Is the Market in Transition? 4 Charts to Watch

Includes: GS, MS, TLT, USL, XOIL
by: Jim Farrish

The swing in sentiment over the last two weeks has been neurotic. On March 16th the negative swing in momentum hit its peak before calmer heads prevailed and a bounce off the low shifted momentum back to the upside. Regardless of which camp you are in, bull or bear, the market remains in a state of flux. The following are four charts to watch for clarification on future direction.

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Financials are cooked in a squat. They made an attempt to finally break above the April 2010 high, but reversed and tested support at the short term trendline. The approval of dividend hikes allowed by the Treasury and Federal Reserve turned into more of a disappointment than catalyst for the banks. The brokers have reversed course with Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) leading the way. Too many question marks hanging over the sector as a whole, but large banks have been the challenge. The insurance sector has not helped, selling off nearly 10% from the February high. Without a healthy financial sector the markets will have to gain leadership elsewhere. Watch the downside risk as we move toward earnings in the coming weeks. Disappointment may be the theme of earnings in the sector and prompt a short play in the sector overall.

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The S&P 500 Index bounced off support at 1259 and is making an attempt to move back to the previous high at 1343. The volume has been lackluster to say the least. Seven of the eight trading days since the low on March 16th have been below average volume. While that data unto itself is not a sell signal, it is a warning relative to participation or conviction on the behalf of investors. I think volume is something to watch short term in conjunction with price action. The index and market overall is setting up to trade within a define range rather than resume the previous uptrend. There would need to be a catalyst to push the broad markets higher. With earnings right around the corner we may find the catalyst, but for now I remain cautious relative to a sustainable move higher.

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Crude has been rising on fears related to all the geopolitical issues in the Mideast and Africa. A look at the chart above shows the reaction to Libya and Egypt. Technicians are looking at the potential double top pattern near the $106 level. As you can see on the chart the second attempt to move above this resistance level moved lower. Is the fear trade dissipating? Is oil headed lower short term? Only time will provide the answer, but the longer term trend is up. A pullback or correction in oil prices back to the lower end of the previous uptrend channel would leave the uptrend in play. I like the odds for a downside push toward the upper end of the channel near $98 per barrel, but that would likely result in a bounce off support. The momentum in oil is to the upside. A short term pullback from resistance would be just that a pullback and opportunity to buy oil with a longer term outlook to the upside. United States Oil 12 Month ETF (NYSEARCA:USL) is a way to play the longer term view for oil to move higher.

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If the economy is doing so well, why are bonds moving higher? There is a measure of fear in the broad markets and money has rotated back to bonds for safety. The chart above of iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) reflects the inflow of money to bonds since early February. That coincides with the problems erupting in Egypt and the money flow peaking with the sell off on March 16th. The micro trend is higher, but the longer term trend is still down to sideways. If yields move lower and the price of TLT moves above $94.25 on accelerated volume I would worry, but for now we are seeing normal action and reaction in the price of bonds to current market conditions. The longer term view is for rates to rise and bond prices to fall, signaling a downside on bonds.

This poses the question: Are investors more worried about missing out on a potential or the risk of investing in the current market environment? The answer lies in the charts. In one camp are those who respect the risk of the current market and have taken money off the table or hedged against the downside risk. In the other camp are those who don’t see risk in the current market and damn the torpedoes, full speed ahead. Both camps may be right in time, but the answer for you is based on your goals and objectives, not someone else’s opinion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Money Strategies, Inc. clients may or may not hold positions in the stocks or etfs mentioned in the article.