With Monday being August’s new moon, we arrive at the last higher-probability topping point mid-year 2014 for those indices which have not yet topped out:
With SP500 and Nasdaq overbought and showing negative divergences, their breakouts this week have the potential to become fakeouts here.
SP500 hourly RSI reached >95 and previous occurrences are shown in yellow on the two charts below, i.e. typically a pullback followed:
ISEE put/call ratio is 3 days over 200 and the last such occurrence led to a drop in January and the previous time before that in 2011:
Thursday produced the most NYSE unchanged issues since 22 Feb 2007 (source: Dana Lyons), which could be a sign of complacency as last time it preceded a 3.5% drop on 27 Feb 2007. This is supplemented by Skew which is back at historical elevation warning of a potential big down move:
Nasdaq reached a Demark exhaustion sell signal on Thursday and SP500 is expected to today.
Gold has weakened as the US dollar has surged higher. However, positioning in the Euro, which acts inversely to the USD, suggests that may be about to reverse:
Source: J Lyons
In short, we have the set-up for a reversal here in both equities and USD, for at least a partial retrace of the recent gains, and as we pass through Monday’s new moon the set-up looks good for a down week next week. Margin debt has yet to be released for July, but with indices overall down in that month I expect a decline. However, if stocks were to rally further next week it would raise a question mark over margin debt in August, whilst taking the Dow to new highs and cementing the breakouts of the SP500 and Nasdaq. Alternatively a down week next week should create fake-outs on the SP500 and Nasdaq and set up the possibility of a full retrace of the rally of the last 2 weeks. The negative divergences on the new marginal high in SPX versus the July peak support this occurring: