Seeking Alpha

TomAspray's  Instablog

TomAspray
Send Message
Tom Aspray, professional trader and analyst was originally trained as a biochemist but began using his computer expertise to analyze the financial markets in the early 1980s. Mr. Aspray has written widely on technical analysis and has given over 60 presentations around the world. Many of the... More
My company:
Trade Your Own Mondya
My blog:
Charts in Play
My book:
Bi-Weekly Trading Lessons eLetter
View TomAspray's Instablogs on:
  • The Week Ahead: Time To Join The Bear Market Camp?

    The stock global markets were punished again last week as most traders and investors couldn't wait for the long weekend. Several analysts last week proclaimed that we are now in a bear market. One of the new bear market forecasts came from a regular TV analyst who last proclaimed a bear market near the October 2014 lows. That of course does not mean that he will be wrong again this time.

    The transition from a bull to a bear market is a gradual process which historically takes time. There are generally plenty of signs from the stock market as well as the economy before the major trend changes. There is a good correlation between bear markets and recessions as stocks top out before the economy enters a recession. So should you join the bear market camp now?

    (click to enlarge)

    One of my favorite economic indicators is the Conference Board's Leading Economic indicator (NYSEMKT:LEI) which is a composite reading of ten components. As the chart indicates the LEI topped out in 2006 well ahead of the recession's start in early 2008.

    An early warning of the impending bear market was the stock market's six week drop of 12% in the summer of 2007. The panic selloff in the middle of August 2007 rattled many investors. This set the stage for a rebound into early October when the stock market made its final high.

    This new high was accompanied by the formation of a longer term divergence in the NYSE A/D line. This combined with the well established downtrend in the LEI shifted the balance of evidence in favor of a bear market and a recession. Stocsk declined sharply into early 2008 as the bearish sentiment reached a very high level. This set the stage for a classic 16% bear market rally that allowed investors to reduce their equity exposure.

    (click to enlarge)

    The LEI did decline slightly in July 2015 after a sharp rise in June. The analysis from Doug Short has led him to conclude that "the LEI has historically dropped below its six-month moving average anywhere between 2 to 15 months before a recession. The latest reading of this smoothed rate-of-change suggests no near-term recession risk."

    In over 35 years of using technical analysis I have developed a methodical and objective approach to analyzing the stock market. This allows me to identify benchmarks that tell me when things are changing. These benchmarks have kept me in the correction camp this summer when the Nasdaq 100 was making a new high in July (Narrow Advance Warrants Caution)

    In my June 12th Week Ahead column I pointed out that "The week of May 15th the A/D line did not make a new high (see arrow) and then on June 5th it dropped below its WMA and the support at line c. This may be warning of a more significant correction "

    As the summer progressed the deterioration in the market internals became more pronounced and this set the stage for the recent plunge in stock prices. Let's look at a current chart.

    (click to enlarge)

    The weekly chart of the NYSE Composite shows that it has already violated the October 2014 lows as it hit 9509 on August 24th. The 38.2% Fibonacci retracement support level from the 2011 low is at 9415 with the 50% support at 8850. This is over 10% below current levels.

    The NYSE A/D line violated its WMA after forming a three week negative divergence. The A/D has been holding up better than prices as it is still well above the October 2014 low, line a. If this support is broken it would generate a stronger sell signal. The A/D line is still well below its declining WMA. By the end of the 2011 correction in October the A/D line was closer to its WMA and moved back above it just one week after the low.

    The NYSE is now 8% below its 20 week EMA but in October 2014 it was just 4% below its EMA. This along with the fact that prices dropped below both the weekly and monthly starc- bands confirms that the market is now clearly oversold. The Arms Index hit 4.95 last Tuesday which is a level characteristic of a panic low.

    (click to enlarge)

    Since 2012 the German Dax Index has been leading the S&P 500 both higher and lower. In 2015 it topped out in April well ahead of the US market. The drop two weeks ago took the Dax well below its weekly starc- band and the uptrend ( line b) has been tested. There is even longer term support now in the 8500 area, line a. The MACD and MACD-His dropped more sharply last week and both are still in the sell mode as after turning negative in the middle of May.

    The latest survey from AAII reveals that investors have not turned more bearish as 32.4% are still bullish. This is virtually unchanged from the week before and 31.7% are bearish which is down 6.6% in the past week. This week's data should be quite interesting as I would like to see a much lower bullish % reading before the correction could be complete. (Three Reasons To Stay Patient)

    The Economy

    The monthly jobs report missed on the number of new jobs but did reveal some positive as the unemployment rate dropped to 5.1%. The upward revision of the prior two months was a plus as were the increase in hourly wages. The report did stimulate a new round of debates on when the Fed would raise rates and the threat of higher scared investors.

    The other data last week, especially on the manufacturing sector, was not as strong as one would like. The solid number from the Chicago PMI was in contrast to the very weak Dallas Fed Manufacturing Survey as the region has been hit hard by plunging crude oil prices.

    Nationwide the PMI as well as the ISM Manufacturing index both recorded the lowest readings since May 2013 but are still in the slow growth mode. The ISM is still in a downtrend, line a, and it needs a move above the May high to break the downtrend.



    Construction Spending was up last week but Factory Orders were down. The data on the service sector last week was better with the ISM Non-Manufacturing Survey holding on to recent gains as it broke through resistance in July, line a.

    There is a light economic calendar this week with the markets closed on Monday. On Thursday we get jobless claims along with Import and Export Prices. On Friday we get the Producer Price Index (PPI) as well as the mid-month reading on Consumer Sentiment from the University of Michigan.

    Interest Rates & Commodities

    (click to enlarge)

    The yield on the 10 Year T-Note was a bit lower last week but held up better than expected in light of the weakness in the global stock markets. The 10 Year is usually the go to safe haven in times of market turmoil.

    The break of the uptrend, line b, still favors lower yields and we may just see a sharper decline in yields in the coming weeks. Yields bounced back to the former uptrend two weeks ago before turning lower. A drop below 2.00% is needed to get the market's attention. The MACD has been negative for the past month which is consistent with lower yields.

    (click to enlarge)

    The SPDR Gold Trust (NYSEARCA:GLD) recently tested the downtrend from the highs early in the year (line a) before turning lower. This suggests that the rebound from the July lows may be over. A drop below the support at $104.90 should increase the selling pressure with monthly pivot support at $99.90. Volume increased as the rally stalled with the weekly OBV now close to breaking key support at line c.

    Crude oil prices closed the week higher but it was a volatile week. The weekly doji indicates indecision but the daily volume and open interest analysis has improved suggesting that a bottom may now be forming. The oil stocks are clearly starting to outperform the S&P 500.

    Market Wrap

    The Dow Utilities continued their recent slide last week as it lost 5.3% which is more than its current yield of 4%. Most of the other major averages like the Dow Industrials, S&P 500 and Nasdaq were down 3% or more for the week. The small cap Russell 2000 was down just 2.3% while the Dow Transports held up even better losing just 1.5%.

    The ugly start for what is historically a poor month for the stock market will have many re-evaluating their equity holdings after the holiday as investors prepare for the last quarter of the year. All the sectors were lower with consumer services and goods holding up the best.

    Barron's cover article this week reviews the generally bullish outlook of Wall Street Strategists which in my view is not a positive for the market as both the weekly and daily technical studies are still negative. After such a severe market decline I would like to see more "gloom and doom" before the market can bottom.

    (click to enlarge)

    The daily chart of the Spyder Trust (NYSEARCA:SPY) like many of the market averages shows short term flag or continuation patterns. The drop on Friday came close to completing these patterns so it will not take much more selling early this week to signal another push to the downside. There is next support at $190 and at daily starc- band which is at $188.76.

    For the SPY a strong close above the $198 level is needed to signal a rally back to the $200-$202 area which would squeeze the shorts. The sharply declining 20 day EMA indicates it will take time before it could flatten out and turn higher.

    The S&P 500 A/D line rallied up to its declining WMA last week before turning lower. As I have noted previously the break of support at line c was a sign of weakness. The A/D line still needs a move above the downtrend, line b, to signal that SPY has bottomed. The daily OBV also still looks weak with key resistance now at line d.

    (click to enlarge)

    The weekly chart of the Powershares QQQ Trust (NASDAQ:QQQ) shows that the long term uptrend, line b, was broken on the early sharp drop on August 24th. The QQQ closed the week above this support which is now at $96.60. The early 2014 high at $90, line a, is now major support.

    The weekly Nasdaq 100 A/D line dropped below its WMA on June 5th and is still well below its declining WMA. The A/D line has next major support at line c, which corresponds to the October 2014 low. The weekly OBV has been in a downtrend, line d, since early in the year and closed back below its WMA last week.

    The QQQ has initial resistance now at $105.74 and the declining 20 day EMA. There is more important resistance at $107.43 and the quarterly pivot.

    My current analysis indicates that it is too early to conclude that we have entered a new bear market. The economy continues to look positive and there are signs that the consumer's positive outlook will trigger good spending in the months ahead. By the end of the year we need to see better data on manufacturing which is needed to keep the economy in a positive trend.

    The stock market will need at least 2-3 weeks of rallies and declines before it could bottom out. The strength of the rally once a bottom is in place will clarify the intermediate term outlook for the stock market. If the market was able to make new highs this fall it could cause the formation of more serious bearish divergences.

    During the week you can follow my daily stock market analysis via Twitter and StockTwits,

    If you are interested in my other market services or would like me to speak to your investment group I can be contacted at wentworthresearch@gmail.com.

    Tags: SPY, QQQ, IWM
    Sep 05 9:35 AM | Link | Comment!
  • Stick With June's Reasons To Stay Patient

    The stock market's best percentage gain since 2011 has helped to calm investors and in early trading Thursday global markets have continued higher. Clearly the severity of the recent decline has caused significant technical damage that typically takes time for the market to absorb.

    As I noted in my June 30th column (Three Reasons To Stay Patient) " the market internals had continued to deteriorate since the A/D line formed a negative divergence in May. This made a market correction inevitable.

    Over the next six weeks the S&P 500 stayed in its broad trading range as all the sharp selloffs were met with good buying which maintained the trading ranges. Even though the A/D lines continued to deteriorate many became complacent as the market failed to drop more sharply.

    For the past few months I have felt that when the correction came it would be a buying opportunity but urged investors as well as traders in June to be patient and wait until the following three criteria were met. These were the three reasons to be patient

    1. Wait for clear signs from the A/D lines that the correction is over
    2. AAII bullish% now at 35.6% needs to drop to the low 20% area
    3. The percentage of S&P 500 stocks above their 50 day MA needs to turn up from the 20-25% level

    Even the new highs in the Powershares QQQ Trust (NASDAQ:QQQ) on July 20th did not change the market's outlook as the new price highs were accompanied by lower highs in the Nasdaq 100 A/D line (Narrow Advance Warrants Caution).

    I continue to think that this correction will create a good buying opportunity but the market has not yet signaled that the correction is over, Let's look at the evidence

    (click to enlarge)

    The NYSE Composite closed below its daily starc- band for the first three days of this week before Wednesday's rally.

    • There is next resistance at 10,068 and then at 10,371, line b.
    • The declining 20 day EMA is at 10,491 which should be a difficult level to overcome
    • The NYSE A/D line formed a bearish divergence at the May highs, point 1.
    • The drop in the A/D line below support, line d, confirmed the divergence on June 4th.
    • The A/D line turned up Wednesday as it was well below its WMA and oversold.
    • The A/D line has resistance at the early August highs and needs to overcome the downtrend, line c, to indicate that the market's decline is over.
    • Monday's low of 9509 was not far above the major 38.2% Fibonacci retracement support at 9415.

    The Spyder Trust (NYSEARCA:SPY) had an early panic low on Monday of $182.40 but then closed on Wednesday 6.7% above this low.

    • There is next major resistance in the $197.50 area with the declining 20 day EMA at $202.86.
    • The S&P 500 A/D line formed a slight negative divergence in May, line f, and failed to overcome this resistance on August 17th.
    • The break of A/D line support, line g, on August 20th was a sign of weakness.
    • The A/D line has turned up but this former support now becomes resistance.
    • The A/D line needs to overcome the downtrend, line c, and the highs from June and July to turn positive.
    • The on-balance-volume (OBV) has been in a downtrend, line h, since late July and broke support last week.
    • The OBV will find resistance at its declining WMA.

    (click to enlarge)

    The % of S&P 500 stocks below their 50 day MA dropped below 8% this week but has now turned up.

    • The five day MA of the % is still declining and it has now dropped below the lows from last October.
    • Typically I would like to see the MA turn higher to confirm that we have seen an oversold extreme.
    • The 5 day MA at 15.49% which is over two standard deviations below the mean at 59.31%.

    What to do? In the latest survey released today from AAII the bullish % is at 32.5% up 5.7% from last week. The bearish % also rose 4.9% to 38.3%.

    On June 11th the bullish % dropped to 20.04% and then hit 21.11% on July 30th. This may be enough to signal an extreme in sentiment but I did expect a lower reading this week.

    Certainly the drop this week was more severe than I expected. The extreme in balance of orders on the open Monday has likely created a price low that may not be broken before the market bottoms out.

    Still I would expect some backing and filling before a sustainable market bottom is in place. Though a v-shaped bottom is always possible I will continue to wait for clear signals before concluding the market's decline is over. Of course many stocks and sectors are likely to bottom before the major averages.

    Tags: SPY, QQQ
    Aug 27 11:20 AM | Link | Comment!
  • The Week Ahead: A Replay Of 2011 Or 2012?

    The stock market bulls finally threw in the towel last week as the selling accelerated from the opening last Thursday and was heavy into the close on Friday. The sideways trading over the past three months appeared to have been a tug of war between the bulls and bears.

    As I have been pointing out since early July (Greece Isn't The Real Problem) investors should have been worried about the technical deterioration not Greece. The uptrend in the major averages was accompanied by a downtrend in the A/D line which was a sign that just a small number of stocks were pushing the market higher.

    after last week how much more can stocks decline before the correction is over?

    The Markets

    (click to enlarge)

    The sharpest correction in the current bull market occurred in 2011 as the selling was exacerbated by the debt ceiling crisis and the downgrade of US debt. The stock market had turned higher in September of 2010 as the weekly S&P 500 A/D line had started a new uptrend by moving above the previous highs (point 1).

    The weekly A/D line stayed well above its rising WMA until June 2011 as the Spyder Trust (SPY) rose from $102 to a high of $127 in May 2011. The S&P 500 A/D line dropped below its WMA in early June and stayed below it for five weeks. In late June and early July, the market rose sharply taking the SPY just a point shy of its previous peak.

    Two weeks later, the SPY closed at a slightly new rally high but the A/D line formed lower highs, line b. On Friday, July 29, the A/D line dropped below its long-term uptrend and its WMA (line 2). The following week, the SPY opened above $122 but closed the week just above $112, a drop of 7.1% for the week. The weekly A/D line stayed below its WMA until early October, point 3.

    The decline from July through October was preceded by a sideways pattern of the daily A/D line in both February-March and May. These periods resulted in corrections that dropped the SPY by 8% and 7% respectively. When the weekly A/D line dropped below its WMA on July 29 the market was therefore more vulnerable. In the next seven days the SPY dropped from its close of $120.84 to a low of $103.03. which was a decline of over 14%.

    On October 4, the SPY made its final low of $100.91 in early trading before closing the day higher. Five days later, the daily A/D indicators confirmed that a bottom was in place as I wrote at the time in Be Bold, Be Fearless.Buy the Dip.

    From the 2011 lows, the weekly NYSE Advance/Decline began a clear new uptrend and stayed above its WMA from the start of January until May 11 2012 when it dropped back below its WMA. At the time, the markets were also nervous about the Euro debt crisis and what countries might be forced to leave the Euro Zone.

    (click to enlarge)

    The weekly A/D line made a new high the last week of April before reversing two weeks later and dropping below its WMA on May 11 (line 2). By then the daily A/D line was already below its WMA and had also violated the April lows (line c). This confirmed the new downtrend. The decline lasted another fifteen days as the S&P 500 formed a doji on June 4, and the next day, a HCD buy signal was triggered.

    The A/D line did not make a new low in early June, line d, forming a bullish divergence. The bearish sentiment was quite high at the time and in the June 6 column, Rally Potential That Bears Don't Expect, I also pointed out the bullish divergences in the McClellan oscillator. The rally from the June lows lasted sixteen weeks as the S&P gained 16.4% from low to high.

    In 2012, the first wave of selling resulted in a 8.5% decline in the SPY while by the June low the SPY had lost 10.2%. So where do we stand now?

    As of Friday's low the SPY has lost 7% while the Dow Industrials is already down 10%. Therefore a 10% top to bottom correction in the SPY may be a bit optimistic. In any case we should see a rebound in the next week and then another decline where signs of a tradable low could emerge. Alternatively we will see another 2-4 week period of sideways trading before the market sees a further decline. This is what happened in August and September of 2011.

    A decline in the SPY back to the $192 area would be a 10% correction that would cause a very sharp drop in the already low bullish sentiment. However a 15% decline would take the SPY to the $182 level and I am sure would convince many that we are in a bear market.

    The Economy

    There is a close correlation between bear markets and recessions as stocks generally top out before the economy officially enters a recession. An important part of my market analysis is to follow a number of economic indicators. My favorite is the Conference Board's Leading Economic Indicator (NYSEMKT:LEI). It is a composite of ten fundamental indicators and is reported monthly.

    (click to enlarge)

    As the excellent chart from www.dshort.com demonstrates, it has a good record of peaking out well before economy enters a recession. My analysis indicates that the NYSE A/D line typically peaks out well ahead of the start of a bear market. Last week the LEI declined slightly but it will take several more months of lower readings before one could conclude that it has topped out. The A/D line has not yet formed any significant intermediate term bearish divergence suggesting it is too early to look for a bear market.

    Overall the economic data has improved this summer but there still needs to be work done especially in the manufacturing sector. Last Monday the reading from the Empire State Manufacturing Survey was a disappointment but later in the week the Philadelphia Fed Business Outlook Survey was better than expected. On Monday we will get the Chicago Fed national Activity Index with Durable Goods on Thursday

    Of course it was the FOMC minutes last week that helped push the market over the edge as once again the debate picked up as to when the Fed would raise rates.

    The Housing Market Index and Existing Home Sale data last week was positive as the homebuilder stocks rallied early in the week before they were also hit at the end of the week. This week we get the S&P Case Shiller HPI on Tuesday as well as New Home Sales that will be followed Thursday by the Pending Home Sales Index.

    We will get an additional reading on the consumer with Consumer Confidence on Tuesday followed by the Consumer Sentiment on Friday. On Thursday we will also get the second reading on the 2nd quarter GDP.

    Despite the heavy selling also in the Euro zone markets their Purchasing Managers report on Friday did show solid growth.

    Interest Rates & Commodities

    (click to enlarge)

    Bonds and gold were some of the few winners last week. The 10 Year T-Note yield chart from last week indicated that yields would move lower and bonds would move higher. The uptrend on the weekly yield chart, line b, was broken last week and a break of the 2.00% level will suggest a decline to the 1.649% area, line c. The MACD-His had turned negative a week ago and has dropped further into the sell mode.

    Of course crude oil prices were punished again last week which has caused some of the most bearish analysts to lower their price targets to $30 per barrel or lower. There are no signs yet of a bottom but the high level of bearish sentiment suggests that traders should be on the outlook for a short covering rally.

    (click to enlarge)

    It was a good week for gold as the futures gained $46 per ounce. The weekly high close doji buy signal last week was a positive sign that did materialize into a price gain. The resistance from late last year and early this year, line a, has now been slightly overcome. There is next resistance now in the $1200-$1215 area and the quarterly pivot resistance. The weekly studies have turned higher but still are well below their key resistance levels (lines b and c) suggesting that a major low may still not be in place.

    Market Wrap

    There certainly wasn't any bargain hunting into the close on Friday as the major averages settled on their lows with the futures dropping even further after the close. The 1000 drop in the Dow pushed it down 5.82% for the week, pretty much in line with the 5.77% drop in the S&P 500. The Nasdaq Composite was hit the hardest losing 6.78%.

    (click to enlarge)

    As one would expect the market internals were very negative for the week with 2878 stocks declining and just 384 advancing. The weekly chart of the NYSE Composite shows that the next real support is at the October 2014 low of 9868 (line a) which is 3% below Friday's close. The major 38.2% Fibonacci retracement support from the October 2011 low is at 9415 or 7.6% Lower.

    The NYSE Advance/Decline line dropped below its WMA on June 12th warning that the market was in the corrective mode. The A/D line has next support at line b, which was the October low. The NYSE ARMs Index closed at 2.90, a level that may be signaling a panic low. The daily McClellan oscillator closed at -227 which is the lowest level since December 2014.

    The NYSE closed below both the weekly and daily starc- bands with the monthly at 9833. The 20 day EMA was tested early last week and now stands at 10,723 but an oversold bounce is unlikely to reach this level.

    (click to enlarge)

    The Spyder Trust (NYSEARCA:SPY) also closed well below its weekly starc- band with the monthly at $193.35 which is just above the weekly uptrend, line a. For September the tentative monthly pivot support is at $188.36 or 4.7% below Friday's close.

    The S&P 500 A/D line dropped below its WMA the week of June 5th, line a. It made new correction lows this week and is still in a clear downtrend as it has been since July. There is nextgood support at the 2014 lows, line a.

    The daily A/D line (not shown) has been in a solid downtrend since it formed a slight divergence in May and the failure of the A/D line to overcome this resistance was a sign that the correction was not over. On Friday the daily A/D line plunged well below the July lows.

    The weekly OBV has been holding up much better than prices as while it has now dropped below its WMA it is well above the long term support at line d. The daily OBV just tested its declining WMA on Monday before it plunged.

    For the Powershares QQQ Trust (NASDAQ:QQQ) the next good support is in the $98.90-$100 area with the October 2014 low of $89.49.

    The iShares Russell 2000 has already reached my initial downside target in the $114-$116 area. There is next major support for IWM in the $108.50-$110 area.

    What to do?

    I start writing the week ahead column early each Friday and the heavy degree of selling late in did change my focus. It now seems less likely that the current correction is going to resemble 2012.

    A correction like 2011 or possible even 1998 when the Russian Ruble collapsed looks more likely. In 1998 the stock market topped on July 24th and bottomed in early October. We may not see as large a drop as we did in 201 or 1998 but it may last as long. As was the case in 1998 I expect the technical studies to give us ample warning that the market has bottomed.

    In my June 30th column "Three Reasons To Stay Patient" I outlined the signs I was looking for to signal that the market's correction was over.

    Three reasons to be patient

    Wait for clear signs from the A/D lines that the correction is over

    AAII bullish% now at 35.6% needs to drop to the low 20% area

    The percentage of S&P 500 stocks above their 50 day MA needs to turn up from the 20-25% level

    The A/D line always is the dominant factor and it has been in a solid downtrend since early in the summer. With Friday's plunge it will take some time before it can break its downtrend and start a new uptrend.

    It is likely that the bullish % of individual investors will drop to the low 20% level in this week's survey but as I have noted before it can bottom ahead of prices and stay at low levels for a number of weeks.

    The percentage of S&P 500 stocks above their 50 day MA dropped to 20.36% on Friday while the 5 day MA is at 41.64% and still declining. The MA dropped below the 20 level last October so it can still get more oversold before it turns higher.

    For those who are already committed to the stock market it is likely to be a rough month or so as the current decline could last into the fall. The only good news is for those who are not yet in the stock market as there should be an excellent buying opportunity once the stock market bottoms out.

    My analysis shows no signs that we have started a bear market or that the economy is starting a new recession. Therefore I do expect a good market rally in the last quarter of 2015. I will continue to be watching the large diversified global ETFs that I discussed in early August.

    Some of you may find my past articles beneficial in understanding the current correction.

    The Week Ahead: Damn the Torpedoes …. - July 18th, 2015

    The Week Ahead: Should You Trust Thus Rally? - July 11th

    The Week Ahead: Greece Isn't The Real Problem - July 4, 2015

    If you are interested in my other market services or would like me to speak to your investment group I can be contacted at wentworthresearch@gmail.com.

    I will be out of the office next week but will share my market thoughts during the week on both Twitter and StockTwits

    Tags: SPY, QQQ, IWM, DIA
    Aug 22 9:37 AM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.