GETTING TECHNICAL: SELL INTO THE RALLY
From Decision Point:
After the S&P 500 broke down from the rising wedge pattern I expected that prices would continue to head lower into a 20-Week Cycle low at the end of this month. But no. Instead prices rallied back above the rising trend line which formed the bottom of the wedge. Prices even rallied to a marginal intraday new high, so the rising trend that began at the March lows remains intact. In spite of that, it looks as if prices are forming a double top.
On the chart I have drawn a new rising wedge pattern that conforms to the gradual rolling over that prices appear to be doing. As usual, we should expect prices to break down out of the wedge, and, perhaps, that will lead to the correction we have been awaiting.
Below, our OBV (On-Balance Volume) suite of charts shows the short-term CVI and STVO coming off overbought levels and allowing for further decline in the short-term. The medium-term VTO shows that an internal correction is in progress that appears to be spreading to price behavior.
In his comments today, John Murphy (StockCharts.com) pointed out that large-cap indexes are beginning to out-perform small cap indexes. This should be of special interest to our subscribers because we track both cap-weighted and equal-weighted versions of the major market and sector indexes. (Equal-weighted indexes the smaller-cap stocks in the index to exert more influence on the price of the index.) In the example below, we have a chart of the S&P 500 displayed with the Price Relative to the Rydex S&P Equal Weight ETF (RSP). You can see that the S&P 500 relative strength line trended downward since March, but recently it began to trend upward. The message being that it is probably time to shift money out of the equal-weighted vehicles and into the cap-weighted vehicles. (See signal table below to see how well equal-weighted stocks have performed.)
Bottom Line: Last week I thought that a medium-term correction had begun, but a rally to new highs killed that projection. The market now looks as if it is topping, and internals support the idea that there will be a decline into the end of the month. A further sign of weakness is the fact that money is moving out of small-cap stocks and into large-cap stocks.
Source: Decision Point
Looks like the DOW and S&P500 are desperate to reach 50% retracing of the drop from the 2007 peak to 2009 lows. Will they reach it and the top or break through and shoot higher? (The October high right at 1,100 was mid-month.) Will November be the same with a mid-month high or will we see the next leg up? If we see the next leg up, will it stick or will the market correct back under 1,100?
TPC,
If after hitting 50% retracing and new highs, we see a correction, at what level would you consider the risk-reward relationship good enough to purchase equities?
I am 40% allocated to equities. I would like to increase my allocation at S&P 1,000 or below but I am starting to think we will never see that level again. I almost increased at S&P 1,036 a couple weeks ago, but waited hoping the correction would continue a bit longer. Now I am regreting that decision and I am becoming impatient.
I find it strange that long-term Treasuries are strengthening along with equities again. Falling yields on Treasuries don’t make sense with the falling dollar and rising equities. The market dynamics seem strange.
Also the technicals of the main leaders of the US rally (KBE Financials, IYR Real Estate) look pretty bad, and consolitating in a top-like formation. Many of them peaked a while back and have been moving sideways for some time.