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Technical Nuggets: The Heartburn Market

By Joe Duarte on December 5, 2016

The Trump rally remains underwhelming and the Italian “No” vote spawned an overnight rally, but by all indications this market is still not sure about what it’s going to do next. 

In the previous issue of Technical Nuggets I wrote: “the overall tepid technical picture suggests that the post-election rally was just an oversold bounce and that the odds of more selling are above 50%.” And so far nothing has happened that changes my mind.  Indeed, with so many intangibles in the mix, this December could be a time to break out the antacids as the market may just lurch from one event to the other and mostly go nowhere. 

Too Much Greed Still Present

A good market rally often springs from the depths of investors’ despair.  But that’s not what’s going on at this moment.  In fact, investors can’t seem to make up their minds. Two of the crack market sentiment indicators, the CBOE Put/Call ratio and the CNN Greed and Fear Index are at opposite ends of the spectrum.  The former closed at 0.92 on Dec. 2, signaling investor caution, a good thing for the prospects of a rally. The latter had a reading of 71, signaling Greed, a bad thing, which often signals a market top. Similarly confused readings from these and other sentiment indicators in the past have been a prelude to choppy markets that can often grind around for weeks. 

Charts Remain Cautionary

With three weeks of data after the election, there are still many unanswered questions, which is investors are not convinced in their bullish expectations and that a big drop could be on the way.  Perhaps the most troubling indicator is the market’s rolling over after the most recent and rather sedate new high on the S&P 500.

Joe I

Figure 1 – The S & P 500 (SPX)

There are three signs of the market’s health, money, volume, and momentum.  When all three are heading in the same direction, up or down, the trend is considered to be solidly in place.  

The Money Flow Index (MFI) tells us whether money is flowing in or out of the market, but not how much. This is better quantified by the On Balance Volume Indicator (OBV), which I will discuss below.  Currently MFI suggest that money flowing into the market topped out a few days ago and that investors are looking around to see what comes next.

The MACD and MACD Histogram Indicators (middle panel, lower level), measure the market’s momentum. The former gives a buy signal when the red line crosses above the black line and a sell signal when the black line crosses below the red line.  The histogram signals rising momentum when the bars are above the zero line and negative momentum when it crosses below the zero line. Both indicators are signaling potential trend reversals, to the down side, in momentum.

Of the three instruments, volume is the most indicative of investors’ confidence in the current trend.  An excellent way to further measure this volume-related confidence is the On Balance Volume Indicator (OBV, lower panel).  When OBV line is rising, it’s a sign that stocks that are rising in price are getting the largest share of the money going into the market.  This is what makes a bullish trend.  Currently, this indicator is barely off of its recent lows and moving generally sideways, which is a sign of low confidence from the bulls.

A fourth indicator, the shrinking the Bollinger Bands (green line surrounding prices) is suggesting that some type of a decisive move may be coming.  But at this point, as usual it’s difficult to predict the direction, given the divergent picture painted by other signals.

A Market Going Nowhere

The market’s breadth—the number of stocks advancing minus the number of stocks declining – is an excellent way to see what’s happening outside of the indexes.  And the NYSE Advance Decline line (NYAD, upper panel) has improved of late.  Unfortunately, it hasn’t made a new high to confirm the recent all time highs in the S&P 500 and the Russell 2000 indexes, both shown in the lower panel of the chart.  This line topped out in mid September and correctly predicted the pre-election swoon. Its partial recovery isn’t much better than a non-recovery.


Figure 2 – The NYSE Advance Decline Line compared to three major indexes

When the NYAD is compared to the three indexes below, it’s obvious that the culprit for the lack of a livelier advance-decline ratio is due to the very poor performance of the Nasdaq 100 Index (NDX, lowermost panel). This index is the home of Facebook (FB), Alphabet – aka as Google – (GOOGL), (AMZN), and Netflix (NFLX), also known as the FANG stocks. Along with FANG, the rest of the high tech sector has been floundering of late.

Joe II


Have a Bottle of Tums Handy

The month of December tends to be bullish for stocks, especially toward the end.  The current mixed picture provided by neutral to bearish charts with too much optimism in some of the sentiment indicators suggest that this market is likely to return to the choppy sideways, volatile-within-a-trading-range situation that we saw before the election.  The only thing that could change the market’s direction is likely to be some type of external event.  That, given the current times, could mean anything from the Federal Reserve to any number of foreign situations including the Italian referendum, Mr. Trump’s ongoing activities, and even some parting shots from Mr. Obama. 


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