Assessing The Market's Technical Trend

Assessing The Market's Technical Trend

The Technical Trend Indicator (TTI) registered -6 on Wednesday. Industrials, transports, utilities and technology stocks closed lower on the day. There were fewer advancing stocks than declining stocks (A/D) on the NYSE. The largest market cap stocks (BMBI) closed lower on the day while the majority of stocks with the highest daily volume (MASI) on the NYSE also closed lower on the day. Bond yields closed lower on the day, positively impacting the TTI. The TTI registered 2,898 versus its long-term moving average of 2,852, +46 above trend.

There were no real changes in the technical indicators. Relative strength indicators (RSI) for US and EU markets have moved into positive territory above 50%. MACD momentum readings are still negative for all markets. The S&P 500 has edged above the long-term MA (50WMA) for the first time in months but the S&P 100 closed back below the 50WMA yesterday. The tech sector, S&P 500 and 100 indices in the US are showing readings with the majority of stocks trading above their 200DMA, but no confirmation yet from the broader NYSE index. The NYSE A/D Line is approaching the highs set in December while the TTI has broken out to new all-time highs.

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Overbought

Overbought

The stock market technical indicators delivered another improvement yesterday. Relative strength indicators (RSI) for US markets have moved into positive territory above 50%, now joined by the EuroStoxx 600 Index this week. MACD momentum readings are still negative for all markets. The S&P 100 and 500 have edged above their long-term MA’s (50WMA) for the first time in months. The tech sector, S&P 500 and 100 indices in the US are now showing readings with the majority of stocks trading above their 200DMA. Meanwhile, the NYSE A/D Line is approaching the highs set in December while the TTI has broken out to new all-time highs.

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Reading the Tealeaves

Reading the Tealeaves

I have outlined my expectations for the stock market in the chart below. In scenario one, the S&P 500 forms a head-and-shoulders top pattern, similar to the German Dax Index. For this scenario to play out, the S&P should peak in the region of 2,750-2,850 over the next three months. In scenario 2, the S&P tops out here, retraces 50-78% of the recent rally, forms a higher low with positive divergences in RSI and MACD and then resumes the bull market and breaks out to new highs later in the year. The continued recent strength in my TTI suggests that scenario 2 has higher odds of playing out at the current time.

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Waiting Game

Waiting Game

Following the December plunge in the stock market, we are experiencing a sharp oversold rally, which is now running into resistance overhead. The longer-term 50 week moving average is turning down and should cap the advance from here. What happens next is all important. Is this a bear-market rally that has run its course, or the start of the next leg higher in an ongoing 10-year bull market? We will find out shortly.

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Assessing the Market's Technical Trend

Assessing the Market's Technical Trend

There is a lot going on in this chart but if you spend some time with it, I think you will find it quite a useful study. The chart captures the daily volume flowing into advancing versus declining stocks on the NYSE. In a bullish trend, the majority of the volume (cash moving into and out of stocks) each day flows into stocks that are rising. Hence the Advance-Decline Volume Index ($NYUD) trends upwards. In a similar fashion, when the majority of the volume flows into declining stocks, the Index trend downwards. What is also quite interesting is that the Index tends to peak and trough ahead of price, which provides me with very timely information. The Relative Strength Indicator (RSI) and Momentum oscillator (MACD) provide further clues that help me to assess the market’s future direction. In the chart, you can see that the RSI and MACD also tend to rise and fall ahead of price.

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Bitcoin's Headed For $2,000

Bitcoin's Headed For $2,000

There is absolutely nothing bullish about bitcoin’s current chart setup. Despite the collapse from $20,000 to under $4,000, bitcoin has traded sideways for months as it has worked off its oversold position. Bitcoin continues to consolidate below the declining channel and looks set to shortly resume its decline. Odds now favour a drop towards $2,000 before potentially finding a more meaningful low. I am bullish on the long term prospects for cryptocurrencies and am researching a number of exciting new technologies in this sector. However, there is still too much optimism and far far too many ‘alt-coins’ still in existence. Many need to go to zero before the clean-out can finally end.

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Sterling Strength

Sterling Strength

Despite all the noise that surrounds the ongoing Brexit talks, it is interesting that GBP has strengthened by 5% in recent weeks versus both EUR and USD. Any additional rally by GBP versus EUR and sterling will break below the consolidation triangle that has been in place since 2016. A meaningful rally could be starting. Relative to USD, a similar setup is taking shape. The chart on the right shows that GBP is showing relative strength versus USD and improving momentum, despite the 2018 decline in this relative currency pair. We still need to get through the next couple of months of political maneuverings as the 29 March deadline approaches, but I continue to believe an opportunity to add an allocation to UK assets may be close at hand.

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The Correction Begins....

The Correction Begins....

Last week I noted how many were taken aback by the sharp -20% plunge in global equities in December. A glance at some of the technical charts would have been enough to warn investors of the broad deterioration that was taking place beneath the surface. The information was in plain sight for those to cared to take a closer look. For example, the $OEXA200R captures the the percentage of stocks trading above their long-term moving average. It corrected sharply in 2018 despite the US equity indices making new highs in September.

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New Highs & Lows On NYSE Back in Balance for Now

New Highs & Lows On NYSE Back in Balance for Now

Yesterday, I discussed the relief rally underway in stock markets, which was fast approaching overhead resistance. I expect the long-term moving averages that are now coiling lower will cap the recent run. We should now expect a re-test of the December lows in the weeks ahead. IF those lows hold, or are taken out but the market then recovers, we have a set up to get long equities again. If the lows give way, then the downtrend will resume and cash will remain the favoured position. I monitor the number of stocks making new highs versus those making new lows on the NYSE each day….

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Resistance Ahead

Resistance Ahead

Following a-20% peak-to-trough correction in stock markets in December, we are now witnessing a powerful oversold rally. How far will it run? Is it a counter-trend rally in a new bear market or the beginning of a new leg higher in a still-ageing bull market? We are about to find out. Stock indices are approaching strong resistance overhead. The long-term 50-week moving average has started to coil downwards for all the major indices for the first time since 2016. This should cap the recent rally in stock markets. If somehow equities can power through the strong resistance overhead and turn the moving-averages back up, turning resistance into support, it will be some performance by the bulls. In that event, the Active Asset Allocator will return to a fully invested position. Until then, defense remains the priority.

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Oversold Rally

Oversold Rally

We have had the sharp correction,. Now it is time for stock markets to rally. I am watching closely to see how far they can juice the market higher before heading into trouble. The relative strength and momentum indicators are oversold but still in a sharp downtrend. My guess is that stock markets need to re-test the lows at a minimum before a more sustained rally can commence. Today is options expiration in the United States, so often prices can get manipulated in the short-term. The next few weeks should provide meaningful information as to the health of the stock market.

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Bearish Trend Still in Force

Bearish Trend Still in Force

Regular readers will know I rely heavily on technical analysis and reading the charts to assist me in forming my views on global markets. It has definitely helped me navigate the volatility of the equity markets in recent months and steer clear of the downdrafts. Many were taken aback by the sharp -20% plunge in global equities in December. However, a glance at some of the technical charts would have been enough to warn investors of the broad deterioration that was taking place beneath the surface. The information was in plain sight for those to cared to take a closer look.

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Sterling Performance Mrs. May

Sterling Performance Mrs. May

Sterling has been consolidating between €0.82 and €0.94 for over 2 years following a greater than -30% decline in the currency versus EUR in 2016. Today, the UK parliament votes on Teresa May’s Brexit plan. Odds are that May will lose the vote. If she loses by a significant majority, watch for $EURGBP to break out higher from the triangle consolidation as GBP resumes its decline versus EUR. An unexpected vote in favour of May’s plan would see a sharp rally in GBP and a break lower from the 2-year consolidation. While it is not possible to predict the outcome of this afternoon’s vote, I can assign a much higher probability to the longer-term direction of $EURGBP following the break higher or lower from the pattern below.

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Renminbi Volatility vs Gold

Renminbi Volatility vs Gold

Last October in ‘As Good As Gold’ I referenced China’s long-term intention to replace the United States as the world’s global superpower. China has a lot of work to do. As part of the process, China needs to provide an alternative to the US dollar as the world’s reserve currency. China is making some progress in this regard. Since 2016, renminbi volatility versus gold has declined sharply and in recent weeks, the currency has rallied sharply relative to gold. The renminbi experienced quite a difficult end to 2018 but as the new year turned and the currency reached the lower support range versus gold that has been set over the last three years, the renminbi rallied sharply…

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Banking on a Bounce

Banking on a Bounce

A healthy and profitable banking system is at the core of a well functioning economy. We saw what happened in 2008 when the banks collapsed and the ramifications that were felt across the wider. Back in 2007, while the S&P 500 continued to make new highs (see chart below) the KBW Bank Index started to diverge, reversing trend and making a series of lower highs and lower lows. That was the tell that something wasn’t quite right in the banking system. Bank shares began to accelerate lower shortly thereafter and the S&P 500 soon followed. The collapse was catastrophic.

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Breaking the Buck

Breaking the Buck

The USD has suddenly started to sell off in the last four weeks on no significant news. It is down -3% versus the euro and a similar amount versus the Chinese yuan. Big trending moves often start on no ‘news’ and stories often break later explaining the change in trend. I think the break lower here is important and part of the reason that gold has refused to decline despite being late in its own investor cycle. Regular readers will know my views on USD. I think the greenback is headed a lot lower in the years ahead. Now, quite a number of investment specialists that I respect hold a contrary view to mine on USD. There are, in fact, a lot of USD bulls around. I think there are too many in the bullish camp.

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A Lot of Work to Do

A Lot of Work to Do

Following the December 2018 rout in stocks, I have noticed quite a divergence in opinion about the future direction for equities - varying from ‘a multi-year bear market has begun’ to ‘simply a correction in an ongoing bull market’. You know my views but I am open to being proven wrong. For that to happen, equities have a lot of work to do to repair the recent damage to the charts. The S&P 500 broke multi-year support lines during the recent sharp drop and fell out of the long-term triangle pattern, which had contained every correction since the 2009 rally started.

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Times to Sell Stocks and Buy Gold

Times to Sell Stocks and Buy Gold

Gold moves in cycles. Gold also often tends to trade inversely to equities - not always, but often - as it is considered a safe haven asset. It is clear from the chart below, which shows the relative performance of US equities to gold, that US equities outperformed the precious metal pretty consistently from 1990 to 2000. Then it was gold’s turn. Despite the rally in equities from 2003-2007, gold consistently beat the stock market for a decade from 2000 until 2011, when gold surged to a bull market top at $1,923/ounce.

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Miner Miracle

Miner Miracle

Gold has traded in a range of 3-6 times the $XAU, an index of gold mining companies, from the early 1980’s all the way up until the global financial crisis of 2008. Then something happened. For a host of reasons, over the next decade, the gold miners kept getting cheaper and cheaper relative to gold, even as the precious metal rallied from $700 in 2008 to $1,900 in 2011. Following the 2011 peak in gold, the miners collapsed over the next decade.

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Crypto Carnage

Crypto Carnage

Last May (Crypto Volatility) when Bitcoin was trading above $8,700, I wrote that, while bullish on the potential for the underlying technology, I expected the majority of these digital currencies would end up worthless. At the time, there were over 1,600 ‘coins’ listed on the Coinmarketcap.com website, with a combined market value in excess of $400BN. Roll forward to today, you can buy a Bitcoin for $3,980. There are now 2,073 coins listed on Coinmarketcap.com but their combined market value has plunged -67% to $131BN. Some will emerge from the carnage but the majority will die.

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