InvestedCentral
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Houston, we have a problem! We have warned for many weeks that technical and sentiment signs were suggesting rough waters ahead. Well, now the market has found itself in the midst of a tsunami. Sector after sector after sector has broken key moving averages or price support levels. Volume has continually been heavier on the selling than it's been on subsequent rebounds. Many indices/sectors/industries have broken below February 2010 lows and these lows are widely viewed as key support levels in maintaining the uptrend off the March 2009 lows. We share those views.
We are now approaching the historically weak summer period in absolutely horrible technical shape. And sentiment isn't much better. It is on the verge of unbelievable that the S&P 500 "could" print lower daily highs for ten consecutive trading days and the equity only put call average during this ten day period is nearly identical to the ten days prior when the market was moving straight up. Think about that for a minute. Equity options traders are nonchalantly shrugging their shoulders as one of the worst short-term periods in our market history unfolds. If we print a lower high on Tuesday, it will mark the tenth consecutive day of lower highs, only the 19th time it's happened since 1950. Two of those occasions occurred in October 2008 and most of the others fell during the very difficult market period in the 1960s and 1970s. The six decade record of lower daily highs on the S&P 500 sits at 13 consecutive days back in 1966. We're at 9 now, so a record the bulls don't want to see could be equaled on Friday of this upcoming week.
The market doesn't perform like this during bullish periods. It's very, very rare. Therefore, we have to assume it's occurring now because the market is likely to struggle for weeks or months, if not longer. Moves to the downside continue to be impulsive while advances are more corrective. Leaders are finally being destroyed technically. This creates additional problems for the bulls because where does money go in the market? If much of the daily volume is technically-oriented and technical indicators across nearly every stock, sector and index is bearish, why would technical buyers buy? They won't, and that's going to make it even more difficult for the bulls to regain control of this market. We'll need positive divergences to form on daily charts in order to grow more comfortable that an intermediate-term bottom is forming.
We can hear the questions already. They go something like this - Aren't there already positive divergences present across many of our indices and sectors? We have lower prices and a higher MACD? That's the definition of a long-term positive divergence, correct? Our very short answer is NOOOOO!!! This gets into an area that requires a lot of teaching and explaining, and it's much easier to discuss this and demonstrate it in a webinar rather than in an article. Understanding Divergences is our next topic in our continuing monthly Online Traders Series and we encourage you to sign up in order to further understand MACD divergences. It will be one of the most enlightening subjects you'll ever study in technical analysis and we'll provide insights that we believe nearly every technical analyst overlooks.
The lack of fear amongst equity options traders really has us concerned. And there's been little volume in equity options, unlike share volume. We've seen confirming share volume on breakdowns. Normally, after technically-important breakdowns occur, a bigger sense of fear follows, resulting in extreme relative pessimism to mark near-term bottoms. Unfortunately, if the bulls are hoping that the extreme pessimism has kicked in and the market is looking to bottom at current prices because of it, they're likely to be very disappointed. Potentially - and we stress potentially - the market could have a very long way to drop before enough panic hits the equity options market to help print a near-term bottom. More importantly, several key sectors are on the brink of losing major price support zones with little support in sight. If these groups lose price support and there isn't enough panic in the markets, tsunami conditions are present. Does this mean we'll see collapsing markets this week? Of course not. But you'd better realize that such a selloff is definitely a possibility, even on the heels of the selling we've witnessed the last two weeks.
This week we are providing double the usual number of sector and industry charts for members because of the significance of the technical and sentiment indicators we're witnessing. Below is just one example of the potential technical damage we could see this week:
We understand this isn't a pleasant marketFORWARD report this week and, trust us, we don't like authoring it. But we have issued cautious comments for several weeks, even months, suggesting that all of the market weakness and selling was not behind us. It's the reason we have not bought into all the hype that we've heard from media outlets in 2010 about our "recovery". We could see the trouble brewing, we just weren't certain as to when it would hit. It's much more obvious now. The stimulus packages put a bandaid on the real problems under the surface. Until steps are taken to create real jobs (not census workers), the market will likely struggle. We'll allow the technicals, however, and not the fundamental reports (or the talking heads) determine our approach to the market from here.
The bulls can hold out hope for a near-term bounce simply because the past ten days selling has left the market very oversold and shorts could be vulnerable to a short-lived bounce. While a long-term bottom could print from this level, it is very unlikely. Chances are we'll be dealing with lower equity prices over the summer.
Happy trading!
We are now approaching the historically weak summer period in absolutely horrible technical shape. And sentiment isn't much better. It is on the verge of unbelievable that the S&P 500 "could" print lower daily highs for ten consecutive trading days and the equity only put call average during this ten day period is nearly identical to the ten days prior when the market was moving straight up. Think about that for a minute. Equity options traders are nonchalantly shrugging their shoulders as one of the worst short-term periods in our market history unfolds. If we print a lower high on Tuesday, it will mark the tenth consecutive day of lower highs, only the 19th time it's happened since 1950. Two of those occasions occurred in October 2008 and most of the others fell during the very difficult market period in the 1960s and 1970s. The six decade record of lower daily highs on the S&P 500 sits at 13 consecutive days back in 1966. We're at 9 now, so a record the bulls don't want to see could be equaled on Friday of this upcoming week.
The market doesn't perform like this during bullish periods. It's very, very rare. Therefore, we have to assume it's occurring now because the market is likely to struggle for weeks or months, if not longer. Moves to the downside continue to be impulsive while advances are more corrective. Leaders are finally being destroyed technically. This creates additional problems for the bulls because where does money go in the market? If much of the daily volume is technically-oriented and technical indicators across nearly every stock, sector and index is bearish, why would technical buyers buy? They won't, and that's going to make it even more difficult for the bulls to regain control of this market. We'll need positive divergences to form on daily charts in order to grow more comfortable that an intermediate-term bottom is forming.
We can hear the questions already. They go something like this - Aren't there already positive divergences present across many of our indices and sectors? We have lower prices and a higher MACD? That's the definition of a long-term positive divergence, correct? Our very short answer is NOOOOO!!! This gets into an area that requires a lot of teaching and explaining, and it's much easier to discuss this and demonstrate it in a webinar rather than in an article. Understanding Divergences is our next topic in our continuing monthly Online Traders Series and we encourage you to sign up in order to further understand MACD divergences. It will be one of the most enlightening subjects you'll ever study in technical analysis and we'll provide insights that we believe nearly every technical analyst overlooks.
The lack of fear amongst equity options traders really has us concerned. And there's been little volume in equity options, unlike share volume. We've seen confirming share volume on breakdowns. Normally, after technically-important breakdowns occur, a bigger sense of fear follows, resulting in extreme relative pessimism to mark near-term bottoms. Unfortunately, if the bulls are hoping that the extreme pessimism has kicked in and the market is looking to bottom at current prices because of it, they're likely to be very disappointed. Potentially - and we stress potentially - the market could have a very long way to drop before enough panic hits the equity options market to help print a near-term bottom. More importantly, several key sectors are on the brink of losing major price support zones with little support in sight. If these groups lose price support and there isn't enough panic in the markets, tsunami conditions are present. Does this mean we'll see collapsing markets this week? Of course not. But you'd better realize that such a selloff is definitely a possibility, even on the heels of the selling we've witnessed the last two weeks.
This week we are providing double the usual number of sector and industry charts for members because of the significance of the technical and sentiment indicators we're witnessing. Below is just one example of the potential technical damage we could see this week:
We understand this isn't a pleasant marketFORWARD report this week and, trust us, we don't like authoring it. But we have issued cautious comments for several weeks, even months, suggesting that all of the market weakness and selling was not behind us. It's the reason we have not bought into all the hype that we've heard from media outlets in 2010 about our "recovery". We could see the trouble brewing, we just weren't certain as to when it would hit. It's much more obvious now. The stimulus packages put a bandaid on the real problems under the surface. Until steps are taken to create real jobs (not census workers), the market will likely struggle. We'll allow the technicals, however, and not the fundamental reports (or the talking heads) determine our approach to the market from here.
The bulls can hold out hope for a near-term bounce simply because the past ten days selling has left the market very oversold and shorts could be vulnerable to a short-lived bounce. While a long-term bottom could print from this level, it is very unlikely. Chances are we'll be dealing with lower equity prices over the summer.
Happy trading!