Monday, April 21, 2014

A look at the broader equity markets

We are at an interesting cross roads with the US equity markets as well at this point in time, so lets take a look at the charts of the 3 main indices starting with the Dow.

First things first, we can see an overall uptrend within this chart.  When we look closer we can see this resistance level we have not been able to get above at 16,600.  We can also see it has twice tested the 16,000 level recently and rallied off of that.  This level is also where our trend line meets that support point.  The first cause of concern is that RSI and MACD are trending lower as price consolidates.  This is negative divergence, and may be spelling out that this rally is about to turn lower if it continues this way.  The main key points to watch to see if that will be the case is the 40-60 level on RSI.  Typically, a market trending higher will never really dip lower than 40 on the RSI.  It will range from overbought to a low of 40 as it climbs higher.  A market headed lower will never have RSI rally above 60, it will range from oversold to a high of 60.  So we want to look to see if RSI begins having trouble getting above the 60 level, and then falling through the 40 level.  It held just recently at the 40 level when it bounced off 16,000, so lets see if it begins to falter here.  On MACD, a market going higher will typically have MACD never dip too far below the zero line on corrections.  Then the signal lines cross over and price moves higher.  Again, a market going lower is typically the opposite;  MACD will not rally much higher than the Zero line then cross below and begin falling again.  We can currently see MACD trending lower, and recently reached the zero line and has crossed higher.  If bulls can not get this market above the resistance level it is currently being stopped at, MACD will lose momentum, and cross lower.  I'm reminded of the old adage "What doesn't go up MUST go down". It might not seem to make sense, one minute were in rally mode on a long uptrend that fails to make a new high right away, why would that mean such a drastic turn?  But it typically does.  If momentum fails to the upside, selling will increase fueling momentum to the downside.  Let's watch these key levels and indicators to get an idea where this is headed.  We should have an answer within a week.

Next up, the SP-500

The SPX looks stronger overall than the Dow.  This has been a theme for a while, as the Dow is made up of giant "slow poke" companies, who focus more on dividend paying than growth.  The SPX has typically out performed the Dow for the last 5 years.  We can see the same sort of pattern here as in the Dow.  RSI and MACD are trending lower, as price goes higher/sideways.  We can see here we had a break higher that reached 1900 and was then instantly pushed lower again.  We can infer by that rejection, that 1900 was a level that people overwhelming wanted to sell at, so as the range tightens, we must look to see whether sellers decide 1825 is good enough to sell at, pushing the market lower, or if 1900 is suddenly a good reason to buy at, driving it higher.  (The latter seems like a stretch though)  Let's watch the same indicators and the 1900 and 1825 level for a resolve.

And finally, the one I REALLY wanted to talk about; The NASDAQ...

What's important about this chart is the obvious.  For a very long time the Nasdaq drastically outperformed both the Dow and the SPX, until recently when it has been very much UNDER-PERFORMING.   The failure at 60 level we are looking for in the DOW and the SPX for the RSI level has already occurred here on the NASDAQ.  Price has already broken the trendline, MA's have already crossed lower and MACD has already fallen below the zero line.  If the Nasdaq is typically the outperformer, and leading indicator for the rest of the markets, this is definitely not a good thing.  However, there is pretty good support right at 4000 where we have recently caught.  I would expect we rally from here.  MACD will attempt to retake the Zero line, RSI will attempt to get above 60, and price will attempt to get back above the trendline at about 4200-4300.  I think as all these levels are reached, it will roll over and again head lower, taking the other indices down with it.  So, I will be watching over the next week at the NASDAQ especially to see if we make a stab at that 4200 level.  If a failure there occurs, and it then begins to head lower, you can take an opportunity to open a short position there with a stop just above it's recent high near 4,400, leaving you with very little risk on the position.  

Lets watch this as the week goes on.  As things progress I will post shorter term charts so we can fine tune our entry and exit points, if we are given the signals to do so.

-Jonathan M Mergott

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