Mid-week trading update: This morning started off well for the bears – until oil prices began to rally. I wrote on the weekend that while my inner investor was constructive on stocks, my inner trader still believed that downside risk remained. Those views are unchanged.
Here is where the SPX stands today. The rally was unable to overcome technical resistance earlier in the week at 1950 and at the 50 day moving average (dma). Moreover, the 5-day RSI flashed a sell signal by moving from an overbought reading (above 70) and then falling below 70. Two overnight gaps (shown in yellow) had the potential to get filled as the market weakened. The first gap got filled this morning, but stocks rallied intra-day.
As of the close on Wednesday, breadth readings from IndexIndicators show that the market is still overbought (red dot my estimate), which may serve to limit any short-term upside.
On the other hand, the setup for a Zweig Breadth Thrust buy signal remains in play and the market has until this Friday to move the ZBT Indicator from 0.615 to trigger a buy signal (for full details see Bingo! We have a buy signal!). Readers who want to follow along at home can click on this link for intra-day updates on the progress of this signal.
Prepare for more volatility
My interpretation of these technical cross-currents is traders should be brace for more chop, at least in the short run. Neither the bulls or bears have been able to demonstrate that they can seize control of the tape.
For the bulls, they need to either rally the market sufficiently to either generate a ZBT buy signal or overcome resistance at the 50 dma and 1950. The bears, on the other hand, need to push prices down to at least fill the second gap at 1865-70, or at least alleviate the overbought readings.
Until that battle is resolved, both camps will find directional bets frustrating. My inner trader is still leaning short with a small SPX short position.
Disclosure: Long SPXU
Cam, can we get a quick update on Gold in your next update (this weekend maybe?)? It’s depicted some very strong behavior lately and would like to get your take on it in the micro/broader context.
I can’t say I have a lot of insight into gold, other than to say that it looks a bit extended. Similarly, USD looks like it wants to rally here, which would be negative for gold and other commodities.
Thank you for this mid-week update. Today’s market action was certainly interesting. Earlier in the year someone said 2016 markets will challenge the thrill of roller-coasters; I saw proof of that today.
The % of NDX stocks above their 10 dma was 85% yesterday. Hard to see that going down on today’s rally. Nosebleed territory.
Cam
Really appreciate these updates.
Dear Cam,
thank you very much for valuable update. However I have to say that I agree with Dr. Duru re: OIL vs SPY relation:
Once again, market observers looked to oil to explain the day’s moves in stocks. On a closing basis, oil did seem to drive the action. An intraday view shows a much more nuanced picture. Oil inventories were reported at 10:30am Eastern. Oil spiked higher and then quickly reversed those initial gains. The S&P 500 remained mostly flat through that entire move. As oil took off for good, the S&P 500 also made a more definitive move off its intraday low. From there, the index mainly moved higher into the close whereas oil was much more choppy. There was even a stretch from 1 to 2pm where oil glided downward while the S&P 500 continued higher. In other words, contrary to assumptions, traders cannot automatically look to oil as a guide for trading stocks – at least not based on today’s action. I use United States Oil (USO) as a proxy for intraday oil prices.
For more details see: http://drduru.com/onetwentytwo/
Moreover I think that Urban Carmel is true and that SPY will retest recent highs in max 8 days: 2008 bear market. Each 90% up day close retested intraday. Longest interval was 8 days. https://twitter.com/ukarlewitz/status/702522525721333760
Thank you very much in advance for any comments.
Regards
Petr