Market Report 3/21/16

The S&P 500 has had a significant rally off the February low of 1810 and closed last week at 2050. That’s 240 points or +13% off the low print of this cycle. The current trajectory of the move is unsustainable and mark my words – it ends soon.

Keep in mind that down near the lows I was one of few contrarians that expected a rally and posted this chart here at the time. If you review this years weekly posts you’ll find we had a good handle on things all along the way up, including this chart that I posted last week.

See the upper trendline and the little circle at the top of last weeks chart? That’s essentially where the market closed this past week.

Now of course I had no way of knowing it would actually make it up there, it was just an observation based on the upper trendline we’ve been watching for some time. Recall the prior week (ahead of the Fed) the market closed right at the major inflection point around 2020 where the lower downward-sloping trendline met the 200-day moving average and all the other “items” converged at that level. But the Fed announcement kicked off “another leg” to the current rally which has pushed it up to the area of the upper trendline.

So what happens next?

First let’s look at where we are and you’ll notice I removed the “inflection point” trendline and added another upper trendline. (click image for full-size)

SPX_D_3202016

There’s still just a little room to the upside until the price actually meets the first downward-sloping trendline. We have to assume that’s a significant point of overhead resistance and the market might get turned back there (here).

Now that the Fed announcement is out of the way and we just had quadruple-witching options expiration day Friday, the possibility exists that the current move has run it’s course and we start to see signs of that this week.

But notice the new items I added to the chart.

As you know I’ve been using the August-October 2015 price action as an analog for some time now and I drew a new “rallied back to where it started” zone across that time period. I’ve added that same zone to the current pattern. You’ll notice last time it overshot just a little bit and that could happen again.

I’ll go over all this in a lot more detail on the shows this week, but I want to state something emphatically right now – write this down.

The current rally is nearing the end of it’s run. As I noted on the chart, the current trajectory is unsustainable and if this were a baseball game, we’d be in the 7th or 8th inning (maybe the 9th).

It all depends on how bad they want to squeeze the shorts and kill off the last of the remaining bears.

I saw “the most confident market technician in the world” Richard Ross on TV last week saying you have to be short with a stop at 2070 and it made me think that they might be gunning for that “rallied back to where it started” zone to take guys like him out. Heck they might be able to rally it back to that new upper trendline I drew, which happens to come close to that all-important 2100 level from last year.

(in 2015 the market crossed the 2100 level like 65 times as it traded sideways for months – it was the proverbial “permanently high plateau”)

If you still have your pen in your hand, write this down too. The current rally is long-in-the-tooth, stretched and will be ending at any time now. It may be days, it may be at the end of the month which is 9 trading days from now.

I can point out the important technical levels and indicators but i don’t have a crystal ball so I can’t be certain exactly how it plays out. But the good news is that I know what to watch for that will tell us the rally has ended.

1) watch for a break of that steep rising trendline I drew up from the lows
2) watch for a close below the 9-ema
3) watch for the price to drop below the 17/43 ema’s on the 60-minute timeframe and the 17 to cross below the 43

Until these things happen, as I noted on the chart – the current trend is up. Simple as that.

I’ve mentioned here in the past how I evaluate the technicals, sentiment and news cycle, which all seem to run in sync at certain times. The market starts an up cycle like we’ve seen and the technicals improve as the sentiment starts turning up. The “Fear and Greed index” over at CNN Money has gone from 20 to 80 as the market moved up. Bad news has pretty much been absent and even things like bad economic news or N. Korea firing missiles is shrugged off.

But everything is cyclical and soon the technicals, sentiment and news cycle will turn. Sometimes it’s a slow transition – sometimes it happens quickly. I think you understand my concept so I won’t belabor the point.

Speaking of technicals, notice that the SPX RSI is approaching 70. This is important because it means that things are stretched. The last couple times the RSI got to 70 or above a subsequent pullback was imminent.

SPX_RSI_3202016

Also notice the MACD on that chart and add it to the list I made above. When the signal lines cross back down (and they will) that will confirm the market is in “pullback mode”.

I have no idea how the imminent pullback manifests or exactly where it starts from, but there’s a lot of support below and I never said I expected the market to collapse did I? It’s normal to get a pullback after the type of move we’ve seen and I have a feeling there are a lot of “participants” ready to step up and “buy the dip”. I marked a couple support levels on the chart at the top.

As you know, stock buybacks are a major influence on the market and over the next couple weeks companies will enter the “blackout period” for share repurchases. This will begin to remove buying pressure in addition to the shorts and bears that have been destroyed on this move. Once they’ve forced every short to cover and the stock buybacks end who will step up to buy RSI 70 after the market just went straight up 13 or so percent?

Add to that the fact that CNBC is now asking things like “is it safe to buy stocks again?” and “is the market set to hit new highs?” and you can see where I’m going with this. It’s been an incredible move off the lows and the breadth has been good and oil has rallied about +50% and the Central Banks have added fuel to the fire. But moves like this come to an end – or at least take a breather and pull back.

We know what to watch for and we know that trying to call the top is pointless. So we just have to go with what we see play out, keeping in mind that a pullback is imminent.

Let’s not lose sight of the fact that S&P earnings have been coming down and as Mr. Kudlow always says “earnings are the Mother’s milk of the stock market”.

Earnings_GAAP

The fact that earnings have been coming down should be cause for concern, but I’m more interested in watching the technicals for signs of a reversal.

I stumbled across this chart recently and even though it’s a bit outdated it gives a good view of what I’m driving at.

spx_cheap-expensive

Regardless of the bigger picture and regardless of the overall market there will always be plenty of opportunities for trading.

As a matter of fact I’ve been looking at the VIX a lot more recently and it’s just another clue I’ll use to tell me what’s happening. The VIX stands at 14 which is right around a 6-month low. It will be interesting to follow the VIX in addition to everything else and there might be opportunities to trade volatility on the horizon using one of the ETF’s.

I’m not opposed to using the leveraged short market ETF’s either to trade a dip or down cycle but as I said above, I’m not going to try to call a top yet. I’ve just been pointing out the warning signs and what to watch for.

As always I try my best to remain objective and like I said, the current trend is up and I won’t fight that. When I see signs and confirmation the uptrend has ended I’ll consider playing it the other way. But I am open to the idea they continue to push this thing higher for a bit to eradicate the early shorts, the non-believers and skeptics.

When it turns and confirms I’ll know it when I see it.

In the mean time we go into the week with no open swing trades and the CIT trade last week turned out well. As cautious as I am on the overall market there are always individual stocks with constructive charts and opportunities for short-term trades.

As this week unfolds I’ll be on the lookout for new ideas and stocks we can trade for quick gains. At this juncture I think the hit-and-run approach makes sense and I already have some good ideas on my notepad.

I’ll post some new ideas in the Chart Feed and add new ideas to the Focus List as I find them. I like to keep an open mind going into each new week and watch the open Monday to get a feel for how things are unfolding. This is especially important this week with the Fed and opex behind us.

We are at the juncture where things get tricky.

The market is extended but they could push it higher. The price of oil plays a big part and we have the VIX down at the lows, the dollar has been pulling back and everything seems interrelated. The market’s been strong, the trend is up and the breadth is good. But it’s nearing the end of what seems reasonable and everything’s stretched.

Identifying and navigating inflection points is not easy but I’ll do my best to call things as I see them as they unfold from here.

Join me at the open Monday morning for the live show and we’ll proceed cautiously into the end of the 2nd Quarter.