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 , thanks to an idea I stole from "Above the Green Line" over at Stockcharts.com, to show the % difference between $SPX and its 250 . 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 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.
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.
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.
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.