Market Posture

In my last post on June 3, despite the apparent reasons for caution, I concluded that things were still quite bullish. I am trying to reiterate to myself as well as others that a trend or posture isn’t “changed” until it changes. So since the various significant levels and moving averages hadn’t yet been broken, a trend trader could only assume that things will continue on as usual. Since then, some of the significant red flags have been raised. The uptrend has not yet been broken in terms of highs and lows, but we have put in an equal high and backed off that level, leaving it as a fortified resistance point and putting the uptrend strongly in question. A lower high and lower low will officially change the trend to downward. Until then, we’ll noodle more or less sideways.
As for the moving averages, the 20 MA was broken, reclaimed and again broken. Meanwhile, the 50 MA has provided support on two quick bounces. Friday’s close was just below the 50 MA, so I’ll call it breached but not definitively broken. Will it hold again or finally crack?
You may also notice on your charts that the SPX is now showing a fresh set of 3 red arrows, the second set that has recently appeared since the big run began with a double bottom reversal in March.
Notice also that the Market Forecast intermediate term line (green) is heading down and has exited the upper reversal zone. Obviously, this is bearish for the intermediate term on this indicator. The Longer term orange line is still above 80 but is rounding over and showing potential for a more meaningful downturn, though 80 remains the official signal line to call it bearish.
Keeping things simple, though, we must remember that price is king and the most obvious signs now will be the strong breaking of the 50 and certainly taking out the recent lows around 1490.
(Click imagine to see it larger)

For the third part of the Investools taught market posture procedure, we look to the VIX. I want to emphasize, particularly to ease Jim’s mind, that these other aspects of the Market Posture procedure should be looked at as confirming indicators and in no way should be thought to hold more sway or even equal the power and significance of the index price and posture itself.
With that said, last time I suggested setting an alert to go off if the VIX broke above its resistance at around 14.50. That alarm was sounded and the VIX has since dropped back below and again risen through 14.50. This weekly chart shows it most clearly. The bias looks upward to me.

But even if the market doesn’t drop and in turn lift the VIX, I suspect that this slightly higher level will be sustained and perhaps with a wider range from the 17 area down to 12.50 if not 14. Whatever the specific numbers for support and resistance on this volatility index may turn out to be, the message seems clear that rise or fall, the markets will be more volatile for the foreseeable future. For the active trader, this is actually a good thing. For the buy and hold investor, maybe not.
I’m not going to go through the whole Posture thing for the Nasdaq too, but for a bit of comparison, here is a view at some of the major indexes with weekly candles. I always like looking at weekly candles because it simplifies the daily noise into a clearer big picture view.
I’ve left off the Dow Jones, as it closely resembles the picture of the SPX. I’ve also used the Nasdaq 100 because the composite shows a discrepancy between the TOS charts and Prophet charts and I think the data is wrong. Besides, the NDX is perhaps a better, more focused look at the powerhouses of tech.
Most noteworthy to me is the succession of weekly bearish engulfing patterns on the SPX after the recent series of bull runs. This speaks strongly for the likelihood of a trend reversal. What these matching bearish engulfing patterns on the weekly chart translate into on the daily is a potential double top pattern.
But the other thing to consider from a bullish perspective in these charts is that the tech indexes have not shown the same strength as the SPX and Dow since the highs in February. The NDX and SOX especially are showing a bit of relative strength compared to the SPX. While the SOX did sell off with the rest of the market on Friday, it broke out to a new 52-week high on Thursday.

Could the semis and tech lead the next leg of the bull market?

Other factors to keep in mind:

Crude oil broke above its recent resistance level. From here, up seems more likely than down. You can check here for a longer term weekly chart. But here’s the daily.

I won’t pretend to be very knowledgeable about bonds and treasury notes. But at the very least it makes sense to me that if yields go up, the appeal of being in stocks is decreased for long term investors. We’ve heard a lot about the 10 year yield rising lately. It may find some resistance here in the area below 5.5, but this very long term chart going back to ’81 shows what might be a very significant long, LONG term trend break forming.

I know I’ve said this before, but I hope to get a new and improved watchlist up soon.
For now keep eyes tuned to VSEA. After a wild up and down day on Friday, it closed near the top of the range, breaking the recent downtredning resistance and peaked back above the 50 MA.

LRCX also looks interesting, though not as high scoring.
Tech monster Google(with an impressive F/E score of 3.88!) is out at a new high after testing old resistance as new support. If you’re interested in getting in this stock and not missing the boat again, this seems like as good a time as any. Remember, there’s not that big a difference between buying 10 shares of a $50 stock and 1 share of a $500 stock.

On the downside, REITS are looking weaker and weaker. Some have clearly begun breaking down, others are just beginning to crack now. I’d like to see some of the first to break down come up to test resistance for a better entry.
Homebuilders have seen renewed selling. Banks look pretty weak too.

Have a great week!