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A Watershed Market?

Last week's Thursday's strong rally followed by a steep nosedive the following Friday demonstrated why the DOW and S&P 500 indexes posted their biggest monthly loss in a year. A sharp increase in volatility is causing large intraday market swings that's keeping unnerving investors and gave Wall Street a rough month last January.

Records show that the U.S. economy keeps expanding at a slow but solid pace which is keeping the Fed on track to raise interest rates sometime late this year. Yet, the Fed chair Janet Yellen keeps repeating that they would be "patient" in deciding when to up these rates.

Some influential economists agree and wonder why the Fed should be rushing this thing. The U.S. economy is not running a lot of additional risks by keeping these rates low. But were rates to rise prematurely it could easily derail this still fragile economic recovery.

One of the reasons last week's Friday's market got hammered was the news that economic growth slowed sharply in the fourth quarter. Also, weak business spending and a wide range of deficits offset the fastest pace of consumer spending in nine years.

This bad economic news offsetting good news has market participants fleeing from risk-oriented equities into the safety of bonds. But this mindset could change quickly as an enormous tailwind from lower gasoline prices is about to let lose on the economy and consequently the stock market.

But meanwhile, there are market issues to contend with.

Check this daily bull-chart [SPXL] and while this index appears to be consolidating, this bull remains under pressure to the downside. Its Moving Average line configuration is strongly bearish with the green line above the red line, its RSI strength indicator shows that this bull is getting weaker and that its MACD momentum bars are sliding into bearish territory is a sign this bull is running out of gas and losing upside momentum. No wonder the bears are sharpening their claws.

When you check the weekly [SPXL] bull-chart you'll note that yes, this long-range uptrend remains intact, but there are warning signals. While this uptrend remains well supported by a bullish MA lines configuration [green line below the red] as it has for the last six years, the RSI strength indicator is slipping into bearish territory, and the MACD momentum bars are hanging limp from their demarcation line, also into bearish space. This is not a bullish scenario for investors.

By contrast, the bear [daily SPXS] seems to be awakening after hitting bottom last December. Now there is consolidation, well supported by a positive MA lines configuration [green line below the red] while the RSI strength indicator keeps inching back into [for the bear's] bullish territory.

Although upside momentum for the bear is still iffy, its MACD momentum bars are back above the demarcation line and if they keep on rising, so will the bear.

When you check the weekly [SPXS] bear chart you'll note that apparently nothing has changed in the bear's camp over the past six years. The trend for the bear still runs from the upper left of its chart to the lower right and that below a negative MA lines configuration [green line above the red.]

But the big difference appears to be that this bear had hit bottom last December, and is ready to give some solid competition to the bull. Still, for this bear to succeed he needs to get the RSI strength indicator to rise into positive territory and ditto for the MACD momentum bars.

Check this [SPX 50] index and note that the bull in this market had problems ever since the end of last December. Not only is this index declining sharply, but its MA linens configuration is getting increasingly more bearish as the gap between the green line above the red is widening.

Meanwhile, the RSI strength indicator keeps slipping deeper into bearish territory, while the MACD momentum bars are sitting totally neutral on the demarcation line. Not a good omen for the bulls.

This market forecasting junk-bond canary [JNK] is still warbling in the bulls' camp. But with its MA lines configuration [there is none] dead on neutral, this little bird could change its forecast pretty quick. But for now, the RSI strength indicator remains bullish and so are the MACD momentum bars on top of the demarcation line. So if you're a bull in this game, keep your fingers crossed.

This VIX bull index [XIV] implies that investors' sentiment in this market leans strongly on the bearish side. The MA lines configuration's large bearish gap between the green line above the red is a sign that this bearish sentiment is growing. The RSI strength indicator keeps weakening in bearish territory, while the MACD momentum bars are sitting things out on top of the demarcation line. Not a positive setting for the bulls.

This daily NASDAQ composite [COM] reflects very much the general negative market scene. While this index appears to be consolidating, its MA lines configuration continues to be decidedly bearish [green line above the red.] The RSI strength indicator seemingly can't get out of its bearish territory while the MACD momentum bars are waiting things out neutral on the demarcation line.

Note that the long-term trend of the NASDAQ [COM weekly] remains bullish as its MA lines configuration continues to be positive with the green line below the red.

But while this index is consolidating the MACD momentum bars are sinking into bearish territory. The RSI strength indicator remains neutral on its dividing line, all of which makes one wonder if this uptrend can continue.

Has the commodity market hit bottom? Could be with this index [CRB] apparently snapping to the upside, and both the RSI strength indicator and MACD momentum bars reaching into bullish territory.

But when it comes to the commodity demand index [BDI] things still look pretty bearish for commodities. The only bullish item is the oversold bubble at the bottom of the RSI channel, which could trigger an upside attempt.

Gold, the yellow metal is performing just right. While this index [GOLD] has pulled back to find some renewed traction to the upside, its MA lines configuration remains exceedingly bullish [large gap between the green line below the red] maybe too much so.

The RSI strength indicator continues strongly in its bullish territory, while the MACD momentum bars are taking a well-deserved rest on top of the demarcation line.

With its MA lines configuration still extremely bearish [large gap between the green line above the red] oil [WTIC] still has a tough time of it.

But with its MACD momentum bars steadily above the demarcation line and the RSI strength indicator trying to reach into bullish territory, this index's lift off the bottom could portent something positive for oil.

A survey shows the biggest decline since 1987 in the number of rigs drilling for U.S.oil as producers are responding to the oversupply of oil. Maybe that explains the uptick in the WTIC.

The saving grace for the bulls in this game is this contrarian [XLP: XLY] index. For as long as it stays down, with the RSI and MACD momentum bars in their respective bearish territories the bias of this market will remain to the upside.

The only spoiler here is the MA lines configuration [green line below the red] which is bullish for this index, and therefore bearish for this market.

All in all, this is a watershed market which can turn in a flash to either the bullish or bearish camp.

Meanwhile and in case the market comes your way, here are some favored ETFs to consider.

ETF sectors:

Consumer Discretionary, Energy, Health Care, Biotech and Technology.

Leveraged Bull ETFs:

Real Estate 3x (NYSEARCA:DRN), Health Care 3x (NYSEARCA:CURE), Biotech 2x (NASDAQ:BIB), Semis 2x (NYSEARCA:USD), Retail 3x (NYSEARCA:RETL), Health Care 2x (NYSEARCA:RXL), NASDAQ 3x (NASDAQ:TQQQ), China 3x (NYSEARCA:YINN), S&P 500 3x (NYSEARCA:UPRO), DOW 30, 3x (NYSEARCA:UDOW), S&P 500 2x (NYSEARCA:SPUU), Mid Caps 3x (NYSEARCA:UMDD), Mid Caps 3x (NYSEARCA:MIDU), Energy 3x (NYSEARCA:ERX), Gold Miners 2x (NYSEARCA:NUGT), Jr. Gold Miners 3x (JUG);

Non-Leveraged Long ETFs:

China (NYSEARCA:PEK), Biotech (NYSEARCA:FBT), Real Estate (NYSEARCA:VNQ), Transports (NYSEARCA:XTN), Pharma (NYSEARCA:PJP), Health Care (NYSEARCA:FHLC), Medical (NYSEARCA:IHI), Biotech (NYSEARCA:BBH), Health Care (NYSEARCA:IYH), NASDAQ (NASDAQ:QQQ), Semis (NYSEARCA:SMH), Alerian (NYSEARCA:AMU), Transports (NYSEARCA:IYT), Small Caps (NASDAQ:PSCD), Home Construction (NYSEARCA:ITB), S&P 500 (NYSEARCA:RPG), Discretionary (NYSEARCA:XLY), Gold Miners (NYSEARCA:GDX), Jr. Gold Miners (GDX);

Leveraged Bear ETFs:

Technology 2x (NYSEARCA:REW), Industrials 2x (DIJ), Small Caps 2x (NYSE:JDD), Gold 3x(NASDAQ:DGLD), Silver 3x (NASDAQ:DSLV), Nat-Gas 3x (NYSEARCA:DGAZ), Oil 2x (NYSEARCA:DTO), Financials 2x (NYSEARCA:SKF), Energy 3x (NYSEARCA:ERY), Technology 3x (NYSEARCA:TECS), Semis 3x (NYSEARCA:SOXS), NASDAQ 2x (NYSEARCA:QID), DOW 30, 3x (NYSEARCA:SDOW), Mid Caps 2x (NYSEARCA:MYY);

Non-Leveraged Short ETFs: