Market Internals Degrade

As discussed on www.financialsense.com, it is not all bright and clear in the market. Internals are crumbling. It is important to remember that just because internals are crumbling, it does not imply that a correction or worse is dead ahead. The internals can improve or stay the same as the market continues to advance. But internals are painting a different picture than the market averages, and this is something to which you should pay close attention.

The Nasdaq is a market leader; yet the percentage of stocks listed on the Nasdaq that are above the 50 day moving average is just below 39%. This is down from about 78% in mid September. The market advances  while this internal is making lower lows and lower highs.

The Dow stocks have led along with the the most liquid and highest capitalized Nasdaq stocks. 83.3 percent of the 30 Dow stocks are above the 50-day moving average, and they are all above the 150-day moving average.

As traders plunge their money into the largest and most liquid stocks, the small cap stocks are showing weakness. While the Dow makes a new high, the small cap index is making a lower low and a lower high. This appears to be in a correction.

If and when the equity market corrects, it is likely that the gold market will correct because they are tracking each other on a daily basis. Keep an eye on silver and gold mining stocks where recent new highs are dead ahead; as are failures at or near the new high.

Look at the October highs for both gold mining stocks and silver.

And Speaking of Head and Shoulders...

We just get done talking about a bearish head and shoulders reversal in the weeks to months time frame, and what happens? We get another head and shoulders reversal. This time it is in the months to years timeframe and it is an inverse head and shoulders which is bullish. This one may prove out to be a reversal of the long term bear market. But again, the pattern is not completed until it is a completed pattern. Given the tremendous percentage distance between the head and the neckline, a break of the neckline to the upside projects to about 1350 on the S&P 500 index. (This is based on the application of the head and shoulders projection principle.)The rules of the head and shoulders bottom include that if the neckline is broken, it must be done decisively and (most importantly) it must be on very high volume. This gives the analyst some context. A failure of the neckline invalidates the pattern at least until the neckline is broken to the upside. An apparant break of the neckline on low volume would fool a lot of analysts and set up the selling opportunity of the year. However, a break of the neckline on high volume creates a most profitable situation for stock market bulls thereby resulting in a buying or add-to-long-position opportunity.

S&P Head and Shoulders - Not Completed Redux

This is a critical moment for the S&P 500 index in that a head and shoulders reversal pattern has been formed but still it has not been completed. Yesterday, the index whip-sawed overly aggressive bears. Note the high volume candlestick of yesterday (Wednesday), perhaps confirming the neckline of the not-completed pattern as support.

The action here is very compelling for technical analysts. And in the longer term there are a wealth of market internals which suggest that the HAS (formed, not completed) is going to be a reversal pattern and not a continuation. The perfect scenario for long term market bears would be a weak rally that would carry the S&P to the 910 to 920 area, which would be the perfect low risk entry point for entering bearish positions. A close below Wednesday's lows, however, should be respected as an important indicator of a completed HAS reversal pattern with a price objective of 818 or even less. In as much as important financial stocks report quarterly results over the next few trading days, that would be the likely backdrop for a weak rally. They are going to tell the best story they can to excite the market. Whether they are successful will show on the chart below over the next week.

S&P Head and Shoulders (not completed)

The pattern in the S&P looks to be forming a head-and-shoulders (HAS) reversal. Some words of caution are in order.  First the pattern is not a completed pattern until the pattern is completed. If the pattern breaks decisively below 880 on the downside, that would suggest a price objective of about 813 or even less. But until that happens, the HAS has not been completed. Second, sometimes the HAS is a continuation pattern. And if it is, that will catch a lot of overly aggressive bears on the wrong side of the trade.

The most intelligent guess that I could make at this time is that a short term rally back to the 920 area is in order. But given the shorter term duration of the right versus the left shoulder, a decisive break below the neckline would be especially bearish and suggest a lower price objective than 813.

It is important to remember that the pattern is not a completed pattern until the pattern is completed.

Are Your Hands Strong?

It is important to manage position size. I think I'm right about Natural Gas, but as another higher low is put in, the market seems to be disagreeing in the short term. Right about now, there are a lot of folks who are right and going to lose money anyway because they will have to stop out of a position in natural gas. Of course, this beats the alternative of being wrong and having a position that is too big. This would be the worst of both worlds and not one that you ever want to be in.

Here's the Natural Gas to Oil Ratio chart again. This is positively out of whack.

For early and safe entry from the bear side, check out the chart of Capital One (COF). Have a great holiday, and I'll be back Sunday evening.

Martin

S&P Action Likely to Show Market Confidence

After putting out a "sell" signal on the point-and-figure chart about a week ago, the S&P 500 has rallied back to resistance. I think that on this holiday week, with the market showing confidence, the S&P 500 will probably meander back into the 925 to 950 region on low volume. This confidence could even remain throughout the summer. Big volume will be the determining factor if and when it arrives. But in the short term, it would appear that 2005-2006 rules apply. These rules? No corrections of more than about 7%, all of relatively short term duration. It could change in the future; but until it does, this "trend" deserves the benefit of the doubt.

Particularly typical of the market in recent weeks is the action in (you guessed it) Goldman Sachs, where the stock is now approaching $150 a share on light volumes not seen in well over 3 months. Is there anyone left to buy?

Another buying opportunity for natural gas too. By buying opportunity, I mean a price at which there is value, and technically, there are prices to set logical stop losses.

Financials ETF - The Time is Now

The financials select ETF (symbol) XLF has rallied to just above its 40-week simple moving average. Still, as can be seen in the chart below, the XLF remains steeped in a long term bear market. It made its recent weekly high about eight (8) weeks ago. Since that time, it has losts its momentum, and volume, and a bit of its relative performance versus the S&P 500. Yet it has given up only about 8% off its high price.

The daily action shows how XLF, after making a high at 13.08 has put out a series of lower highs and higher lows thereby forming a trianglular pattern - perhaps indicating some indecision on the part of the stock. The short term action (over the next few weeks) will determine whether the long term bear market will prevail; or whether the financials are at the beginning of a new bull market. Along with the price action, look for high volume clues.