Non-Confirmations Multiply according to Prechter

Although I am not an Elliott Wave technician, they do have market influence. Hence awareness of leading practitioners is a useful background input. Robert Prechter is such a practictioner. Bob Prechter's "Elliott Wave Theorist" newsletter published the 23rd November notes that the DJIA has achieved a 50% retracement of the fall from the 2007 high to the 2009 low, and has done so in 50% of the time it took to fall.

The following is taken from the same publication:

"Non-confirmations continue to multiply, as no other significant market index – among the S&P, NASDAQ, Transports, Utilities and the broader Value Line indices – joined the Dow in making a new intraday high today.

This morning's high occurred 39 minutes into the session, immediately after an upside gap in the DJIA during the session (his italics), an extremely rare event…I am betting that it was an exhaustion gap, not a continuation (wave 3 of 3) gap.

After 8 months of rally and a 52% retracement, I believe I have seen enough to recommend that traders move to 200% short. Those who were "maximum leveraged" for the 2007-2009 decline and reinstated half their positions on the recommendation in the August 5^th issue may return to their full former holdings now."

Prechter's services can be found at http://www.elliottwave.com/

The NYSE cumulative advance/decline indicator is a measure of market breadth. It is giving a non-confirmation at the moment - the NYSE Composite hit a minor new high a week ago, but the advance/decline did not then or since. Non-confirmations are useful to give confidence for high conviction calls on the market. The evidence is building for a high confidence bear entry point.

Two-Way Battle Continues Between Buyers and Sellers

The Greenwich Alternative Investments Macro Sentiment Indicators are based on the outlook of hedge fund managers employing a macro view and who manage, in aggregate, in excess of $30 billion in assets. The purpose of the indicators is to reveal how these managers believe the S&P 500, the U.S. Dollar and the U.S. Treasury 10-year Note will perform over the current month. There is an interesting trend in the results over the last three monthly surveys.

Greenwich Alternative Investments Market Sentiment Indicators
for U.S. Equities (S&P 500)





The survey is released on the 2nd of the month and this month shows that those who use a macro view to run their hedge funds are in one camp or the other – nobody is neutral. The neutrals have tended to become more bullish, and a minority of those that were formerly neutral have become bearish.

There have been two distinct phases in the rally to date. The first phase (March to end May then a month of consolidation) had a much steeper ascent than the second phase (early July to mid October). These have been two phases of a liquidity-fuelled rally from a massively oversold bear market low. The later stages of phase two were accompanies by some recovery in the real economy - 3Q GDP was up after all. Classically the real economy will continue to draw money from financial assets – the liquidity push and then cushion will be defused over time.

The breadth and volume in equity markets reflect this gradual withdrawal of liquidity – there is less buying power evident now, and selling has more of an impact on prices. The declining momentum is picked up in the lower peaks of the (14-day) RSI on the top of the S&P chart below.

I am grateful to Bernie Schaeffer for pointing out that the 80-day moving average has been significant to this market this year. Having touched it in July the S&P 500 has flirted with it at the turn of this month. The upside this month to minor new highs has caught some market-watchers: chartist Greg Troccoli wrote this week “I didn’t see this type of strength coming. The bigger picture at this juncture is quite interesting. The resiliency of this market is admirable, however, as can be viewed in the chart the major portion of a possible head and shoulder top has already formed. The right shoulder is coming together at this time- only time will tell if in fact this topping formation will come to fruition. Note that the right shoulder is usually higher than the left- which is taking place now.”

A head and shoulders is a reversal pattern that takes place over a period measured in weeks or months. For my part I see a distribution taking place – less buying power accompanying the market going up this month – the volume has noticeably dropped as the markets climbed from the 80-day MAV. If a head and shoulders does emerge, many participants and commentators will be on it. The measured target for a H&S on the S&P is the 950 area – exactly where the first phase started to consolidate from in the first half of June, and a good support level.

Whilst we see which camp becomes dominant on a multi-month basis, the waning buying power at work suggests that the bears will soon dominate, but there is not a clear sign that the bulls are out of it yet. So we could see a minor new high on the S&P shortly. That would be an untrustworthy further rally given what has unfolded over the last month.

The distribution referred to in these posts could be a trading range market for a while. It doesn’t have to be a dramatic fall to the bear market lows. After this year’s gains a visit to 950 on the S&P would be neat technically. But the consolidation of the gains could be a longer lasting sideways band – say 150 points trading up and down on the S&P lasting 6 months. There is more than one way to consolidate a rise, even a major liquidity-fuelled one.

S&P at resistance, Volume fallen on rise

Yesterday the S&P500 traded up by nearly 2%, completing a four-day up sequence from the intra-day lower low of Monday. On the New York Stock Exchange 2501 issues advanced and 541 issues declined for a ratio of over 4.6 to 1. Advancing to declining volume was better than the ratio of issues A/D at 6 to 1. Overall volume has fallen through this week as the market has risen – not a good sign. Falling volume on rising prices in the first half of October at the exchange/index level provided a good set up for the top formed in the second half of the month.

The S&P index is now in a resistance zone, and after four up-days and being a Friday, which has a tendency to be a reversal day (profit taking ahead of the weekend) expect a dull day at best today. Beyond today we are still in distribution mode – trading down on bigger volume and up on lesser volume. The 10 and 50 day moving averages should cross today (a dead cross as opposed to a golden cross). Investors can come back to the market in January and not have missed any major upside in prices – this is highly likely. That is not to say that that equity markets have to go down a lot. The liquidity cushion is still under financial assets, so markets can consolidate the huge gains from the March lows by moving sideways, hence the distribution rather than collapse to lower levels.

Tactically today is as a week ago – a good day for lightening longs, adding to shorts and overwriting call options. Beyond a day tactics should be focussed on selling into strength when the index gets into resistance levels.

Equity Market Distribution to Continue

Last week I wrote a piece headed “Interim Top on S&P Signalled on Close on Wednesday”. Market activity since could be characterised as topping action. Over the week the market broke to the downside the 20-day moving average on the indices (a MAV watched by traders), and traded back beneath the previous month’s highs. In four of the last five sessions the markets closed near their lows of the day. This is a change from how the markets traded earlier in October. Over the whole of October volume has gone up in the latter part of the month (as markets traded down) compared to the earlier part of the month. Not a healthy sign for bulls. Wednesday was a short-term selling climax for stocks as volume of selling expanded. So the market was ready for a reversal day, and got one yesterday.

Yesterday the Dow jumped 200 points, and the S&P500 rose by over 2% on the “end of recession” GDP release. Did this make me change my view that the markets are topping? No, because of breadth and volume yesterday. Overall volume for the big up-day was in line with the previous 10 trading days, to be more bullish needed a volume expansion.

Then the breadth was not particularly constructive yesterday. What do I mean by that? Yesterday (Thursday) the volume of shares trading up was somewhat concentrated in the number of names participating to the upside. The NYSE is still the best exchange to look at for technical data for the broad market. On the NYSE yesterday advancing volume was 1.3bn shares compared to 150m shares declining, a ratio of over 8.5 to 1. However in looking at the number of issues: 2,504 issues advanced and 552 declined, a ratio of less than 1 in 5. So the reversal day was not fully in gear to the upside.

A good counter-trend reversal day is useful for tactical positioning. Yesterday near the close was a good time to be locking in some gains, trimming long positions and over-writing portfolios with short call options.

Interim Top on S&P Signalled on Close on Wednesday

On Wednesday there was a new high followed by a close at the low of the day on the S&P. This is a sign of an interim top. Sometimes there can be a weak minor new high after, but over the course of weeks we are going down on the basis of this one signal. Other signals are already in place on momentum, and valuation has been in a warning zone for a while (high but can go higher).

Yesterday's market action of up 1% net on the day, finishing just under the high of the day, did not negate the call of an interim top. Yesterday also had a lower opening than the previous day's close and the close (and intraday high) were some way below the previous day's high of the day.