this high, the air is so thin, it becomes difficult to breathe, difficult to move, and very dangerous.  For mountaineers, everything slows down dramatically; progress towards the summit is arduous and painstaking, leading many to turn back before reaching the top. Many only reach the top with the aid of supplemental oxygen. Time in this zone is of the essence; summiting the mountain must be done as early as possible as getting caught overnight above 8000m is virtually a death sentence.

For this reason, this part of the mountain has been called the “Death Zone,” not because everyone who enters it dies, but because the vast majority of deaths that occur on Mt Everest occur there. Entering these rarefied levels requires heavy preparation and extreme caution.

What does all this have to do with the S&P? Because in recent weeks, if the post crisis upward trading range on the S&P 500 were Mt Everest, then we are currently in the death zone.

S&P 500, 3 minute bars

S&P 500, 3 minute bars

Looking at the 3 minute chart, it is clear that we have slowed down noticeably. We may be undergoing a shift to another lesser sloping trend channel (from the green channel to the white), which would be the fourth such downshift since the October 15 low. Until such a shift is confirmed, though, we should treat the 2060-2080 range as our operative support and resistance range, and be on the lookout for breaks though either, adjusting positions accordingly.

S&P 500, 10 minute bars

S&P 500, 10 minute bars

This new channel runs nearly parallel to the longer term trend (orange on the 10 minute chart), just beneath it, rising at a rate of roughly half an S&P point per day. We may see trend development along this path, but it may also be transitory. Only time will tell; we will continue to monitor the market at this junction to get an idea of which path we’re headed down.

S&P 500, hourly bars

S&P 500, hourly bars

What is clear from the hourly chart is that the market slowed down dramatically once we passed into the “Death Zone” range (between the orange lines) on November 6th. We’ve moved in fits and starts; there were a few noticeable pops, but typically followed by selling pressure that kept any acceleration in check.

S&P 500, daily bars

S&P 500, daily bars

Stepping back to the daily chart, we can see at least 4 instances in the past couple years of the market crossing into this range, trading parallel with it briefly, though for nearly two months in June-July of this year, but then pulling back sharply. Moves into this region tend to be brief, and followed by sharp pullbacks.

S&P 500, 3 day bars

S&P 500, 3 day bars

Looking at the 3 day chart, we see that this range proved to be insurmountable resistance as far back as 2010 and 2011 as well. There is certainly a real possibility that this time could be different, and that we could be on the cusp of a major sustained breakout from the post crisis “wedge” between the red and orange lines on the chart. The range is getting tighter and tighter all the time. The lower end held quite well as support quite well in October, which may suggest a resolution of this long term range to the upside.

I would urge caution, however. There is no reason to give give this hypothesis the benefit of any doubt. I think the risk of a pullback from these levels, while not imminent, is real and traders should approach long positions with great care. It will be difficult for the market to make any large moves to the upside from here. Even good economic news may produce tepid rallies, and possibly result in selling pressure. A case in point is the Jobs Report this morning, which reported a blowout 321K jobs added for November, far exceeding the 230K expected, yet the futures point to a nearly flat open.

While we may not selloff significantly for some time, we can expect, like climbers in the Mt Everest Death Zone, slow going from here, barring a major breakout. Move up your stops if you have profits, and keep an eye out for breaks either out or down. Good luck out there.

Disclosure: I remain long the S&P through UPRO, though with a half position.