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S&P 500 (SPX) & Nasdaq 100 (NDX) Market Timing

 

 

 

 

S&P 500 Index (SPX) Chart Analysis

Last week we wrote:

"The stock market has started the new year out with a bang. A huge week number one rally in the S&P 500 Index - SPX that has managed to close at a new high by the close on Friday. The markets have momentum, new highs and a positive fiscal cliff resolution on their side. At the same time there are some concerns and we will look at them in the chart analysis section below."

This week:

The stock market started the week on the downside after last week's strong gains may have prompted some to take profits and lock in those gains.

But on Wednesday through Friday the stock market pushed higher after early morning weakness. It is encouraging when several days go by and early morning selling is erased by gains in the last hour or so of trading.

We expect momentum to continue to push the markets higher.

Looking at the economy:

On Thursday the Labor Department said new applications for jobless benefits rose in the first week of 2013, but the level of claims stands little changed over the past few months and is consistent with a modestly improving U.S. labor market.

Initial jobless claims climbed by 4,000 to a seasonally adjusted 371,000 in the week ended Jan. 5. That's the highest level in one month.

Federal regulators released final mortgage rules on Thursday aiming to clean up the marketplace by forcing lenders to consider a borrower's ability to repay a loan, while also offering lenders protection from consumers' legal actions if loans go bad.

The Consumer Financial Protection Bureau's rules say that lenders must document borrower characteristics such as employment status, income and credit history, among other items.

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In an interesting article from Lipper; equity funds, including exchange-traded funds, took in $18.3 billion for the week ended Jan. 9, the fourth largest net inflows since Lipper began calculating weekly flows in January 1992. Some $10.8 billion poured into equity ETFs, while mutual funds took in more than $7.5 billion, their largest inflow since the week ended May 2, 2001.

The possible explanation is that investors are returning to the stock market after holding back for several years, or at least since the 2007 bear market.

Looking at the charts:

Last week we had a close above the prior rally highs originally reached in September, 2012. Those new highs were not decisive (meaning substantially higher than the prior highs). This week we did have a decisive close above the highs after a strong Thursday rally.

A rally that pushes the SPX to a new closing high is a bullish indicator for coming weeks. The markets have strong momentum behind them and it is likely they will continue to move higher.

Last week we mentioned that small caps were leading the advance and they continued to be strong this week. In bull markets, if that is what is ahead, we expect to see small caps lead the charge higher.

There continues to be a bearish divergence in the Nasdaq 100 Index - NDX which did not break out to new highs and is instead still down near short term resistance levels. In fact, the index is far from making new highs (read NDX analysis below).

Divergences are often bearish indicators, but the strength in small caps may be offsetting this one. For certain we will soon find out.

In the prior week, on Wednesday, January 2nd, we had a strong new bullish indicator when up volume exploded at the NYSE. Up volume on the NYSE exceeded down volume by a ratio of 10 to 1. When we see this ration at 9 to 1 or better it is a rare event. If we have another such day within the next three months it is called a double barrel buy signal (Martin Zwieg - Winning on Wall Street).

Watch for another such day in coming weeks. If we get one it is a very good signal.

Interestingly, the CBOE Market Volatility Index - VIX jumped into potentially bearish territory on Friday of the last week in December, reaching the 22 level. But then in the first week of the New Year, the index dropped dramatically to around 14.60. This Friday VIX closed down at 13.36.

The 1400 level has been decisively surpassed. The "wave c" we were watching for never materialized and with a new high, the entire bearish three wave corrective pattern has been voided. We are watching for signs that point to the next wave pattern.

Conclusion:

The SPX had closed at new four year highs, breaking out decisively above the May 2008 highs. The close above those highs had been erased and an ominous triple-top formation had formed (daily chart). But this bearish triple top has now been voided by a close at new highs.

QE3 has been announced and is a stronger program than anyone expected, with open-ended printing of new money at the rate of $85 million monthly (total of two programs) until full employment is again reached.

"Never bet against the Fed" is an old rule. In this case the Fed has pulled out all the stops with the huge money printing QE3 program.

The SPX portion of this strategy is BULLISH in the Rydex Nova S&P 500 Fund - RYNVX (or other bullish S&P index fund).

S&P 500 Index (SPX) Daily Chart

S&P 500 Index (SPX), Weekly Chart

Nasdaq 100 Index (NDX) Chart Analysis

Last week we wrote:

"The Nasdaq 100 Index - NDX managed to erase the bearish close below its 50-day and 200-day moving average lines in two powerful trading days. Monday and Wednesday. The index starts the new year up at NDX 2724.49. But that is the concern. The NDX was not able to decisively close above short term resistance at 2731. A bearish sign for this index."

This week:

The Nasdaq 100 Index - NDX followed the early week pattern of losses, with strength then coming in Wednesday through Friday and also with a close at new highs for this advance.

But...those highs have not managed to reach or make a decisive break above critical resistance levels.

The daily chart below pretty much tells the story. After the big rally two weeks ago, the NDX remains stuck at its 61.8% resistance level. A close above this level and then above NDX 2783 is needed to really get this index into rally mode.

Of course if the SPX continues to power higher, the NDX will be pulled along for the ride, but as we wrote above in the SPX analysis, this difference in these two important indexes is a bearish divergence.

It may turn out to be nothing, but until we see a breakout for the NDX to new highs, we will be watching this divergence like a hawk.

The 50-day moving average line and 200-day moving average line for the NDX have also crossed. This is a bearish indicator for coming weeks though the lines are again coming close to another crossover, this time a bullish one.

Could we still see a corrective "wave c" in this index? It is unlikely, but with this index lagging the SPX by a substantial degree, we have substantial chart confusion. Next week may help to resolve it.

Conclusion:

The NDX had made a major breakout by closing above its April 3rd rally high.

The breakout has been erased and the NDX has declined and then broken below all important support levels.

The NDX rallied this week but has not managed to close decisively above critical short term resistance at the 61.8% retracement resistance level.

The NDX portion of this strategy is BULLISH and in the Rydex NDX 100 Fund - RYOCX (or other bullish NDX 100 index fund).

Nasdaq 100 Index (NDX), Daily Chart

Nasdaq 100 Index (NDX), Weekly Chart