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George Simone
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I'm a long-time Market Participant who has criss-crossed the Market for more years than I care to remember, and a few years ago I got hooked on studying and trading ETFs, especially the leveraged kind. Charts, good charts are an absolute necessity in this field, so the Linchpin of my ETF... More
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  • Bull-Trap Rallies? 0 comments
    Mar 3, 2014 1:55 AM

    Up on Monday down on Tuesday, that's the kind of two-step pattern the market has been engaged in lately. That's a sign that this rally is fuelled by the closing out of bearish bets, rather than new money coming into this game.

    Wall Street ended last week's Friday session with another record close, but well off the highs in early trade. Escalating troubles in the Ukraine caused investors to get into cash first, and ask questions later.

    Major indexes started this session sharply higher after a Purchasing Managers' report and a gauge of manufacturing activity showed stronger than expected economic expansion. This helped February to be the best period for Wall Street since last July. Bonds, stocks and commodities all rallied together for the first time in months, reversing January's losses in equities and materials.

    This has some savvy market strategists proclaiming that this bull-run isn't over by a long shot. As they see it, the fundamentals of last year's rallies are still in place and keep the market geared for higher highs. Besides, this is a "secular bull market" which started five years ago, and could have another ten years to run.

    Fair enough. But secular bull markets can encounter some steep selloffs and spectacular corrections before they reach the top. This was the case during the crash of 1987 which happened right out of the blue in the middle of a bull market. Sure, being a bull this loss was soonrecovered,but investors who suffered that loss couldn't have cared less if it was secular or otherwise.

    But let's check this long range Troika and see if this current bull fits the definition of "secular."

    Note that the two bull components [SPX] and [SPXL] show exceedingly bullish Moving Average line configurations [green lines below the red] which are the technical foundation of a secular bull trend. That the RSI strength indicators of the SPX and SPXL are also deep in their respective bullish territories reflects the strong internals of this bull.

    But note that MACD momentum bars have slipped into their respective bearish territories. This is a caution signal that something is sapping the upside momentum out of this rally and that only fumes are left in its gas tank.

    But the good thing for the bull is that the bear [SPXS] component of this Troika has totally given up the ghost and remains stuck in a deep hole at the bottom of a deep pit. Its MA lines configuration continues to be exceedingly bearish for the bear [green line above the red] the MACD momentum bars remain stuck in negative territory and so is the RSI strength indicator.

    So this Troika is all set to remain bullish for the foreseeable future and that makes this market a secular bull for the long run. But for now, it is facing a sharp pullback that could be followed by a prolonged consolidation period. It won't be the bear which will bring this market down, but the deteriorating upside momentum for the bulls.

    (click to enlarge)(click to enlarge)

    (click to enlarge)

    Meanwhile, confirming the long-range bullishness of the market is this [XLP: XLY] index. Here a reminder that the more bearish this index, the more bullish the market. Note that just like the bear; this index is digging a deep hole at the bottom of a deep pit. Its MA lines configuration is exceedingly negative [green line above the red] which in this case is bullish for the market. The RSI strength indicator has also settled deep in bearish territory [bullish for the market] but that the MACD momentum bars are fading is a warning signal for the bulls in this game.

    (click to enlarge)

    Note that the forecasting junk-bond canary [JNK] also continues to whistle a bullish tune for the market. But while its MA lines configuration remains strongly bullish the RSI strength indicator is blowing a bubble just as it did in May 2013 and again last January. Each time the market responded with a sharp pullback, and it will be interesting to see if it will do the same this time. As is the case all around, the MACD momentum bars are fading, and that is another "watch it" signal.

    (click to enlarge)

    Check these DOW [DIA] and transportation [IYT] ETFs and note that this combo has been lacking this rally since January and thereby is refusing to confirm that this rally has legs.

    Not only that, both the DIA and IYT show sharply bearish MA lines configurations and that alone can put the kibosh to any rally.

    (click to enlarge)

    (click to enlarge)

    The NASDAQ 100 index [NDX] is still bullish, but looks a bit tired after its sharp run-up in February. The MA lines configuration remains bullish with the green line below the red, the MACD momentum bars are also still positive inside their bullish territory and the RSI strength indicator remains solidly settled in its bullish space. Still, some sideways consolidation by the NDX has to be expected before this index rallies further.

    (click to enlarge)

    Check this [CRB] and [BDI] combo and note that the CRB producer's index has finally hit the ceiling. Although the CRB still has an extremely bullish MA lines configuration [green line below the red] this index is headed for a steep nosedive. The RSI strength indicator's bubble is about to burst or at least deflate and the bullish MACD momentum bars are fading into bearish territory, all of which is pulling the support from under the CRB.

    It appears that the BDI commodity demand index has hit bottom which could be a sign that China had its fill of stockpiling the metals and is now using that stuff again. This is why the momentum bars of the BDI are back in bullish territory and so is the RSI strength indicator. Sure, the MA lines configuration is still extremely bearish with the green line above the red and so it may take some time for this configuration to turn bullish again. Until then, the commodity market will be vulnerable to downside squalls.

    (click to enlarge)

    (click to enlarge)

    Although [GOLD] is consolidating and taking a breather, for as long as its MA lines configuration remains bullish [green line below the red] so will this yellow metal. Although the MACD momentum bars are fading into neutral, the RSI strength indicator remains well set in its bullish territory and that should add support for the price of gold.

    (click to enlarge)

    Oil [WTIC] is also consolidating after it had a sharp run-up following its steep nosedive in early January. Although its MACD momentum bars have faded to neutral, its MA lines configuration [green line below the red] and RSI strength indicator both remain strongly bullish, and that will lend support to the energy sectors.

    (click to enlarge)

    For most of the last five years this has mainly been a "buy the dips" bull market. After each dip it rallied back fairly quickly and still appears to be geared to higher highs. But with the heightened possibility that the Ukraine unrest could morph into a "black-swan" situation, any rally from here could be a bull-trap, and should be sold.

    So, it's still best to stay in cash and wait until things get a little clearer out there. Just standing there and not doing "something" is often the best strategy in a market like this one. But this shouldn't't prevent you from keeping track of favoured ETFs featured in this series of blogs.

    Leveraged Bull ETFs:

    Nat Gas 3x (NYSEARCA:GASL), Real Estate 3x (NYSEARCA:DRN), Real Estate 2x (NYSEARCA:URE), DOW 30, 3x (NYSEARCA:UDOW), Semis 3x (NYSEARCA:SOXL), Energy 3x (NYSEARCA:ERX), S&P 500 (NYSEARCA:UPRO), Oil 2x (NYSEARCA:UCO), Financials 3x (NYSEARCA:FINU),

    Oil & Gas 2x (NYSEARCA:DIG), Jr. Gold Miners 3x (NYSEARCA:JNUG), Technology 3x (NYSEARCA:TECL), DOW 30, 2x (NYSEARCA:DDM), Materials 2x (NYSEARCA:UYM), Financials 3x (FINU), Financials 2x (NYSEARCA:UYG), NASDAQ 100, 2x (NYSEARCA:QLD), Financials 3x (NYSEARCA:FAS), NASDAQ 100, 3x (TQQQ-Q), Health Care 3x (NYSEARCA:CURE), Mid Caps 400, 2x (NYSEARCA:MVV), Nat Gas 2x (NYSEARCA:BOIL).

    Non-Leveraged Long ETFs:

    Semis (NASDAQ:SOXX), Regional Banking (NYSEARCA:KRE), Oil Service (NYSEARCA:OIH), Materials (NYSEARCA:XLB), Energy (NYSEARCA:XLE), Small Caps (NYSEARCA:VBR), Developed Markets (NYSEARCA:TLTD), Russell 2000 (NYSEARCA:IWN), Nat Gas (NYSEARCA:FCG), Mid Caps (NYSEARCA:FNX), Small Caps (NYSEARCA:FXD), Health Care (NYSEARCA:FXH), Solar Energy (NYSEARCA:TAN), Coffee (NYSEARCA:JO), Biotech (NYSEARCA:XBI), Pharma (NYSEARCA:XPH), Internet (NASDAQ:PNQI), Technology (NYSEARCA:CQQQ), Aerospace (NYSEARCA:PPA), Semis (NYSEARCA:XSD).

    Leveraged Bear ETFs:

    Gold Miners 2x (NYSEARCA:DUST), Nat Gas 3x (NYSEARCA:DGAZ), Oil 2x (NYSEARCA:DTO), Real Estate 2x (NYSEARCA:SRS), DOW 30, 3x (NYSEARCA:DXD), Emerging Markets 2x (NYSEARCA:EEV), Oil & Gas 2x (NYSEARCA:DUG), DOW 30, 3x (NYSEARCA:SDOW), S&P 500 2x (NYSEARCA:SDS), Financials 2x (NYSEARCA:SKF), NASDAQ 2x (NYSEARCA:QID), Technology 3x (NYSEARCA:TECS), Russell 2000, 2x (NYSEARCA:TWM), S&P 500, 3x (NYSEARCA:SPXS), Energy 3x (NYSEARCA:ERY), Financials 3x (NYSEARCA:FAZ), Real Estate 3x (NYSEARCA:DRV), Small Caps 3x (NYSEARCA:TZA), NASDAQ 3x (NASDAQ:SQQQ), Semis 3x (NYSEARCA:SOXS).

    Non-Leveraged Short ETFs:

    DOW 30 (NYSEARCA:DOG), S&P 500 (NYSEARCA:SH), EAFE (NYSEARCA:EFZ), Mid Caps (NYSEARCA:MYY), NASDAQ (NYSEARCA:PSQ), Russell 2000 (NYSEARCA:RWM), EAFE (NYSEARCA:EFU), Emerging Markets (NYSEARCA:EUM), Equity Bear (NYSEARCA:HDGE), Alerian (NYSEARCA:MLPS), Real Estate (NYSEARCA:REK), Financials (NYSEARCA:SEF).

    GOOD LUCK!

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

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