Monday, February 27, 2012

Morning Market Analysis

Largely due to my work schedule, I haven't had the opportunity to really look at the markets and "get my bearings" as to where we are in the trading cycle.  Thankfully, I have had the opportunity to do that this weekend.  Essentially, the markets have moved through key resistance areas.  But in doing so, they have advanced very strongly and are now in a slightly overbought position.  My thoughts are a correction of 5%-10% is more and more likely, although this correction will hardly be fatal unless the fundamental backdrop significantly changes.  Let's go to the charts:

The weekly SPY chart shows that prices have advanced through resistance at the 135 area.  However, over the last few weeks, the actual price action has been fairly muted -- there has been little movement after breaking resistance.  However, the underlying technicals are still strong: a rising MACD, money flowing into the market, and a bullish EMA position.

The monthly chart puts the recent move into better perspective.  Prices have one more resistance point -- the 143 area established at the height of the last rally.  But that's only about 5% above current levels.  Pay particular attention to the narrowing Bollinger Bands, which is usually an indication of declining overall volatility.  That means prices could be staying at these levels for awhile, meandering between the 135 and 142 level.

The weekly IWM chart shows that after consolidating last fall, prices have advanced through resistance (roughly the 77 price area and are now consolidating gains.  The early 2011high is still functioning as resistance overall.  The underlying technicals of this charts are strong -- a rising MACD, A/D and CMF and a strong EMA position.

But the monthly IWM chart shows that prices are caught at resistance which was established in 2007 and early last year.

The weekly QQQ chart shows that prices have advanced through resistance at roughly the 60 price level, and have made a strong move beyond that point.  However, notice the lower volume readings on the latest rally and shorter candles over the last few weeks.  However, the other technicals the MACD, the volume indicators and the EMAs -- are in great shape.

The monthly charts shows that prices have advanced through important resistance areas -- -- largely in the mid-50s and 60 price level -- and have made advanced beyond those levels.

So -- we have a equity markets that have made strong moves through important resistance  However, to do that, they've had to expend a great deal of energy.

onsider the following charts, which show the percent of stocks in the S&P 500 and NASDAQ 100 which are above their 200 day EMAs:

83% of the S&P 500 stocks are now over their 200 day EMA.  Notice this number reached the 90% level in the last rally in early 2011.

In the NASDAQ 100, we see 81% of the stocks are above their 200 day EMA.

In short, the major averages have already expended a great deal of energy in getting to this point.  It will be far harder to get much higher in the currently situation.  That doesn't mean it can't happen, just that it's far harder.  Also consider these charts which I posted last week from Bespoke:

Finally -- consider this:

The transports are not confirming. 

So here is my conclusion:

The equity indexes are still in a long-term rally.  But, they're spent a great deal of fuel to get to this point.  A sell-off at this point should be expected.  That does not mean it will happen, only that it is far more likely to happen.  I would expect a move lower to previous resistance areas in all the stocks.