A Market Timing Report based on the 5-31-2013 Close published Sunday June 2nd, 2013 with updates.
UPDATE for 6-13-2013 @ 2:40 pm: Is the sell-off over? Not likely. It looks like it could be a Bear trap, but if you discount the retest the other day as an aberration due to Japanese currency antics, I suppose you could say, “Never say never.”
Could we continue straight back up to the prior high? Yes. The statistics I cited in the prior post would say that is unlikely though, and they are pretty impressive. If you play this rally, I’d use a stop.
Today’s chart looks something like the April 2012 test of the 50 day moving average shown here:
SP500 Index wobbled around the 50 day moving average last year. Could repeat a similar pattern.
UPDATE for 6-12-2013 @12:00 am: Take a look at the second chart below. It will show you what is likely to happen over the next few days to weeks. I checked EVERY retest of the 50 day moving average since 10-2007.
Here are all the prior second retests of the 50 day moving average since October 2007. In all cases, the retests followed significant rallies on the daily chart: 10-2007 (100 point drop), 7-2-2009 (shallow dip of about 37 points below 50 day movoing average), 3-2011 (brief 53 point dip below), 5-2011 (failed by only 14 points, then staged another attempt to form higher high, which did not happen and sell-off intensified to 73 points), 7-2011 (bad break of 208 points initially and a bit lower on the Oct. retest of the low), 5-2012 (bad break of 110 points), 10-20-12 (90 point decline).
The 11-2010 retest of the 50 day moving average was an exception in that it did not fail, but it was fairly early in a bigger rally and a very shallow bounce from a very short fall to the 50 day moving average, so it looked more like a consolidation mostly above the 50 day moving average before the resumption the bigger multi-month rally.
So although history does not have to repeat itself, the odds favor a deeper correction. Basically, when the market is not sure about recovering quickly after a fall, it’s a bad sign generally. Noting that is the value of this post.
I will demand more strength for a buy of the SP500 Index at this point. That would mean a sustainable move above 1648.69. Follow me on Twitter to keep tabs on this with me. This means potentially forgoing profits between here and there, so if you disagree, execute a different plan by all means.
If support breaks, I think the March and April lows would be a reasonable first downside target from today’s close or 73-87 points lower or another 4.5-4.7% down. That would bring the total pullback to a respectable 8.75-9.0% correction.
UPDATE for 6-12-2013 @ 10:16 am: This SP500 Index chart shows the potential for a reversal upward at the right shoulder support. The target becomes the prior SP500 high of 1687ish.
If that support does not hold, we go back and retest the 50 day moving average (mav) or the prior low, which was below it.
Retesting at the 50 day mav is not something that we’ve been doing previously in this long rally, so it may not hold this time. In both Feb. and April we hit the 50 day mav and bounced.
Here’s the chart for the reverse head and shoulders formation (it COULD hold, although I’m leaning toward it not doing so at the moment):
Could the reverse head and shoulders support hold at the right shoulder and lead to a rally?
UPDATE 4 for 6-11-2013 @ 2:23 pm: This chart from last Fall for the SP500 Index shows you the potential risk and why I took profits earlier (see Twitter):
Fall 2012 SP500 Index Fail of Retest of 50 Day Moving Average
UPDATE 3 for 6-11-2013 @10:53 am: This chart shows you what happened on 3-01-2013 when we retested a similar bounce from just above the 50 day moving average (aqua line). We went a bit lower today, but it’s the same basic retest picture as the chart shows:
SP500 Index Retest back on 3-01-2013 was very similar to today’s retest.
UPDATE 2 for 6-11-2013 (see next post too) @10:35 am:
Here is why I bought DXJ (yes, it’s very volatile so use a stop). [NOTE: sold as reported on Twitter.] There is a reverse head and shoulders on the hourly chart below also visible on the daily. Whether it holds or not, I can’t tell you, but the set-up is valid for a bounce from here. As I said, use a stop to protect capital, because the trade is higher risk than usual due to the level of volatility in the Japanese market:
Market Timing the Hedged Japanese ETF, DXJ.
UPDATE 9:20 am 6-11-2013: The SP500 Index is testing the low from Friday this morning (base of current consolidation you could say; now lower at SPY 163.20 as I type with low 163.14) and must hold that level or thereabouts or it will likely just retest the prior low near 1600. Whether it will hold twice we don’t know, so watch your stops!
SP500 Index testing base of Friday’s range in premarket. Must hold about there.
UPDATE 6-07-2013 @ 10:02 am: We survived the retest of my closing number that is needed today as mentioned in the text below. Here’s the chart:
SP500 Index making progress in its bounce from predicted support.
UPDATE 6-07-2013 @8:49 am ET: The jobs number fell right around consensus and so my SP500 Index target is now a minimum bounce to 1659, although a stop at 1635 is possible. Above 1659, we re-top at the last high.
It does not have to go there in a single move, and for today I’d like to see a close above 163.42 on the SPY and above 1629.31 for the SP500, which are the highs for 6-05-2013.
UPDATE 6-06-2013 @12:51 pm ET: In considering the fall in rates today with the 10 Year Treasury reversing, I’d say that there are two things it could mean:
1. That the Fed will stay in charge. That the employment number will be somewhere between the ADP number of 135000 and 185,000 jobs created and won’t shock the markets. In fact, the markets will relax knowing that employment growth is still slow.
2. That the stock market will not in fact hold 1600 and the flight to Treasuries from stocks is the driver.
A close below 1600 for the SP500 Index would point to choice #2.
UPDATE 6-06-2013 @ 11:28 am: I started adding back to my equity exposure via SPY and MDY (US large caps and US mid caps). This chart is why. The MDY chart if you look at it on your own shows a drop to below the 50 day moving average with a recovery. Today, the SP500 Index dropped to 0.1 points of that number.
Good enough for a bounce most likely. Yes, set a stop below in case there is no bounce. Also please read my Tweets from the past few days to lower right. Here is the market timing chart:
SP500 Index Market Timing
UPDATE 6-05-2013: The ADP employment report did not help coming in at 135K, but the reaction was not strong in either direction. The market is a bit down today thus far. See my Twitter comments down a bit to the right.
My SP500 Index target is 1600 with lots of support there. It will probably dip below that level a bit to shake out some investors, so the Wells Fargo target of 1590 at their high end is a reasonable next target (1560 was the Wells Fargo low end target as uttered on CNBC). Then the 2007 high comes into play (see green line on chart below).
If we we break below the 2007 high, this whole blip up will be looked at as a failed breakout. The selling on such a break would be significant.
1600ish is the next target.
The Great Rotation is not supposed to go this way. The money is not supposed to go from out of stocks AND bonds at the same time and end up in cash! It’s supposed to go from bonds to stocks. The basis for this pullback is the feeling that the Fed is not going to be of as much help via QE and low rates for an unlimited time and that QE could be reduced in the near future. Less liquidity means lower prices for stocks and higher yields with lower bond prices. High yield bonds are being hammered finally. The capital gains from the beginning of the year are ALL gone in high yield bonds. There is more downside if yields move up to 2.4% on the 10 Year Treasury or even higher.
It will be interesting to see how low the SP500 Index (SPX, SPY) falls on Monday. Here are the chart links:
Market Timing Charts for Sunday’s Issue (opens separate window with all charts)
If the high in the 10 Year Treasury (TNX) is contained at 2.4%, I think this sell-off will be contained at or just above the 50 day moving average, at least for a bounce. Above 2.4% yield on TNX and we’ll see a retracement of the entire rally from the April lows.
So keep an eye on the 10 Year Treasury Chart too, which is at the link above.
The VIX volatility index may stop at about 18-19 in this move, which could happen in one or two days. A perfect set-up for a bounce would be a 10 Year at 2.4%, the VIX at 18-19 and the SP500 Index at the 50 day moving average or at least close to it. Note that back in February it did not quite reach it as the chart below shows.
SP500 Index pullbacks have come close to the 50 day moving average.
It may be worth buying such a pullback this time provided the 10 Year rate is contained at 2.4%. Remember investors believe the economy is getting stronger. Unemployment has been falling. If unemployment drops too much on Friday, I suppose the reaction of the stock market could be negative, but if it eases slightly, but not dramatically, that may be interpreted as positive. A temporary low in the market is likely this week. The ISM reports on Monday and Wednesday will be important tea leaves as will be the ADP report Wednesday.
The market wants the Fed to be active, while the economy improves and not simply turn off the faucet abruptly. Dr. B. has said that, yet the bond market seems to be preparing for higher rates. In the end, rates MUST rise if the economy is improving and earnings will rise as well if that economy is doing well provided that interest rates don’t move too high and stay there. Many companies are fine for now as they’ve refinanced debt at lower rates. So what is happening is supposed to happen, despite this pullback. Rates are supposed to go up and they are.
That is why this market can continue to rally after a pullback. Again, because rates are supposed to be rising. Volatility is up as we near the summer. If it keeps rising, we could be in for an up and down market such as we’ve seen in recent summers.
We could see a low this week and then another rally with a final push lower, before a more sustainable rally. There are lots of Bulls who are ready to pounce on this pullback, which is why I believe we are just a few days from the end of this first A-B-C wave. A down, B up, and C down. It’s like a waltz in letters.
Now what about my remark on Twitter that this could be a “3 wave” in Fibonacci terms? The 3rd wave is classically 1.618 times the first wave down, so the next move after a bounce from this one could bring us to about 1494, which would likely be around the 200 day moving average at that time. That could then be followed by a classic 4 wave up and a 5th wave that retests the prior low (end of wave three) or makes a new lower low.
Reaching an SP500 Index of 1494 would require game changing events such as:
1. A startling left field high risk financial system event.
2. A further slowing of the world economy causing E’s to shoot up and P’s to fall.
3. Interest rates north of 2.4%. I am not certain 2.4% will be high enough to unravel things, but it’s starting to have an impact and if things snowball through massive bond sales by investors who are now losing lots of money in their bonds, they may just decide to sit in cash rather than going from falling bonds to falling stocks.
Will they buy gold (GLD)? Not so likely. I’m watching the developing and very shaky up trend. Gold is at best and aggressive trading buy, due to the poor performance on Friday. The feeling apparently is that rates will be going up much faster than the rate of inflation, so real interest rates will be positive. Gold is a poor thing to hold when that happens. We need inflation or the security of negative real interest rates due to Central Bank intervention to boost gold. I bought a trading position in gold last week, and it’s in the red. I may be forced to dump it in exercising my stop loss. The small up trend line was broken, but it’s possible that a higher low will be formed in this pullback. It’s been a tough trade and that is not likely to change soon. The chart is at the main link above.
The best thing GLD has going for it is GDX, the gold miners. That chart is leading gold up hopefully and the swoon Friday could be temporary. The red lines are support and the aqua lines are overhead resistance, the curved one being the 50 day moving average.
Gold miners showing some life in a reversal from a breakdown. Base formed?
I’ll comment on sentiment separately and tweet the link.
Key Takeaways for the Week:
1. The selling is not over yet. It will likely stop for a bit this coming week
2. There are 3 things that can turn this sell-off into a more serious one: a financial flare-up (Euro debt etc.), a slowing world economy, and skyrocketing interest rates.
3. The 10 Year is headed to 2.4% in this move.
4. Gold is a shaky trade still. The gold miners offer a glimmer of hope for GLD finally. Use a mental stop!
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