CurtisM

$SPX Daily 03/28/2014: Consolidations don't breed rallies.

INDEX:SPX   S&P 500 Index
400 21 12
Well, $SPX             didn't break out of the symmetrical triangle pattern , though it is back inside that pattern and now closer to the apex. So it's going to break out soon, one way or the other. And not much sign of window dressing, though we still have Monday so we'll just have to wait and see how it goes early next week.

On the chart, I have marked in blue previous consolidation phases and as you can see these usually appear prior to some kind of re-pricing lower. After the consolidation in the December/January period, $SPX             dropped around 7%. Now we've entered another consolidation and while history doesn't necessarily have to repeat odds are that it will. Look at the recent daily candles and you will see several with long upper wicks known as topping tails. This means that while the market might rally early in the session, sellers are entering and selling into the rallies which eventually overwhelms buyers. This is exactly what happened on Friday.

Also on the chart, I've set up the PPO, thanks to an idea I stole from "Above the Green Line" over at Stockcharts.com, to show the % difference between $SPX             and its 250 EMA . Back in May of 2013, $SPX             made a new high and was about 12% above its 250EMA. Since then, each new high has come with a lower percentage difference as the rally seems to be running out of gas. This may not mean much in the short term but I think it has longer-term implications.

Take a look at some of the bubble stocks like NFLX             , PCLN             , AMZN             , TSLA             , AMGN             , GILD, FB             , ADBE             , BIDU             SBUX             , or any of the other Nasdaq high flyers that you thought were way over priced. These stocks are now and have been under distribution and some in a big way. Who is selling? Well, it ain't Uncle Ted and & Aunt Alice because retail investors cannot move the market. As SimGlenn pointed out in a comment to one of my previous posts, it's likely hedge funds who are dumping shares of these overpriced darlings.

Of all the sectors out there, there are only a few that are holding the market up at this point: semi conductor, telecom, energy, commodity-related, and agricultural-related stocks . Almost every other sector is either consolidating along with the major indexes or dropping. We lose another key sector, especially the $SOX, and there's no way the market is going up so it's going to be very important to watch $SOX, XLE             , $XTC, & DBA             over the next few days to make sure none of these come under pressure, IMHO.

No one likes these consolidation periods because indicators and oscillators don't give reliable signals. You go sideways long enough and MA's will have bearish crosses that can't be trusted. At some point in the future, we're going to get back into a trend and that trend, whichever direction that happens to be, is likely to dominate market action for quite some time. Until then, be careful and don't let your personal heuristic color your decisions. Instead, wait for the market to show its hand and then go with it.

All IMHO and subject to change without notice.

GL in the week ahead.
2use
3 years ago
Great analysis. I assume that it will go down to 1800 and consolidate there to see if it can push up again. Btw 2011-08 to 2011-10 was a consolidation period also and rallied after that...or one could say that a consolidation breeds a selloff that breeds a rally judging by the 2 previous years.
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CurtisM 2use
3 years ago
2use, yes, first the consolidation, then the pull back, then the rally. If $SPX does in fact pull back before it goes higher, then 1800 wouldn't be hard to reach. A failure at that level, round number support, could mean a retest of the Feb lows around 1740.
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2use CurtisM
3 years ago
In traders eyes that could mean a pull back and a huge weakness of the market, one they haven't seen in more than a year. Awaited - yes. Pleasant - not that much.
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vlad.adrian PRO
3 years ago
Great chart. From what I see, this PPO indicator works great!
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paulyberndt PRO
3 years ago
A couple of thoughts. The Monthly and Weekly charts remain bullish so buyers 1. dont want to pay the prices and looking for better entry. 2. Buyers are profit taking and rotating out of sectors into new ones. The Energy patch and Financials just made new highs both to me saying the market is getting stronger as demand for energy and finance increases. IMHO buyers are sitting underneath waiting for entry which will drive the market even higher 50-100 day SMA areas Not saying we couldnt have a major correction but even if the SP retraced to the 1540 area on the pitchfork monthly the market would still be bullish long term. Also watch the OEX as this is where the institutions sit with positions. You start to see blue chips start to falter we are going alot lower. If it pulls back on a correction the trade is long for re entry.
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2use paulyberndt
3 years ago
True, but a bit far view from my perspective. As we are technical traders looking at weeklies and monthlies is not the major indicator for me My points on your comment are:
1) Biotech and healthcare down - financials and energy up = sector rotation.
2) With this, indexes were down as well, and large caps and blue chips did go down - some on earnings, some on hype. = warranting a possible correction
3) Nasdaq 100 is under 50 DMA, SP and Dow may follow as they usually do.
4) As far as technicals go, if i don't see a sing of a bullish trend - there is none yet. Max i view is weekly charts, and with a grain of salt cause even within the same looking weekly bars things can look differently on daily grain.

I would say its too early to hope for a bull, and for now its a bearish silhouette - i think next week is the one that will tell what is going on, i.e if nasdaq goes lower, its decided bearish. Won't surprise me if on monday due to some news the index falls sharply. I worry on taking a head fake as a bullish sign so i will take two days to confirm the sentiment (and still it may be consolidation and not a bullish trend after that).
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fxtrader66
3 years ago
Great analysis CurtisM!
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paulyberndt PRO
3 years ago
2use I employ the Dr Elder method where he starts his analysis with the next time frame higher to serve to make your tactical decision. Is it 100% not always but it has kept me out of alot of bad trades. Just a thought .
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CurtisM paulyberndt
3 years ago
Thanks for all your comments and thumbs up. Much appreciated.

paulyberndt, I should add XLF to the list of sectors that are not being hit as hard as some of the others, such as retail, so thanks for mentioning that.

Also, and IMHO, it is true that you won't see a correction coming in a weekly or monthly chart. By the time the weekly and monthly charts show a correction, markets could be down considerably. If you look at the most recent 7% correction in the $SPX, it really doesn't show up in the weekly or monthly time frames. It's there, but it doesn't look like much. However, for traders a 7% move down and the subsequent rally provide huge opportunities. I believe traders, as opposed to investors, should start their analysis with the 60min charts and then move to the daily.

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2use CurtisM
3 years ago
I agree. Breakdown is like this
High frequency day trading goes with 1minute, 5 minute, 15 sometimes with one hour
Short term trading - 1hour, 1 day, weekly for a general trend (+DMA)
Long term investing - daily, weekly, month
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SimGlenn
3 years ago
I shorted the SPX again near 1865, but only 1/4 of my previous short position. I will probably add to this position Monday if there is a dubious rally. While the volatility and sideways action is not giving me a clue as to the next direction, I figure I can do some trading and put on some protection since I have a deep long position. The sideways movement has not been for naught. The SPX had serious resistance at 1850 at year end and now that is slowly becoming (weak) support. The multi-year upper channel was 1850 at year-end which accounted for the strong resistance there.

The SPX 1 year upper channel is now near 1925 and will be near 2000 by mid-year. That means this sideways action is building potential for a significant rally toward mid-year. A move down toward 150 DMA in the next month would provide over 200 potential points for that rally. My biggest concern continues to be that the 5 year, 2 1/2 year, and 1 year SPX upper channels have already converged. The 1 year upper channel is now above 5 year trend and is conflicting investors regarding a sustainable trend break to the upside. I believe given the fundamental US economic backdrop, the stage is set for that eventual break-out. It probably will take a move down with the large upside potential I mentioned to ignite the rally.
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2use SimGlenn
3 years ago
Seems reasonable as many cite that prices are a bit ahead of usual valuations. With the uncertainty it is a good period for profit taking and price driving. April may be the hardest month (i.e. smth like June 2013), and maybe stretch it out to another month. A rally still needs grounds for it, so far the US government is not providing a firm ground for this, so i assume next quarter reports are the nearest strongest catalysts
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fxtrader66
3 years ago
The DOW is still trading an old sell setup where it sold off in January. This kind of price action reminds me of a market preparing for a correction. However, will keep an open mind to all possibilities.
snapshot
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2use fxtrader66
3 years ago
Indeed - plus, as they say - how you start a year is how it will be. january was crap, February had a low, march had madness.
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BuboWaveTrader
3 years ago
its gonna brake up in the spring
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BuboWaveTrader
3 years ago
potential false break apex
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RedQueenRace
2 years ago
I've been watching these big rallies fade day after day knowing that this *usually* is not a good sign. Also, the VIX and UVXY refuse to buckle. From February 18th to Friday's close the SPX was up almost 1% yet the VIX is up slightly and UVXY is up around 5% or so. But I have seen stubbornness from the VIX buyers result in them getting crushed a number of times so I don't know if this is a useful indicator.

I don't have a way of continuously monitoring the TRIN but when I spot check it at stockcharts during these sell-offs I do not see readings that definitively indicate distribution to me.While it looks like the rallies are being sold it can also be interpreted as the market absorbing selling from folks who think it has double-topped and believe they are getting out near the highs, as well as sucking in new shorts who are looking at these big sell-offs as weakness. If this is happening would could see another move higher on the back of those shorts, So I definitely agree with your advice to wait for the market to tip its hand.

I will only short this if it becomes overbought and/or the ES makes a blow-off style new high move where it closes strongly at a new high and then gaps and screams up the next morning. Those are almost always a safe short, though one may have to wait a few days as strength like that doesn't just suddenly vanish. On the gap-up day the rally will generally last a couple hours max, though it occasionally goes into lunch.

In the meantime I continue to trade my dividend stocks from the long side, selling those that are overbought and buying those that are oversold. This has allowed me to benefit from these moves while gradually reducing my market exposure over time as more stocks are in overbought states, than oversold, at least in the ones I operate.

Thanks for this post.
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CurtisM RedQueenRace
2 years ago
RQ, good to hear from you. NQ's sold off 31pts into the 4:15 close so they have work to do tomorrow to get back to 3611. Not so bad for YM and ES.

To me today's action was nothing more than end of quarter and end of month window dressing. If it gets legs tomorrow and for the rest of the week, then probably something else.

$SPX now 12pts from 1884 so good chance we'll see another test of that area. Old Wall Street saying, Short double tops, buy triple tops. We break out above 1884 then the chart I put up over the weekend is null and void.

Also, $TRIN chart still on buy but it is not a very strong buy right now. Could change tomorrow, but right now looks weak.

GL
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2use CurtisM
2 years ago
What does your gut feeling tell you about April and this week? :)
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CurtisM 2use
2 years ago
Window dressing. No idea why ES gapped up 5pts at the open of the Sunday night session. Looks like pure manipulation to me.

Let's see what happens tomorrow. We get follow through and 1884 here we come. See my comment to RQ above.
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CurtisM 2use
2 years ago
2use, also look at the chart of QQQ that I put up the other day. Shows Q's going up about another buck before hitting down trend line. Here, I think: https://www.tradingview.com/e/wJpHAeAt/
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