SPX: 50 Percent Retracement Reached

This is just a brief update of a few technical stock market yardsticks. The holiday week was strong, as is traditionally the case (there is a strong seasonal upward bias in holiday-shortened weeks). However, the market strength is therefore also suspect, as trading volume was extremely light. In the course of last week's rebound the S&P 500 has reached the 50% retracement level on the dot (there is no logical reason for the market to do such things, but somehow it happens over and over again…). This is the minimum retracement level we would expect to see. The next Fibonacci based resistance levels are the 61.8% and the 78% retracements, whereby the former is probably the most frequently observed one.




The SPX with Fibonacci retracement levels indicated by the red horizontal lines. Note that it stopped on Friday precisely at the 50% level. Volume has progressively declined as the holiday shortened week wore on – click for better resolution.



Sentiment Data

Since we have been keeping an eye on the equity put-call ratio lately, here it is  again. As shown in the chart below, its recent peak was lower than one would normally expect to see at the trough of a decline of such magnitude. The correction into the June low actually did sport just about the right level of put buying by comparison.



CBOE equity put-call ratio and the SPX. Normally this ratio should approach the 1 level  in corrections of the magnitude recently experienced. Now the ratio is already back near levels that are generally regarded as potentially bearish – click for better resolution.



So what about surveys and futures positioning? With regards to surveys it really depends on where one looks. Market Vane, Consensus Inc. and the NAAIM survey are all showing traders to be quite sanguine (which is bearish), but the AAII survey and the Hulbert stock market advisor surveys are at levels arguing for more upside. We show one of each type of survey (theoretically bearish and theoretically bullish) below, namely the NAAIM and the AAII survey:



The NAAIM survey of fund managers. What the numbers mean: the surveyed managers are 64.2% net long on average (the range of responses is from 200% net short to 200% net long), and they are pretty confident about their posture (confidence measures the variance among respondents). Obviously, higher readings have been seen in the past, but what is remarkable is the speed at which opinions have changed – click for better resolution..



The AAII bull/bear ratio remains fairly subdued, but it has been that way ever since the correction into the June low. Survey charts via sentimentrader – click for better resolution.



Big Cap Tech Stocks At 38.2% Retracement Level


Amazingly, the NDX also stopped right at a Fibonacci retracement level of the recent decline on Friday, but at a different one than the SPX. In this case the rebound has only made it to the 38.2% retracement level.

It is astonishing that it has stopped right there at all, but it is even more astonishing that it did so in concert with the SPX also stopping at Fibo level.



The NDX has made it exactly to the 38.2% retracement level as of Friday – click for better resolution.





Every time a typical retracement level is attained following a downturn from a local high it is worth paying attention to see if the market manages to break through or not.

The recent advance has induced a bit of a character change as well, as the market has managed to stay strong into the close on all the trading days since the low. This is demonstrated on the next chart, a 15 minute chart of the SPX:



Since the low at the end of expiration week, the market has been strong into the close on every single trading day – click for better resolution.



We're actually not sure how informative this fact is, it is just something we've noticed and it represents a marked difference from the market behavior during the preceding decline.

Although we cannot say whether or not the market will keep rising here, a decline from a lower high followed by a lower low would certainly be informative, as would be a breakout to a new high. Normally the market is in its seasonally strongest period from November to April, but several notable highs or secondary highs have historically occurred in October. These were recorded in 1939, 1948, 1967, 1973, 1978, 1980, 1987 and 2007 (the actual intraday high so far was recorded in September in terms of the SPX and NDX, but the October secondary high was very close and the DJIA's intraday peak was actually reached in October – another divergence,  this time in a very short term time frame).

Should the market decline from a lower high and put in a lower low subsequently, then its behavior would deviate from the seasonal trend such as has happened in the years listed above by way of example. This is generally a very negative sign.

Normal seasonal behavior on the other hand would be nothing special – it is after all widely expected.

Lastly, we note that the broader market as represented by the New York Stock Exchange index (NYA) has yet to better its weekly closing high made in the last week of April 2011, a full 18 months ago.

Charts by: stockcharts, sentimentrader & bigcharts



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One Response to “Stock Market Technical Conditions Update”

  • What about the coming replacement of fiscal stimulus with monetary stimulus? How does this impact the stock market? We are looking at a fiscal cliff, a significant increase in tax rates. QE3 has been announced will be flexible and will give the Fed a control mechanism now the interest rate control is no longer effective. Clearly, these events are not unrelated: policy makers have decided to replace fiscal stimulus with monetary stimulus. Since the impact of the fiscal cliff is difficult to know beforehand, the Federal Reserve will adjust QE on the fly as economic conditions respond to increased taxes. Will this work? In what ways will monetary stimulus impact the economy differently than fiscal stimulus?

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