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Don’t Follow Those Bearish Traders

Posted by on Feb 23, 2016

Don’t Follow Those Bearish Traders

The strong technical action Monday with over 3-1 positive A/D ratios further validates last week’s positive action and the shallow nature of the recent pullback. Many of the longer term sentiment measures that I follow still have to change significantly before they signal that bullish sentiment is now too high.

The high level of bearish sentiment and heavy put buying at the February 11th low coincided with the bullish signals from the market internals (Is There Blood In The Streets Yet?) This created the perfect environment for a market bottom. In order for the market to move even higher the A/D lines need to continue to lead prices higher.

Traders are still quite skeptical of the recent market action and that is a positive sign. The Fast Monday panelists Monday were uniformly skeptical of the recent market rally as several were looking for a rally above 1950 in the S&P 500 but not much more.

Put/Call ratios Monday revealed that SPX put volume was 1.7 times the call volume and the VIX Put/Call ratio was almost 3.00. This is also a sign that traders are looking for the VIX to rally and for the stock market to move lower.

Buy what do the charts say?

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The daily chart of the Spyder Trust (SPY) shows that on Monday it was able to move marginally above the early February high at $194.58.

  • The 38.2% Fibonacci resistance has been overcome with the 50% retracement at $195.70.
  • A move above this level will make the 61.8% resistance at $199.18 the next target. This is very close to the daily starc+ band.
  • The long term chart resistance is in the $207 area.
  • The lower starc- band was tested near the lows (see arrow) as the S&P 500 A/D line was forming a bullish divergence, line b.
  • The S&P A/D line is now rising very sharply as it has moved well above the early February highs.
  • This is a sign that the market rally is very healthy and it is also in a clear uptrend.
  • The major A/D resistance at line b must be overcome to turn the intermediate term A/D line analysis positive.

The VIX hit a high of 30.90 on February 11th but closed at 28.14. The lower highs in the starc+ bands suggested that a top was likely in place.

  • The VIX has now violated the support at line d.
  • More importantly the VIX has closed well below the early February lows.
  • There is next support for the VIX below 18, line e, with the starc- band at 16.39.
  • Technically it will take a number of days and much higher VIX levels to reverse the downtrend.

What to do? The S&P futures dropped down to the support in the 1925 area overnight but have rebounded from the early lows. A day or two of sideways action would not be enough to alter the bullish technical readings. It will now likely take a move in the S&P to the 1970-1990 area to turn traders more bullish

I still favor our long positions in the EEM, XLB, XLU and DIA which were bought based on the bullish weekly Viper ETF scans. I am looking for other new entries where the risk can be well controlled.

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The Week Ahead: Three Sentiment Indicators Investors Should Follow

Posted by on Feb 21, 2016

The Week Ahead: Three Sentiment Indicators Investors Should Follow

The market continued sharply higher to start off the holiday shortened week and for three consecutive days the gains were impressive. This was enough to get the market’s and investor’s attention. There were signs early Thursday that the rally was stalling which was supported by the weak technical nature of crude oil.

This was a good example of why it is important to look at more than the price action before taking action. April crude oil had rallied over 17% between the prior week’s low and Wednesday’s close but as I noted in Thursday’s Viper ETF Report ” the OBV is still weak . Therefore I would not chase the long side at current levels as a pullback is likely going into next week.”

The United States Oil Fund (USO) opened 2.8% higher Thursday before reversing to close on the lows. The SPDR Oil & Gas Exploration ETF (XOP) gapped below the previous four days lows on Friday and trapped the late buyers on the long side. Despite the short term weakness there are signs that crude oil and the energy stocks are bottoming.

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The stock market rally was what I was looking for in last week’s “Is There Blood In The Streets Yet?”. The negative sentiment and multiple oversold readings from a number of market measures needed a burst of upside momentum to reverse the market’s downtrend. The strong price gains along with strong market internals was enough to do it.

The S&P 500 A/D line overcame the resistance at line c, which confirmed the bullish divergence (line b) that formed at the February 11th lows. This is consistent with a further rally after the market completes its short term period of consolidation. This should take SPY to new highs for the month with next targets in the $196-$198 area. This of course first requires a move in the S&P 500 cash above the widely watched 1950 level.

The S&P 500 A/D line overcame similar resistance last October, line a, on October 7th as the SPY rallied into early November gaining 6%. In October the A/D line continued to rise sharply after overcoming resistance as it started acting stronger than prices.

The market action this week is therefore quite important and the A/D line needs to overcome the resistance at line d, to signal that an intermediate term low is in place. The market does need to move significantly higher to reverse the massively negative bearish sentiment as while many investors have fled the markets many traders are still holding many puts. A high level of negative sentiment is needed to propel the market even higher.

Watching the sentiment as the current rally develops will be important. If the sentiment reverses too quickly then it could send a warning that the market’s upside momentum is waning.

In today’s article I would like to discuss three sentiment indicators that investors and traders should follow. All are available online but it is important to remember that market sentiment must be combined with technical analysis in order to identify important turning points.

Many of you may be familiar with the Rydex funds as they were one of the first to introduce bear funds. The Rydex Inverse S&P 500 Strategy fund (RYURX) was one of the few alternatives before the introduction of inverse ETFs. One way to use these funds as a sentiment indicator is through fund flows.

Well known technical analysis and founder of Decision point Carl Swenlin introduced this data in 2004 and his company was merged into stockcharts.com in 2014. He has his own unique analysis of this data and more can be found here.

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The chart was created using the weekly data on the Rydex Cash Flow Ratio (Bear CFL + MM Assets/Bull CFL) which you can follow on stockcharts. I have overlaid my starc bands analysis on the chart in order to identify extremes. I have highlighted several instances when this ratio has reached or exceeded the starc+ band.

On September 26th 2011, one week before the market bottomed, the ratio closed at its starc+ band (point 1) Three weeks later the ratio dropped below its 6 week SMA as market began to rally more sharply.

The ratio also came close to its starc+ band (point 2) in late November of 2012 as fears over the fiscal cliff and the re-election of President Obama caused a sharp increase in bearish sentiment. In May of 2013 the S&P 500 started a month long correction as the ratio expanded sharply to move above its starc+ band on July 1st, 2013 (point 3). This happened even though the market had already started to rally.

The ratio also reached sharply higher levels on September 8th 2015 as it closed above its starc+ band (point 4). The ratio stayed at high levels until October 12th when as it began to drop sharply. On January 19th the ratio again closed above its starc+ band (see arrow) and it is still trading near its high. A weekly drop below its SMA at 1.29 will be a sign that the fund flow has changed. If the ratio moves then back below 1.00 it will be time to watch the market action more closely.(Here is a link for my chart)

In the latest survey from AAII the bullish% jumped 8.3% to 27.6% after reaching a low the prior week of 19.6%. Just after the January lows I noted in (“Is Bullishness Low Enough Now?” ) that it had dropped to 17.9% which was the lowest reading since 2005. The long term average is 38.6% and once the bullish% moves back above 40% I will be looking for any technical signs the market’s rally is stalling.

The Put/Call ratios have been very high for some time as they reflected a high amount of put buying and therefore a high degree of bearish sentiment. The Option Strategist’s Larry McMillan, who I have known for 30 years, is one of the top option analysts. In his recent analysis he commented that “Both the equity-only put-call ratios and the Total put-call ratio gave buy signals on Wednesday, February 10th – one day before the lows.”

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The Put/Call ratio is one of the seven components of CNN’s Fear & Greed Index . Just one week ago it was at 21 and a month ago was very low at 9 which was well in fear territory. It is currently neutral at 49 and is likely to move higher over the next several weeks. It would not be surprising for it to get to the 75-80 level as the market moves higher .

By following these three measures of sentiment one should be able to gain some insight on when the market sentiment has changed from being too bearish back to more historically neutral levels. At that point it will be important to closely analyze the market technically to see if it’s trend is changing.

The pullback late in the week is likely a buying opportunity and as I discussed last week ” Charting Barron’s High Yield Industrial Picks” there are several of the big, high yielding industrial stocks that look positive based on the weekly/monthly technical studies.

There are obviously also a number of very oversold stocks which are likely to rebound but do not yet show signs of an important low. Some stocks that had a rough 2015 like Whole Foods Market (WFM) appear to have bottomed. It was down 32.5% in 2015 but it was recommended last week to clients of Viper Hot Stocks.

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The chart of WFM shows that it traded in a tight range over the past month and then closed on February 12th above the doji high. Though WFM did drop below the late 2015 lows in the past month the relative performance (line b) and the on-balance-volume (OBV) (line c) both formed bullish divergences as they did not make new lows with prices. They are now above their WMAs and on a move above the resistance at $35 WFM should run to the $40-$42 area.

The Economy

There were a few bright spots last week from the economic data but overall the data on the manufacturing sector is still weak. The Empire State Manufacturing Survey came in at -16.64 much weaker than the -10 consensus estimate. The Philadelphia Fed Business Survey was a bit better than expected but still weak at -2.8.

The Housing Market Index also dropped to 58 which was down from the prior reading of 60 but well above the key level of 50. According to Econoday it is still ” signaling that confidence among the nation’s home builders is very strong”. Housing starts were down a bit in Janaury but still up 6.4% on a year to year basis.

The Industrial Production was surprising strong in January up 0.9% but is still negative on a year to year basis. This was the best monthly reading since 2014 and another positive reading for February would be a good sign.

The all important Leading Economic Indicators was down 0.2% in January. According to the Conference Board’s Ataman Ozyildirim “The U.S. LEI fell slightly in January, driven primarily by large declines in stock prices and further weakness in initial claims for unemployment insurance”.

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As I have noted in the past this indicator has an excellent record of topping out before the start of a recession. This chart (courtesy of dshort) shows that the long term uptrend, line a, is still intact. However from the insert one can conclude that a decline below the low from last September would be a reason for concern.

The CPI on Friday reflected a 0.3% jump and the recent evidence of wage inflation is a good sign for the economy. It could give the Fed some room to raise rates later in the year. The minutes from the last FOMC meeting did show increased concern over the strength of the economy.

The economic calendar is full this week with the Chicago Fed National Activity Index Monday along with the Flash PMI Manufacturing Index . Then on Tuesday we have the S&P Case-Shiller HPI, Consumer Confidence, Existing Home Sales and the Richmond Fed Manufacturing Index.

We get a new reading on the services sector Wednesday with the Flash PMI Services Index and also New Home Sales. This is followed on Thursday with the Durable Goods and jobless claims. The week finishes with the latest reading on 4th quarter GDP, Personal Income and Outlays along with Consumer Sentiment.

Market Wrap

The Dow Transports and small cap Russell 2000 led the market higher last week with gains of 3.4% and 3.9% respectively. The S&P 500 and Nasdaq Composite gained 2.8% while the Dow Industrials was up a bit less. Very solid A/D numbers as 2683 stocks advanced while only 516 declined. Only 116 NYSE stocks made new lows last week versus 978 the previous week.

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Though the daily outlook on the Spyder Trust (SPY) has clearly improved the more broadly based NYSE Composite is still lagging. On the weekly chart the drop below the weekly starc- band five weeks ago was clearly significant.

The resistance from four weeks ago at 9651 is the key level that needs to be overcome. Once it is the declining 20 week EMA at 9890 is the next key barrier. It corresponds to the lows from late 2015 (dashed line). The weekly starc+ band is is at 10,156.

The weekly A/D line has turned up after breaking support, line d, in January. The A/D line now needs to overcome its WMA and the downtrend, line c, to signal a stronger rally. The weekly OBV has also turned higher but so far the volume on the recent rally has not been impressive. A move in the OBV above the previous peak would be a good sign.

WA2-19g

The PowerShares QQQ Trust (QQQ) which tracks the Nasdaq 100 had a good week as it was up 3.7% for the week. The weekly doji formation on the iShares Nasdaq Biotechnology (IBB) I mentioned last week did suggest a bottom might be forming. This week’s close above in IBB above the doji high indicates it still can move higher along with the health care sector.

The daily chart shows that the QQQ has just reached the 38.2% Fibonacci retracement resistance and the downtrend, line a. The 50% resistance is at $105.12 with the more important 61.8% level at $107.56. There is still a major band of resistance on the daily chart in the $109-$110 area.

The Nasdaq 100 A/D line did not form any positive divergences at the recent lows but was able to overcome key resistance, line b, last week. This does favor a further rally and the WMA of the A/D line is now rising. The daily OBV is still below its WMA and the resistance at line c.

The SPDR Dow Industrials (DIA) shows the best monthly and weekly relative performance as it is leading the S&P 500 higher. The bullish divergence in the Dow A/D line has been confirmed with major resistance now in the $166.60 to $169.40 area.

The key resistance for the ishares Russell 2000 (IWM) is just above $103. When it is overcome the IWM should then rally to the $104.50-$107 area.

What to do? The stock market needs further strength this week to confirm that the recent lows was a good buying opportunity. This is my favored scenario and recommended long positions in select sectors like emerging markets, materials and utilities should continue to do well.

For those who decided during the market’s plunge in January that they had too large a percentage of their portfolio in stocks the rally is an opportunity to adjust your portfolio. In commission free retirement accounts I would suggest you gradually reduce your exposure as the market moves higher. This will allow you to reduce your commitment to stocks enough to reduce your fear level.

My analysis still suggests that the recent drop was a bull market correction not the first phase of a bear market. Therefore I think stocks will post solid yearly gains in 2016 but the action of the economy in the next few months will be important. Of course the technical strength of the current rally will provide clear evidence whether this view is right or wrong and it is important to keep an open mind.

For market commentary during the week please follow me on Twitter where I post commentary daily.

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Charting Barron’s High Yield Industrial Picks

Posted by on Feb 17, 2016

Charting Barron’s High Yield Industrial Picks

The stocks market’s impressive gains Tuesday and 4-1 positive A/D ratios were consistent with the market’s sold out status last week. The divergences in the NYSE High/Low analysis and the analysis of the S&P 500 stocks below their 50 day MAs that was discussed last week suggested the market was near a turning point.

The extremely low bullish sentiment and high degree of pessimism over the economy was also a sign as I noted last week that there was “blood in the streets” . This another reason for investors to be looking to buy, not sell. The bullish divergences in the S&P 500 and Dow Industrial A/D lines are closer to being confirmed after Tuesday’s rally. A good day of A/D ratios on Wednesday could be enough to complete the bottom formations

Additional strength should push the Spyder Trust (SPY) above the $196 which make many of the market bears nervous. Many are just looking for a bear market rally so stocks need to prove themselves on the upside. The A/D lines (One Indicator Stock Traders Must Follow) must start leading prices higher in order to signal that an intermediate term low is in place.

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The Industrial sector has been outperforming the S&P this month and looks like a new market leader . In a February 8th Barron’s article (Industrials Flex Payout Muscle) they examined ten industrial stocks with yields above 3% that based on their payout ratios could grow their dividends.

From the table one can see that all except General Electric (GE) have had dismal one year returns. This past poor performance makes them potentially attractive for new purchase but do any look attractive technically?

As I discussed in “Scanning Stocks For Winners & Losers” my method of finding the best stocks or ETFs focuses on running relative performance and on-balance-volume (OBV) analysis over multiple time frames.

CP217a

General Electric (GE) hit a high of $31.49 in the first week of January and then dropped to a low of $27.10 last week. This was a decline 14% decline as the monthly pivot support at $27.44 was violated.

  • GE formed a doji last week and is already trading well above the doji high of $28.70. This makes a bullish signal likely this week.
  • Once above the January highs there is trend line resistance, line a, in the $33 area. The monthly starc+ band is at $34.40.
  • There is short term support now at $28.63 and the 20 day EMA with further at $28.
  • The weekly relative performance broke out to the upside in October and has continued to make new highs. The monthly RS analysis (not shown) is also positive .
  • The weekly OBV broke out two weeks after the August low as resistance at line c, was overcome.
  • The OBV is now trying to turn higher after testing its WMA.

Deere & Co. (DE) is down 8.7% in the past year but is up 4.6% so far in 2016 which is better than the 6.9% decline in the Spyder Trust (SPY). The weekly chart shows that it is on the verge of completing a twenty week trading range, lines d and e.

  • DE is currently trading above the resistance at $80.83 with the weekly starc+ band at $85.61.
  • There is long term resistance from last summer in the $90 -$95 area.
  • The 20 week EMA at $77.96 was tested this week with stronger support in the $75-$76 area.
  • The weekly relative performance completed its bottom in early 2016 as it moved well above its flattening WMA.
  • The monthly RS analysis (not shown) has moved above its WMA consistent with a market leader.
  • The weekly OBV looks very close to flipping back above its WMA this week.
  • A move in the OBV above its downtrend, line g, would be even more positive .

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Eaton Corp. (ETN) is a diversified machinery company that has a current yield of over 4%. It formed a weekly doji the week ending January 22nd and triggered a high close doji buy signal the following week.

  • The weekly starc+ band is at $59.94 with the downtrend, line a, in the $70 area.
  • ETN opened strong Wednesday which creates initial support now in the $54-$54.50 area. The rising 20 day EMA is at $52.70.
  • The weekly relative performance has completed its bottom formation as it surpassed resistance at line c, after moving above its WMA.
  • There is longer term RS resistance at the downtrend, line b.
  • The weekly OBV looks ready to hook back above its WMA this week.
  • In order to signal a major bottom the OBV needs to break its downtrend, line d.
  • The daily technical studies are positive.

Boeing Co. (BA) is one of the dividend stocks mentioned by Barron’s and is a good example of a stock that looks weak technically. It is down over 22% in the past year. It had a high last November of $149.21 but dropped to a low of $102.10 last week and was well below the weekly starc- band.

  • There is initial resistance in the $120-$124 area with the declining 20 week EMA at $130.14.
  • The RS line dropped below its WMA at the start of the year.
  • It then plunged below support, line f, in the middle of January confirming that it was acting weaker than the S&P 500.
  • The RS line has continued to plunge and is now well below its declining WMA.
  • The OBV had a weak rally at the start of the year as it just moved above its WMA for one week.
  • The subsequent reversal in the OBV (see highlight) generated a sell signal and it then broke the support at line g.
  • The weekly OBV is oversold as it is well below its WMA.
  • The daily studies are negative but are now rebounding.

What to do? All three of the favored industrial stocks look positive based on the weekly as well as the monthly technical studies. They have all moved higher this week which increases the risk in chasing them at current levels.

GE, DE and ETN are likely to pull back to their rising 20 day EMAs in the next week or so which would allow for a better risk/reward entry point. The weakness in BA suggests that a further rally should be used for selling.

Stock traders who are interested in applying this type of analysis to the Nasdaq 100 and IBD top 50 stocks might try the Viper Hot Stocks it is only $34.95 per month.

 

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The Week Ahead: Is There Blood In The Streets Yet?

Posted by on Feb 13, 2016

The Week Ahead:  Is There Blood In The Streets Yet?

There were many signs last week that the few remaining bullish advisors or investors were giving up on the stock market . Even the cautious economic comments from Fed Chair Janet Yellen did not inspire many new buyers. The week finished with a 2% rally in the S&P 500 but did that really change anything?

This famous comment is attributed in Baron Rothschild “The time to buy is when there’s blood in the streets” and it is a staple of contrarian analysis. His buying after the Battle of Waterloo generated huge profits but many investors have endured serious losses over the years in their attempts to be contrarians.

According to AAII the bullish% dropped 8.3% in the latest survey to 19.2% bullish just above the 17.9% reading from mid-January . As I noted at the time this reading was the lowest since 2005 and last week’s reading is just slightly more bullish than the 18.9% reading on March 5, 2009 as the bear market was ending.

The bearish % jumped 14% to 48.7% which is well above the long term average of 30.7% and matched the January 22nd reading. These are the highest reading since April 11th of 2013 when it hit 54.5%. As I have noted many times in past articles extremes in sentiment often occur well before an important market turn and the sentiment data does a better job of identify market lows than market tops.

In last week’s trading the Dow Transports managed a nice gain of 1.5% while the NYSE Composite was down 1.7% for the week. The battered down Nasdaq Composite lost 0.60% The market internals were strong Friday as advances led the declining stocks by a 3.8 to 1 margin but for the week the market internals were decidedly negative as 2476 stocks declined with only 728 advancing.

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Therefore the weekly A/D lines are still declining even though the daily studies do show some improvement . The lower trend line support on the NYSE composite , line b, was tested again Thursday. The weekly low at 9089 came very close to the monthly pivot support at 9032. A solid close back above the 20 day EMA at 9386 would be the first step in reversing the downward price trend.

The NYSE daily A/D line as well as the Nasdaq 100 and Russell 2000 A/D lines made a marginal new low on Thursday so no positive divergences were formed. The S&P 500 and Dow Industrials A/D lines did not make new lows, forming bullish divergences which now need to be confirmed.

The NYSE A/D line needs to move above its WMA and the downtrend, line d, to signal a stronger rally. If the longer term resistance at line c is overcome it would be signs of an intermediate term bottom. The McClellan oscillator did form a strong positive divergence ( line e) but needs to close above the +160 level to signal an upside breakout.

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Last week I Tweeted two charts form the Viper ETF Report that support the view that the market was in the process of forming an intermediate term low. As I commented Thursday “The 5-day MA of the S&P 500 stocks above their 50 day MAs as I discussed on Monday also suggests the market is sold out. The 5-day MA bottomed on August 27th at 12.6% but was only at 16.2% on September 28th. The 5-day MA had a January 19th low of 12.8% but closed at 24.1% on Wednesday. The % is likely to drop further before the end of the week and would look for it to turn up as the market bottoms” .

It stopped declining as of Friday’s close. The number of NYSE stocks making new lows was 709 on Thursday as opposed to 1395 on January 20th (line 2). It dropped further to 139 on Friday. This divergence is similar to what formed in late September of 2015, line 1. The increasing number of new highs is also an encouraging sign.

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The economic data on Friday was better than expected as while Retail Sales rose just 0.2% as expected , general merchandise sales rose a healthy 0.8% in January. Building materials rose 6.9% year on year and e-commerce was up 8.7%. The yearly Retail Sales have turned up and a move through the resistance at line a would be a bullish sign for the economy. The mid-month reading on Consumer Sentiment was a respectable 90.7 which was not far below the four month average of 92.

The economic calendar is full this week with the Empire State Manufacturing Survey on Tuesday along with the Housing Market Index. Then Wednesday we get the Housing Starts, PPI and Industrial Production. The Philadelphia Fed Survey , Leading Indicators and FOMC minutes are out on Thursday followed by the Consumer Price Index on Friday.

What to do? if stocks manage to record several consecutive higher closes this week with good A/D numbers then a stronger rally is clearly underway. It should carry the major averages above the early February highs with the SPY and DIA look the best. This would mean a move above $194.58 in the Spyder Trust (SPY) with upside targets in the $196-$198 area. The DIA has a swing high at $165 which if overcome should push the DIA to the $167.50-$169 area.

In Friday’s article “Where Will Biotech Bottom?” I took a look at the long term charts of the iShares Nasdaq Biotechnology ETF (IBB) which has been lagging the overall market. It has some converging support levels that need to be watched and it formed a doji last week so this week’s close could be important.

Editor’s Note: If you are interested in specific investing and trading advice in the index and sector ETFs you might consider Tom’s Viper ETF Report. It is just $34.95 per month and can be cancelled anytime on line.

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The Week Ahead: Is This The Stock Market’s Secret Weapon?

Posted by on Feb 6, 2016

The Week Ahead: Is This The Stock Market’s Secret Weapon?

The bumpy ride for the stock market has continued in February as the upside reversal on Wednesday failed to stimulate much new buying. Still it was supportive that the major averages were able to recover substantially from the Wednesday lows as after Tuesday’s drop the bearish sentiment had spiked as there was heavy put buying Tuesday.

Individual investors also became less positive last week as the bullish% dropped 2.2% to 27.5% and could drop further this week though doubt it will go below the low of 17.9% on January 14th. The bearish% dropped 5.2% to 37.3% as the neutral camp rose 7.5%.

The S&P 500 had dropped down to the 1872 level in early trading Wednesday but then was able to close 40 points higher at 1912. Now the focus is on Wednesday’s early lows as a drop below these levels would be a strong sign that the rebound from the late January lows was over. These lows were tested Friday but the market managed to close above the lows.

The weaker than expected jobs report did not help as the stock market opened a bit lower on Friday and the selling picked up as the day progressed. The number of new jobs was about 30,000 less than economists expected though the unemployment rate did drop to 4.9%. The three month average gain of 231, 000 jobs is still moderately healthy.

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The 0.5% increase in hourly wages was the largest in a year and does suggest a healthy job market. This along with recent report of another quarterly 0.6% increase in the employment cost index is a sign that higher inflation is now more likely. Investors should realize that an upward trend in inflation is much better that the threat of deflation.

Stocks have been edging higher as some investors now feel that the signs of a weaker economy makes multiple rate hikes less likely. This is of course a double edged sword as the economic weakness is a reason for other investors not to buy stocks as it may mean that earnings will continue to weaken. This was the dominant sentiment at the end of the week.

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The dollar looks ready to drop over 2% this week and the weekly chart shows that it will close below the prior week’s doji low. This sell signal is consistent with a further decline though it looks as though the weekly support ( line a) will hold this week. The weekly starc- band is at $95.04 or about 2% below Friday’s close. The 38.2% Fibonacci retracement support is at $92.45 which is just below the August 2015 low of $92.52.

The dollar index had completed a significant bottom in July 2014 as the Herrick Payoff Index (HPI) moved strongly into positive territory and prices overcame major resistance. The HPI had also helped to identify the recent low in crude oil.

The HPI failed to move above the prior highs, line b, on the recent rally. This bearish divergence was a sign of weakness and the HPI has now dropped below the zero line after failing to move above its WMA. This means that the money flow is now negative.

The daily analysis is also negative on the dollar index but it is testing the starc- band which makes a bounce likely over the short term. I will be looking for a new entry for Viper ETF clients in the PowerShares DB US Dollar Bearish ETF (UDN). The volume in UDN is relatively thin but it looks like the best way to trade a lower dollar.

So why could a lower dollar help the Fed and the economy?

The most obvious reasons as that it will make our exports more attractive and help revive the weak manufacturing sector. A weaker dollar would also help the earnings of the large multi-national companies whose earnings have been significantly weakened as the dollar index has appreciated 20% since the July 2014 lows.

Weakness in the dollar will also help the emerging markets satisfy their debt burden which is generally denominated in dollars. Even if the Fed does not continue to raise rates they are still higher in the U.S. than in most developed countries as Japan moved to negative rates last week. A weaker dollar should be supportive for crude oil and materials which are denominated in dollars. This could also help the beaten down mining and commodity stocks finally stop declining.

Clearly the thought of higher rates in the US this year has caused some capital flows into the US dollar and so we are likely to see some outflows if the dollar moves lower. Other possible negatives from a weaker dollar are consumer related as they will need to spend more to buy imports and other goods.

The impact of the dollar on the US stock market is not clear from the long term charts. The dollar completed a major technical top in 1985. As I commented in a 2011 article “In May 1985, my analysis of the OBV on the major currencies was instrumental in helping me identify major bottoms in currencies like the Deutsche mark (DMK) and Swiss franc (CHF), and therefore, the top in the US dollar (USD). At the time, most of the leading economists were expecting the dollar to remain strong for a few years. The dollar had bottomed in November 1980 with the election of Ronald Reagan.”

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The dollar stayed weak for ten years, line a, finally bottoming in 1995. Stocks accelerated to the upside as the dollar began a six year rally. The Nasdaq Composite completed its top in March 2000 but the S&P 500 did not top out until the fall. The dollar continued higher until April 2002 when it completed a classic top formation.

The dollar continued lower even though the stock market bottomed out in 2003 and began its run to the October 2007 high. After making a low in late 2004 the dollar rallied in 2005 before resuming its downtrend.

The dollar rallied sharply in the second half of 2008 but by the end of 2009 it was again back to the lows. After a three year trading range, the dollar finally bottomed out in 2014 and it has since moved higher along with the stock market.

Given the current market environment I think that the positive factors from a weaker dollar outweigh the negatives so a lower dollar should be supportive for stock prices.

The Economy

The economic data last week validated the view of a weaker economy as the ISM Manufacturing Index came in at 48.2. This was as expected as it was below the 50 level which is consistent with an economic contraction.

The PMI Manufacturing Index came in at 52.4 as it was helped by a firming in new orders. This may be a sign of improvement for manufacturing but that will take a few months to confirm. The market was nervous about the ISM – Non-manufacturing Index and the PMI Services Index so the weak numbers Wednesday sparked renewed selling in the stock market.

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The ISM came in at 53.5, lower than the expected 55.5 but still well above the 50 level. The chart shows that it has been in a continued slide since last summer when it was near 60. New orders remain solid at 56.5 but down from 58.9 in December. The PMI Services Index came in at 53.2 which was down from 54.3 and these readings do signal softening in the 1st quarter.

Factory Orders dropped 2.9% which was a sharp decline from the downwardly revised 0.7% decline in November. Looking inside the report there were few positives with orders for capital goods down 4.3%, and shipments off 1.4%. The weak exports are a big factor as the strong dollar has not helped.

The weak calendar this week may be a plus as most of the data comes out on Friday with Retail Sales, Import and Export Prices, Business Inventories and Consumer Sentiment. Of these numbers the focus is likely to be on sales as well as on the all important consumer sentiment.

Interest Rates & Commodities

Yields dropped sharply in early January and the subsequent break of yield support in the 2.00% area projected much lower yields. The close at 1.848% on Friday was below the April 2015 low which projects a further decline to the 1.740-1.760% area. In February 2015 yields briefly hit 1.654% but just four days later they had risen to 1.938%. I would expect the current decline in rates to end with another spike low in rates.

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The Comex Gold futures closed up over $41 last week as the lower dollar definitely gave the metals a boost. The weekly chart shows converging resistance, lines a and b, in the $1200 area. There is additional resistance in the $1220-$1230 area.

The low volume at the end of the year suggested the gold market could be sold out. Though the volume has picked up on the rally the weekly OBV has just barely moved above its downtrend, line d. I will be looking to evaluate a pullback in the next week or two.

Market Wrap

The weaker than expected jobs report scared away the few buyers as the recessionary fears mounted as the day progressed. Weaker than expected earnings took LinkeDIn Corp. (LNKD) down a whopping 43.6% on the day. Another high flyers Tableau (DATA) was down 50% as its guidance disappointed. many other high flyers like Amazon (AMZN) and Neflix (NFLZ) are down 25% or more YTD. There were several good stock trading opportunities as Viper Hot Stock traders closed out longs in STZ and short positions in AHS

The 3.1% drop in the S&P 500 last week did not look to bad when compared to the 5.4% drop in the Nasdaq Composite. The small caps did not do much better as the Russell 2000 lost 4.8% while the Dow Transports gained 0.52%. The 2.5% drop in the NYSE Composite was worse than the 2 to 1 negative A/D ratios.

The basic material stock bucked the trend last week as they were up 4.3% followed by a 2.4% gain in the utility stocks. Technology and consumer services stocks were down 5.6% and 5% respectively while oil & gas, health care, financials and consumer goods were all down more than 3%.

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The NYSE Composite tried to move back above the 20 day EMA (9527) on Thursday before dropping 1.5% on Friday. The rally from the January lows did slightly exceed the 38.2% retracement resistance before the NYSE turned lower. The stronger resistance at 9784 has not been reached.

On a drop below last Wednesday’s low at 9276, the daily starc- band is at 9099 with the January low at 8937. The lower boundary of the trading channel is in the 8850-8890 area. The NYSE A/D line appears to have stalled at former support, now resistance at line b. The McClellan oscillator looks as though it has completed a short term top but is likely to form a further positive divergence if the NYSE makes a new daily closing low.

Despite the sharp drop Friday the Spyder Trust (SPY) is still holding above the nine day lows at $187.06 as Friday’s low was $187.20. Many traders are expecting heavy selling on Monday’s opening with the daily starc- band at $185.83 and the January low was $181.02. The SPY now needs a close back above $192.75 to resurrect the uptrend.

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The PowerShares QQQ Trust (QQQ) closed on weekly support, line a, last week but just above monthly pivot support at $97.53. The weekly starc- band was violated three weeks ago and it is now at $94.73. There is short term resistance now at $101.60 to $103.17 and the declining 20 day EMA.

The weekly Nasdaq 100 A/D line turned lower last week but is still slightly above the prior lows. There is still major support at line b. The A/D line needs to move above the recent high to suggest a new uptrend could be starting. The weekly OBV turned down before reaching its WMA but is still above the strong support at line c.

What To Do? Investors who were nervous about their equity exposure had an opportunity to reduce their position last week though the market did not reach the stronger resistance levels I had identified in last week’s column.

Most are expecting an ugly start this week after the relentless selling on Friday. However the very high put/call ratios and the two upside reversals do allow for bargain hunting to come it at lower levels. Newcomers to the short side of the market are likely to have less staying power and a move above last week’s highs should make them nervous Such a move is needed to indicate that the oversold rally from the January lows is not yet over.

For investors there are no strong signs yet of an intermediate term market bottom so it may be a tough few weeks. I do expect the SPY to be 5-10% above current levels before the end of the first quarter so long term investors should not give up as equities are still the best bet and a lower dollar may be the catalyst.

There are still some opportunities in special situation ETFs as Viper ETF subscribers took very nice profits on the long term bull call spread position in the Market Vectors Gold Miners (GDX) last week. There are some also some encouraging signs in the emerging market ETFs where new longs were established near the lows. as well as the resource based ETFs.

I will be traveling next week so the next Week Ahead column will be published on February 19th. of course you can follow me on Twitter for interim updates.

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