Saturday Update

1. 10 year treasury yields continue to make an inverse head and shoulders pattern targetting yields of 2.2:

Source: Stockcharts

2. Both the Euro and the Dollar are at S/R that could make for a near term reversal:

Source: Chris Kimble

3. New highs / new lows for the US stock market hit a record high. This could signal a near term reversal, but the implied rally breadth has historically meant continued bullishness subsequent to that, more often than not.

Source: Stockcharts / Greg Schnell

4. SP500 stocks above the 50MA have reached +1 standard deviation, but historically this indicator has usually oscillated in that range for a period before stocks topped.

Source: Index Indicators

5. SP500 bullish percent over put/call ratio has reached the 110+ extreme zone. Again, this indicator has usually gone on to oscillate in this zone for a period before stocks topped.

Source: Stockcharts

Sentimentrader’s indicators now show 40% in the extreme (bearish for stocks) – the highest percentage since January 2011. However, in their own words, with price at new highs this would be a concern if price action became toppy. It is a sign of a strong uptrend, but with near term reversal potential if price signals.

I don’t see price at this point looking toppy. Friday’s session was mixed for stocks, making a gain that finished in the middle of the day’s range. That’s fairly normal after a big up day on Thursday. The Nasdaq and SP500 have spent a week above their breakout, having successfully backtested it, which is bullish. The Hang Seng and Russell 2000 just broke out on Thursday/Friday. Unless price is reversed Monday/Tuesday then this is also bullish. Dow Transports have held above their triangle breakout, having a reversed a fakeout out of the bottom. Stocks breadth has led price, which is bullish. Chinese stocks are attempting a bottoming formation after reaching a Demark selling exhaustion count.

Demark’s last quoted price target for the SP500 is 1478. We didn’t get there yet. I believe stocks can push up a little higher early this coming week, giving a bit more room for the latest breaking out indices to subsequently consolidate above their breakout S/Rs. I respect the overbought/overbullish indicators that we are seeing and am alert to a correction soon, particularly when drawing in the Euro and dollar S/R positions and precious metals overbought/overbullish readings, but currently the evidence is for a consolidation in a continued bullish uptrend. So my approach is to maintain long positions through any correction, until evidence changes.

6. Coffee has a speculator net short position at a 7 year high. Here is the monthly price chart, and the weekly chart which shows a dynamic W bottom is being made. I am going to consider adding to my coffee position on Monday:

Source: Tradingcharts


14 thoughts on “Saturday Update

  1. Good stuff as always.

    Considering the Canadian dollar and US equity markets are very correlated (USD/CAD inversely correlated), the CAD futures net non commercial positions are at a minimum of a 4 year high, as they shot up over 35k to 101k net longs. This is an extreme considering NNC positioning have “maxed out” at around 65k longs on 3 different occasions over the past 3 years.

    On the retail side of the equation, or in the spot market if you will, net longs also hit an extreme per many brokers data for USD/CAD positions, indicating the losses for the pair may be halted in the near term.

    Watching the pair yesterday, we saw a major intraday reversal to which the pair made new 13 month lows before buyers of the pair stepped in and it closed just a few pips off its highs for the day. The pair also put in a near 5 year low in realized volatility at the beginning of September, and this could be an indication of higher real vol with higher prices. Usually these lows in vol indicate chop for some time followed by reversals, however I am not sure if we get this again.

    The pair is stuck in two major downtrend channels and considering the recent Fed move, I am playing the channels (at the bottom of both currently) and not looking for any major reversal. A major reversal, as stated yesterday, would occur (IMO) if we saw some fundamental change like major action out of the BOC to combat the Fed’s dollar deviation policies and programs, but I don’t think we will see that for some time.

    Have great weekend John and the rest.

  2. Hamish McRae did a very interesting article in the Independent today about the cheapness of equities relative to bonds, and stated that the secular inversion would most likely take place in the next 4-5yrs, as money floods out of bonds and other assets, and into cheap equities.

    How will a stocks bull happen if we have a rising bond yield, which has been a sign of lost confidence for Euro Zone countries in recent years?

  3. The Fibonacci Magic video I did a while back suggests that the SPX is stronger intermediate term than what I think the shorter term outlook looks like.
    Still, I’m concerned and watching events closely. I was really hoping for a sell-off on ECB disappointment into Jackson Hole, and possibly even into FOMC which would have substantially changed the technical outlook going into a rally out of FOMC, but as it is with FOMC coming on overextended prices, well, I think we all know all too well what my concerns are with regards to breakouts under these conditions and it’s time for me to shut my trap, at least so as to not bore everyone to death. Time will tell. Let’s see if we get a nice retrace – backtext – that works off the oversold short term and leaves the bulls with another nice long setup.

      1. Sometimes the brain just doesn’t work quite right. Don’t ask me what I was thinking. Gray matter issue. Anyhow, the light just came on: scratch Jackson Hole from the comment above (it should read ECB disappointment into FOMC).

  4. Hi John,
    I have been reading your blog for quite a while and I would like to say thank you for your sharing. I am always curious why the solar cycle seems to be only applicable to U.S equities. You’ve mentioned the market looks to go higher due to the solar cycle maximum in either March 2013 or September 2013 but why it doesn’t happen to equities in Asia like China or Japan ? They have been falling for quite sometime from the peak. If solar activities affect human behavior in making decision, and eventually that results in stock market, why the indexes in China and Japan look particularly gloomy ? Or I miss something important from your web? Thank you in advance.

    1. Hi Terry. If you look at the MSCI World index it made a secular top in 2000 near the solar peak, a panic bottom near the solar minimum in 2008/9. The German Dax did too. The Hang Seng also made these major reversals but the whole longer term Hang Seng chart is pointing more upwards. Japan made the solar min panic bottom too, but whilst it made a key reversal peak in 2000 it doesn’t appear a secular peak on the longer term chart. However, the Nikkei made a massive secular peak in 1989 close to the solar maximum of that year. The Shanghai index isn’t really a free floating market, but nevertheless shared the solar min panic bottom and a major top close to 2000. So the evidence isn’t limited to the US. But I see the US stock markets as the most responsive. Dichev/Janes showed that all markets respond to some degree to the lunar oscillation, but some more than others, so I’d expect an element of that (biological/behavioural differences between peoples).

      We could discuss the same for individual commodities – the complex as a whole is behaving over time per the solar cycles, but within that there will be some more responsive than others (e.g. currently gold looks on track to deliver very well, whereas nat gas has been struggling).

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