The Apple chart shows signs of increased selling pressure with a steady decline in On Balance Volume (OBV) the last 2-3 months. OBV peaked in mid April, formed a lower high in late June and moved to new lows in July. With Apple (AAPL) hitting a new high in late June, a large bearish divergence is taking shape in OBV. Also notice the volume on down days is consistently higher than volume on up days.
GOLD AND DOLLAR DROP TOGETHER… I pointed out last Thursday the simultaneous drop in gold and the dollar, and the fact that both markets had fallen below their 50-day moving averages. I suggested that since both had risen together, it made sense that they should correct together. And they continue to do so. Chart 1 shows the Gold Trust (GLD) down the equivalent of $16 today and heading toward potential chart support near 114. That support is marked by the mid-May low, the January peak, and a five-month rising trendline. Chart 2 shows the Bullish Dollar ETF (UUP) falling again today and nearing a test of a rising seven-month support line. So far, both of these pullbacks appear to be corrective in nature. Put into a wider intermarket picture, it now appears that their drop last Thursday set the stage for today’s bounce in global stocks and commodities.
DOLLAR PULLBACK BOOSTS COMMODITIES… The pullback in the dollar is giving a boost to commodities (outside of gold). Chart 3 shows the rebound in the DB Commodities Tracking Fund (DBC) from potential support along its May low. Chart patterns for crude oil (USO) and Copper (JJC) look very similar. At this point, the bounce appears to be short-term in nature and well within the confines of a downtrend. To reverse that downtrend, the DBC would have to exceed its 50-day average and June high. It’s a long ways from doing that. Stocks are rebounding as well.
FOREIGN ETFS LEAD REBOUND… Another side-effect of the falling dollar is that foreign stock markets are leading the global bounce. Chart 4 shows EAFE iShares (EFA) gapping higher and remaining above their May/June lows (unlike the U.S. market which broke those lows). That sets up a short-term positive divergence between foreign ETFs and U.S. stocks. The main reason for that can be seen below the chart. The blue line is a relative strength ratio of the EFA divided by the S&P 500. After underperforming during the first half of the year, foreign stocks are doing a bit better than the U.S. That’s because of the dollar (green line). A rising dollar (first half of the year) weakens foreign ETFs relative to the U.S. A falling dollar (July) has the opposite effect. Here again, today’s bounce appears corrective in nature. The EFA would have to exceed its June peak to change that.
50 AND 200-DAY EMA LINES… Although most observers compare the simple (arithmetic) 50- and 200-day averages, the EMA combination appears to give more reliable signals. The two lines in Chart 6 show the 50- and 200-day EMA combination since 1998. Only four major signals have been given in the last decade, which include a 2000 sell, a 2003 buy, a late 2007 sell, and a summer 2009 buy (see circles). The 50-200 day EMA trend is still up, but just barely.
By John Murphy
After a steep decline the last two weeks, stocks are deeply oversold and pessimism is running rampant. A story on Bob Prechter’s “take cover” forecast is the “most emailed” article in the New York Times. The 50-day SMA closed below the 200-day SMA in the S&P 500 for a dead cross, which has been covered extensively in the financial press. Statistical evidence suggests that a dead cross is neutral at worst. There is also the head-and-shoulders pattern, which has been covered quite extensively as well. An extended decline may certainly be upon us, but pessimism seems to be getting extreme and this could give way to a bounce. The charts below show the percentage of NYSE and Nasdaq stocks above their 50-day moving average dipping into oversold territory.
On the daily chart, SPY is down around 10% from its 21-June high. The decline over the last two weeks is pretty much straight down. Nine down days (red candlesticks) and one up day (black candlestick). This too is extreme on the downside. A hammer formed on Thursday, but the SPY fell back on Friday. Nevertheless, the ETF has a large falling wedge working and the 100-104 area marks a 50-62% retracement of the July-April advance, which was the last leg up. This retracement zone marks a potential support zone that could evolve into a reversal. RSI is trading at 30.38, which is oversold for all intents and purposes. At the very least, the time to be short is growing, well, short. Betting on a bounce is still for bottom pickers.
On the 30-minute chart, SPY established resistance at 103.5 with Thursday’s high (the hammer high). The ETF attempted a bounce late Friday, but fell back by the close. A break above this level would be the first sign of resilience. Picking the next resistance level is difficult so I am showing the Fibonacci Retracements Tool for potential targets. As noted before, the first bounce may bring out second chance sellers and result in a test of the prior low or a pullback in the form of a falling flag or wedge. Ideally, a falling flag/wedge would provide an identifiable breakout signal to play a second bounce. Mr Market is not always ideal though.
Key Economic Reports:
Tue – Jul 06 – 10:00 – ISM Services
Wed – Jul 07 – 10:30 – Crude Inventories
Thu – Jul 08 – 07:00 – Euro Central Bank policy statement
Wed – Jul 08 – 08:30 – Initial Claims
Charts of Interest: ATVI, EMR, F, IP, JCI, LUB, MAN
With a sharp decline the last two weeks, all indicators are in bear mode. The indicator summary turned negative last Friday (-4) and moved to -10 this week. Oversold conditions and excessive bearish sentiment are the only positives in the stock market right now. This may produce an oversold bounce, but much more is needed to turn the indicator summary positive again. Namely, the AD Lines, AD Volume Lines and major index ETFs established important resistance levels with their mid June highs. A break above these levels is needed to reverse the current downtrends. Indicator details after the jump.
This table is designed to offer an objective look at current market conditions. It does not aim to pick tops or bottoms. Instead, it seeks to identify noticeable shifts in buying and selling pressure. With 10 indicator groups, the medium-term evidence is unlikely to change drastically overnight. Previous turns include: Positive on 11-Sept. Negative on 5-February. Positive on 5-March. Negative on 11-June. Positive on 18-June. Negative on 24-June.
Nasdaq AD Line
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Nasdaq AD Volume Line
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Nasdaq Net New Highs
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Nasdaq McClellan Summation Index and Oscillator
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NYSE AD Line
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NYSE AD Volume Line
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NYSE Net New Highs
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NYSE McClellan Summation Index and Oscillator
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