Short Term Exhaustion - Pullback Expected After Ending Diagonal

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Currently the stock indexes appear to be in the final stage of this vertical trending move since Dec 28th.  While the expected correction may be brief and lead to new highs for the rally, I believe based on the technical picture that a sharp, but maybe brief pullback is imminent.

The chart of the Russell 2000 etf IWM shows what looks like an ending diagonal chart pattern completed with a very strong bearish divergence on the hourly MACD.  While the Russell 2000 has been the leader, it has yet to make new rally highs in today's session, which may be another mild non-confirmation sign that this strong phase of the move is ending.

The other indexes have a similar appearance at this point.  And the VIX is also not confirming this move higher in stocks, which is typical of short-term exhaustion as well.

The short-term target for the IWM would be to pullback to 88.90 at a minimum.  We will probably see a larger pulback than any in several weeks.  But based on typical technical tendencies, I would expect a move to a yet higher high before a longer lasting intermediate term to long term price peak.

Market Rising on Declining Volume - A Bearish Long Term Signal?

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This chart shows the QQQ Nasdaq 100 etf with volume underneath the price chart.  Notice that the average volume is at the lowest point in over a decade!  Looking back throughout history, it is the norm for volume to expand in bull markets.  However, at over 4 years from the low, we are still seeing declining volume in this case.

I don't think there is any long term bullish interpretation of that.  I think the argument is how bearish that is.  I continue to monitor this index for a head and shoulders top pattern which is nicely formed so far and has successively declining volume into this right shoulder which is textbook.

Again, my suggestion is to recognize the danger for longs here, and place protective stops and to keep an eye on technical set-ups for potentially short-selling at the high of what could be a right shoulder to this topping pattern.

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Also, this is the NYSE.  Notice the similar pattern.  Volume has declined sharply since the March 2009 low and is at the lowest average volume in over a decade.  Again, this is not typical for bull markets and should be a long term red flag.

With the NYSE up over 100% in the last 3.5 years, it would be hard to imagine that there is still much institutional buying power on the sidelines that is yet to be deployed in this bull market.  Add that to the fact that mutual fund cash levels are still hovering near multi-decade lows (courtesy of Sentimentrader.com), I don't think that there is much ability to lift stocks a lot further.

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The daily RSI on SPY closed above 70 today which is the typical overbought level.  However, it will almost always form a bearish divergence when at new highs like this.  So, we will probably see some further upside over the next couple weeks, but it may become more choppy.

US Dollar Vs Euro

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A 4 hour chart of the Euro/USD shows sharp bearish divergence at the recent highs suggesting a multi day pull back in the Euro may have begun.

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The daily chart shows a mild intra wave bearish divergence on the daily stochastics.  Not shown is the MACD which has a classic bearish divergence relative to the late Decemeber highs.

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The weekly chart shows a bearish divergence on the stochastics, suggesting this could be a larger time frame high as well.  Also with price touching the upper bollinger band, it may be set for a top in a major down trend.  Further rallies against the upper bollinger band, would be suggestive of a major uptrend.

Also notable on the chart is that the price is in an area of fibonacci clustered resistance at current levels.  Additionally, there is a potential ABC upwards pattern that could be completing at the current price level.

This is a situation where a trade could be put on with exit of part of the position at the shorter time frame exit signal, and then begin a trailing stop strategy above resistance until the larger time frame exit signal comes.

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The monthly chart of the US Dollar index is shown here with a possible large scale inverted head and shoulders bottom pattern forming.  However, price is well below a possible breakout of the neckline, so there is no confirmation of a completed/valid pattern yet.

The smart money commercial traders in the CoT report are heavily net long the US dollar right now relative to other currencies, suggesting that currency traders be alert to a new major up leg in the US dollar.  The maximum net long position by the smart money in the past has occurred prior to the ultimate bottom in prices forming a classic divergence, which could mean there is more downside here.  But, given that the current signal is at a higher low than the previous signal, it is suggestive of a major uptrend in force and that the smart money views the US dollar value to be low compared to other currencies.

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The daily chart of the US Dollar Index shows a symmetrical triangle in the forming.  Rather than guess at the direction of the breakout, one could wait for a close above or below the contracting boundary lines to increase the probability of successful identification of the new trend direction.

The last point I will note that may be significant (it has often been in the past) is that while stocks have moved to new highs above the September highs, the US dollar has not fallen below its Sept low.  (Typically there is a negative correlation and confirming price action).  The US Dollar Index has made a series of higher lows since the Sept bottom, which if accompanied by a breakout of the symmetrical triangle to the upside could suggest a significant rally for the dollar and a possible early end to the current rally in stocks.

Given historically typical legs up in stocks, it would be common for prices to move up into the mid to high 1600's before experiencing the next major correction.  So that would probably accompany a downside breakout in the current US Dollar chart.

Stock Market Update - Overbought But Uptrending

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The QQQ is still in the middle of its range since the large gap up at new year's.  If the first breakout of the range is to the downside then it may be an ideal long trade set-up on the hourly chart.  If it is to the upside then it may be best to wait for a subsequent hourly chart oversold signal and look to go long.

Notice that while the SP 500 is at new highs (chart below) the QQQ is not, so it is lagging a little, and often that will indicate a resolution to the downside at least briefly.

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The S&P daily chart shows a bullish moving average configuration with 50 day over the 200 day.  So the price trend is clearly up.  The daily ADX study below the chart shows that it is about to move above 20 which is classic for a new trending move, in this case to the upside.

The last such signal was pretty uneventful in Sept.  But in January of last year it was an ideal signal.

The recent CoT data is somewhat mixed, but I will give my interpretation.

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The commercials have reached a lower net short peak than they did in September, with prices right near the September highs in the S&P 500 and Dow.  This is similar to the way the net positions played out at the May and July 2011 tops indicated by the red arrows.  So while they did not sell the recent rally it may indicate that they are basically fully hedged at this point.  Likewise, it indicates that the large speculators didn't buy the rally, but rather used the rally to close out positions and take profits.

The Russell 2000 commercial traders remain near a record net short position indicating that they consider the Russell 2000 to be overvalued and at a risk of decline.

Overall this could be a typical type of divergence at a significant market high.  If not, then a typical pattern would be for the commercials to cover short positions on rising prices if prices continue to push higher.  That often leads to a steady, but low volatility rise in stock prices.

Given the major uptrend in stock prices, it would probably be wise to wait for weekly time frame sell signals to shape up before shorting the indexes.  And if long, a stop below the late December low would be logical based on the price action.  

AAPL Update 1-14-13

AAPL gapped down over 3% this morning, made a new low for its decline since Sept and looks to have broken out of the descending triangle pattern noted in the last post.

The daily MACD has bullish divegence, so this is possibly a terminal type move if we see a quick upside reversal, but until that is proven, I believe the higher odds is that this is a breakout of the descending triangle which will likely push AAPL down to $430 or lower over the next few weeks.

AAPL Descending Triangle

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AAPL looks to be forming a descending triangle which projects a move down to $425 if completed.

The daily chart of AAPL above shows a horizontal support line at roughly $500 where 3 recent swing lows occurred on the price chart.  The lower swing highs over the last few months create a descending triangle formation on the chart.  A close below the lower boundary would trigger the pattern and project a move to about $425 based on textbook projections of the widest leg of the base of the triangle projected down from the breakout point.

Also of note is a large unfilled gap up from earnings in Jan 2012.  The descending triangle projection ends near that gap up, so that area seems to be a likely next target for AAPL if it breaks to lower boundary of the triangle.

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Continue monitoring the Nasdaq for a head and shoulders top formation.  The look and volume pattern is roughly correct at this point.  It would take a close below the neckline (the upsloping line drawn on the chart) to trigger the pattern.  The minimum price projection would put the price back near the Oct-Nov 2011 lows if completed.

It will be interesting to note large trader response to last Wednesday's price jump when this weekend's CoT report comes out.  As of last week's report, the "smart money" is at a record net SHORT position on the Russell 2000 contract, and the major index combination still showed smart money heavily net short near multi year extremes.

The smart money has tried to compress the market between the Sept high and the Nov low.  A break of either price level is likely to lead to a continuation move in the same direction.  If prices on the Dow and S&P 500 move above the Sept high, then it could lead to a rather extended period of short covering by the smart money.  Such occurrences tend to lead to low volatility price advances for several weeks.

Stock Market Update - Exhaustion or Breakout?

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In the last update I had suggested that it was probable to see another push to new rally highs before an ideal topping pattern would complete for a possible extensive move down in stocks.

Obviously we have seen a move to new highs, but in dramatic fashion in conjunction with associated "news" from the fiscal cliff situation.

That move down into that recent swing low has been completely retraced in less time than the decline took to form keeping the price logic objectively up.  So the question is whether this recent pop higher is an exhaustion type move in typical "buy the rumor, sell the news" fashion, or whether it is a real breakout with likely continuation.

From a technical perspective, a very large gap up to a new multi month high seems rather likely to be filled over the next week or two from statistics I have seen.  And as seen in the hourly chart of SPY above the MACD is the most overbought it has been in months and is just starting to cross down into a sell signal.  However there is no divergence on it, suggesting that even if a pullback of some degree occurs soon, the market may need to under go a period of "slowing down" before it is ready to pull back toward that gap up.

There is nothing that clearly invalidates the possibility of the upward pattern completion that I suggested in the previous update.  However, there is no confirmation of any sort that a high is in place at this point.  So from perspective, any move BELOW the 12-31-12 low would be a sign of significant weakness for stocks.  If you think about it, if this pop higher truly shifted the market opinion and cleared the way for a move higher, then any price move back below that pre-news level, would suggest that the news did not really change much.  In other words it may have just been an exhaustion type blip.

The huge drop in volatility the last couple days may be offering an ideal time for purchasing put protection at this point.  I personally am watching the daily MACD and weekly MACD charts on the indexes for a possible shorting opportunity.

On a side note, the NASDAQ seems to still be positioned well to form a head and shoulders top pattern.  I will have more to offer on that after next weekend when I can see the CoT reports that cover large trader response to the recent news and extreme price movement.  If we see the "smart money" selling heavily on the news, then that would suggest a likely failed breakout attempt in stocks here, and a probable lower top in the Nasdaq which could form the right shoulder.

AAPL has been weak relative to the market, which may be a negative for stocks.  Earnings is coming up in a couple weeks, so that could also spark a big price move in AAPL and may give some solid indication for the future direction of stocks.