Ideal would be normal trading, backing and filling and a price decline that holds 255 on SPY for this week. We do expect the SPY 240 area to be retested also, but probably not this week unless 255 is breached.
This should be the best week to raise cash, write calls, or otherwise be defensive. After this week (if not sooner) we could start another move down. TLT has been pulling back over the last few days and has held on for now. A move below 163 now would target 156. LQD has rallied to resistance and could fail in this 124-area. A retracement into support of the move off the low is quite possible.
The Fred's Price Oscillator (FPO) is giving some indications suggesting very strongly that the 220-area low is the low that will hold for a bit. We are seeing some good signs in the New Highs/New Lows indicators. New Lows have fallen off – from 2714 new lows on March 20th week to 284 this week.
We still would not be at all surprised to see a move down to 235 to 230 on SPY, as we have discussed elsewhere, and expect a down week. We would add money on a dip toward SPY 235. GLD has started to retrace as well, and could retest 142, where we would buy it again, for a move to 153.
We have heard a lot about big equity buying as rebalancing occurs on Tuesday, but the indicators suggest this week will be down, and could challenge 235 to 230 on SPY. EWJ at short term support is probably a good addition for international exposure at this time.
If this works like it did in 2008, the big push we see now (which happened then – up 12% in a week as mentioned in the weekly) should give way to a choppy, difficult rally with scary down moves as part of an advance.
The A/D line did not make new lows and is showing some divergence. The last several days of this decline has been exacerbated by margin selling, and this should begin to abate this week. We have a short-term buy signal on GLD that might make it tradable here.
All financial assets tend to become correlated towards the end of sharp equity bear market moves and is actually a good indication that such a move is ending soon, at least for a while. Our Accumulation Models have become negative on GLD, similar to TLT.
These big ups and downs are bear market action. Until this type of action stops, we would continue to spend cash sparingly. The one concern we have in commodities is that accumulation models in USO and UGA suggest that these low prices will last for a bit, which in turn suggests oil stocks are not candidates for recovery.
What do we want to see in the equity markets, to be more confident we are in a bottoming area? It looks like today will be the sort of day we would like to see, with a down open, and trading in a more sedate matter. Consolidation in this area and some up and down moves would be ideal.
The first bounce was roughly a 50% retracement, and the short-term retest has held, making a higher low, and suggesting this coming week could see a fairly nice rally despite the limit down this morning on equity indexes of -5%.
Tuesday’s decline is part of this pattern, one that will hopefully lessen the bullish sentiment we have seen over the last few years. Market Vane % Bulls has moved over 70% on bonds, a sign that this market may be getting too bullish, but really 78 to 80 is where we would be concerned.
A double bottom has larger chance of occurring than a “V” bottom. If this pattern holds the way it should, then we would assume five to eight weeks from the first low until the second. GLD has likely peaked for the year, unless that high is exceeded. One thing about this week that is interesting, but has not been remarked on much, is the performance of the Chinese ETFs. These outperformed the US last week.
We have no changes to our basic market outlook, which is more corrective behavior. We expect more upside on bonds, but that this move will be retraced completely when the equity correction is over.
The technical condition remains such that when the overbought is resolved, stocks look positive. Homebuilder ETFs suggest a strong economy into the election.
Understand we are NOT intermediate term bearish and would view such a decline as a buying opportunity. We have been underweight this sector for over a year and keep looking at it with a view toward changing our rating but the signals never materialize.
We could see some choppiness into the end of February or even March. However, we would add money to models slowly through that time, as this is no means assured. As far as bonds go, they are beginning to fail at our projected resistance, and the same with gold. GLD may be the riskiest here because our accumulation models suggest a quick drop.
SPY is declining about as we have expected, and the 320-area is being tested as we speak. Ideal would be a small bounce and then a test of the 315-area we have mentioned, but that could also be tested right away.As stocks pull back, TLT has rallied to the top end of the range, but there is glaring non-confirmation from the accumulation model, which suggests this move could be retraced.
