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Technical Nuggets: Stock Market Meanders as Fed Panders

By Joe Duarte on May 23, 2016

Stocks struggled last week as several Fed governors suggested that more interest rate increases are possible in 2016.  One went so far as to imply that a rate hike in June is plausible.  We think that if the Fed analyzes price charts, they may have second thoughts and here’s why: The S&P 500 (SPX) topped out on May 21, 2015 at 2130.82, and has since failed five times to rise above that key chart point.  This lack of a breakout to new highs has coincided with the Federal Reserve’s ending the third round of its quantitative easing (QE3) maneuvers in October 2014 followed by its first interest rate increase in eight years on December 16, 2016.  The subsequent lack of monetary stimulus and other factors have led to an uneven economy over the ensuing six months. 

SPX 2016 05 20

Figure 1 – The S&P 500 Index (SPX) seems to be rolling over again as it nears the 2100 area.

Over the past twelve months the stock market has been frustrating for investors and traders alike.  This is what the charts are telling us:

  • SPX is stuck in a trading range from 1843 to 2130.
  • SPX is above the 200-day moving average (red line), a positive since the 200-day moving average divides long term up and down trends. Prices above the 200-day average are considered bullish.
  • SPX is struggling to rise above the 20-day moving average (green dotted line) and the 50-day moving average (blue line) simultaneously. The 20-day moving average smooths out the short term price trend (days to weeks) and the 50-day line is an intermediate day indicator (weeks to months). When more than one important chart level converge, the price area becomes very important as a resistance or support level (areas that provide end points to prices).  If SPX can get above this 2130 resistance point it would be a big positive. A failure here would likely turn into a significant price decline.
  • The chart looks negative after the recent failure to rise above 2100 convincingly in April. Five failures by SPX in this price area over the last twelve months mark a major resistance point. A decisive break above this area would be a signal that higher stock prices are coming.
  • Three widely followed market momentum oscillators – the RSI, or Relative Strength Index (upper chart panel), the MACD (Moving Average Convergence/Divergence) and its histogram (red and black lines in the lower chart panel) – are neutral, signaling investor indecision. Price oscillators signal when the market is overbought (has risen for too long a period) or oversold (has fallen for too long a period). 
  • Bollinger Bands (which measure price volatility) are trending down and not shrinking or expanding (green lines above and below prices). When the bands shrink around prices it’s a signal that a meaningful move is near.  Currently they are indicating that the current down trend is likely to stay in place. Note how the tightening of the bands in February preceded the rally that is now in question.

To summarize, the stock market is stuck in a rut with a downward bias until new information emerges that changes investor sentiment.  

Sector Spotlight: Biotech

The Nasdaq Biotech Index (NBI) chart shows biotech in a trading range between 2030-3050.  The key difference between the NBI and SPX charts is that the Bollinger Bands on the NBI chart are shrinking, predicting a big move ahead. The direction is uncertain.  Notice how tightening of the bands around prices in March, April, and May led to significant price moves in NBI.

NBI 2016 05 20

Figure 2 – The Nasdaq Biotech Index (NBI) could rally in the short term.

The biotech chart looks better than that of the S&P 500 as the RSI, MACD, and MACD histogram oscillators are all positive. The key here is whether NBI can rise convincingly above 2800 and then make its way back to the 3050 area.  All the same, any rally in biotech could be short lived, as resistance at 200-day moving average looms.

What’s the bottom line? The technical picture of the stock is nowhere near rosy. Caution, individual stock picking and patience remain the key to success in this market.

Joe Duarte

P.S.  I write about biotechnology and technology stocks for Investing in Breakthrough Tech Profits .  This is the initial issue of Technical Nuggets.  Our goal is to deliver a useful snapshot of the market’s current technical status and useful sector related information.  Expect to see Technical Nuggets in this space the second and fourth week of every month. Feel free to use the Stock Talk feature beneath this article if you have any questions about it. Thank you.

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