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Market Sentiment At Its Lowest In 10 Months

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Stocks sold off last week…

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SPX: Breakout

  • The consolidation phase has proven, as expected, to be a continuation pattern.
  • Headline news: On Friday SPX achieved a new ATH
  • Long term view: Monthly and Weekly oscillators are in agreement with a potential Elliott Wave ending pattern
  • Short term view: The risk of a pullback is increasing

Monthly time frame:

  • There is nothing bearish in sight if the breakout is confirmed by the end of February:

SPX Monthly Chart
Larger Image

  • However monthly oscillators are flashing "warnings lights":
    • The RSI has breached and not reclaimed the trend line support from the 2009 low and it is displaying a sequence of lower highs (Negative divergence)
    • The Stochastic has a bearish cross in force since December
    • The MACD is testing the signal cross

SPX Monthly Momentum Chart
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  • What could happen when SPX concludes tha rally from the March 2009 low? Probably a multi-year pullback should have as a target at least the 0.382 retracement. If we had already a top it would mean a 26% drop.

SPX Monthly Chart 2
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Weekly time frame:

  • If the break out is confirmed (Odds favor it) since we are in uncharted territory we have two trend lines that can be used as potential resistances (Reversal zone?)

(1) We have a trend line resistance in force since March 2012. This trend line will be at 2148 +/- by the end of February:


SPX Weekly Chart
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(2) A second trend line resistance (That connects the July-November-December peaks) could belong to an Ending Diagonal. If this pattern pans out it could end the rally from the 2009 low.

SPX Weekly Ending Diagonal Chart
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The last up leg of the assumed Ending Diagonal could go straight up towards the upper trend line and reverse or it could consume more time with a large Zig Zag (The second up leg after a pullback will establish the top). If this is the ending pattern probably the latter should be the correct scenario.

This is just an idea, hence going forward I will monitor the price action in accordance to the breadth indicators.

So far what information can be obtained by breadth indicators?

  • Cumulative Tick continues to suggest higher prices ahead, however the further it moves away from its 10 dma (Signal line) odds should favor a smaller gap, in other words it is getting too stretched.

NYSE Cumulative Tick Chart

  • The 10 dma of the NYSE Advance-Decline Volume has crossed the overbought line

NYSE Advance-Decline Volume Chart

  • The NYSE Summation Index despite SPX`s new ATH is not showing relative strength as it is still below its December peak (negative divergence), in addition the RSI is entering the overbought zone

NYSE Summation Index daily Chart

However the RSI can remain overbought for an extended period (one month? ) before the next sell signal is triggered when the index crosses the 10 dma

NYSE Summation Index Daily Chart

The weekly stochastic (5,3,3) also has crossed the overbought line (Another warning).

NYSE Weekly Stochastic Chart

  • The SPX % of stocks above the 50 day moving average has just crossed the overbought line. Theoretically at a major top we should expect extreme overbought readings (Above 84%)

SPX % of stocks above the 50 day moving average

However with an ageing up trend it is worrisome the negative divergence that it is displaying:

SPX % of stocks above the 50 day moving average Chart 2

  • The McClellan Oscillator should cross the 60 line in order to expect a potential reversal (It has room to the upside before entering the overbought zone)

NYSE McClellan Oscillator Daily Chart

Lastly the VIX/VXV ratio has dropped to a dangerous reading where the probability of a reversal is greater.


Conclusion: Breadth indicators are suggesting caution. They are not timely indicators but I would not be "all in". It would not be a bad idea to start preparing a plan for the "lean years" just in case.

Daily time frame:

  • On Friday SPX has established a new ATH with a 3-wave move from the February low (The internal structure is uncertain)
  • Price has crossed the upper Bollinger Band (Sign of caution)
  • Whenever there is a sharp rally in a short period of time it creates pockets of air below that can be filled if bulls were to fail to sustain this break out at the first attempt, hence we have three support layers that would not jeopardize this move at 2086 - 2080 and 2072. Elliott Wave wise we can rule out a major reversal since a 3-wave up leg cannot end a pattern, but a period of consolidation is possible since the gap with the 10 dma is quite stretched
  • I have labelled the 3 -wave up leg from the February low as an ABC since both up legs are not impulsive (Hence even the wave C is not correctly labelled). So far the pattern is illogical.

SPX Daily Chart
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Since the count of the second up leg is not clear (No evidence of a s/t top) we shall see if next Tuesday the NYSE TRIN rises above 1 suggesting selling pressure or drops back below 0.6 signalling buying exhaustion.

NYSE Arms Index Daily Chart
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Anyway we should not be too far away from a s/t pause, we have the 0.618 extension at 2098.50, in addition the NYSE advance - decline volume by the eod on Friday was displaying a negative divergence.

NYSE Advance-Decline Volume Daily Chart

60 minute time frame:

  • As mentioned above from the February 2 low, so far, we have a 3 wave up leg. The first up leg is clearly corrective (wave A), while the second one is questionably impulsive, but for the time being I will label it as a wave (C)
  • If the thin blue trend line were breached odds should favor a shallow retracement. I would be surprised if the gap at 2068.59 were closed. (Fibonacci retracement of the assumed wave C = range 2076 - 2063)
  • Elliott Wave wise an advance that is not unfolding an impulsive sequence (1,2,3,4,5) is suggesting a complex corrective pattern (Zig Zag, Double Zig Zag or Triple Zig Zag)

SPX 60-Minute Chart
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  • Oscillators could roll over. The RSI is displaying a negative divergence while the MACD is testing the signal line. If the Stochastic loses the 80 line we would have a potential multi-day pullback.

SPX 60-Minute Momentum Chart
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