In the last post on 4/11/2013, I noted that several time-frames on the benchmark SPX were overbought or near it using RSI. The monthly chart had closed in March at 70.4; weekly had been above 70 for 5 of 6 bars since the beginning of March; daily was getting close at at 67, and 4H was about there at 69.5. So far 4/11 is the high of the year.

However, I also pointed to the rally in the 1990s to illustrate that markets can get overbought and stay there. Although USA stock indexes are probably not in the same environment, it can still happen. Just look at what the Nikkei 225 has done in 2013; RSI on the weekly has been overbought the whole way. Obviously, exiting a long when the indicator first reached above 70 at the end of December 2012 would have missed another 28% gain, and any short would have been completely and repeatedly crushed. (ps: I'm not saying buy Nikkei here.)

So which is it? Do we have an overbought reversal here on SPX, or just a minor reaction down in a larger uptrend? Let's think about the current investment climate for USA equities. Retail investors have not really participated in the rally from the 2008-09 lows. According to a recent CNBC piece, mutual funds saw total withdrawals of $600 billion 2007 to 2012; 2013 has started to turn the tide with an inflow of $75 billion (as of the end of March), but obviously it will take a lot more to get back to 2007 levels. 

It would be helpful to include information on ETFs since they are gaining popularity as a mutual fund alternative, but I couldn't readily find data. Still it is fair to say that the average American retail client is not in the same position to buy stocks as the mid 1990s or mid 2000s. Just a few years ago many saw investment accounts get sliced in half; many people are still dealing with debt; and most face a more demanding yet less robust job market. In this climate stock market investing is just not on the high priority list. 

This leaves institutions: the Wall St companies, hedge funds, pension management firms, and so on. These are the big buyers in the market. Smart money does not like to buy high and sell low, for they have been well trained - buy low, sell high.

This means we are less likely to see the RSI frothiness of the 1990s and 2000s. Indeed, SPX made a new all time high just about a week ago, yet there seemed to be little celebration because a lot of the smart money saw overbought. That said, the very same money is quite ready to buy on support. Keep in mind the alternative - a 10 year Treasury is currently yielding just 1.70%. SPY, the ETF on SPX, currently yields more than the 10 year bond. 

In addition, valuations per current 12 month earnings on the S&P are still quite reasonable at 15.27. At 2013 estimated earnings, p/e is just over 14. Despite what I think of as negative timing the next few weeks, I don't think this pullback will go very far. And at already -3.8% from highs, most of it easily could be in.


For more detail, consider a subscription. 

If you are getting this post by forward or Twitter and want to receive notifications of posts, simply email.

In the last key highs and lows update on 3/29 I said the high was "not quite yet" and this has proven very correct! We just had a major league breakout on the benchmark SPX. 

But a lot of timeframes are overbought or near it. (This refers to standard RSI settings; if you don't know what I mean then check this post.)

SPX monthly chart first. March RSI closed at 70.4, currently 71.7. The blue lines refer to the 2007 price high and monthly close high which were very near the 2000 top. As you can see, it is now above! 
 

Onto the weekly. RSI currently 73.3, but has been above 70 for all bars except one since the beginning of March. 

The daily SPX chart is not yet overbought but getting close. That said it has been overbought several times this year and trend has remained strong up. The daily chart was last oversold on 11/14-15/2012 which was an incredible buy for those who entered and held. 

It is not a rare thing for the 4 hour SPX chart to reach overbought in a strong uptrend, but still it is about there. 

All that said, does RSI matter when SPX has just had huge breakout above a 13 year level? I really don't know as there are not so many examples to back test.

And maybe the party is just getting started. Check the RSI on the SPX monthly chart from 1993 to 2000 below. RSI first reached 70 in in March 1993 with SPX at about 450. After a minor pullback it came close to overbought for several months in 1993, then reached 71 in January 1994. After another pullback the launch really started in 1995 and RSI was back above 70 in May 1995 with SPX closing at 533. It then stayed overbought until August 1998! That's over 3 years of consecutive overbought readings. SPX more than doubled with the monthly chart overbought the whole way. And even that wasn't the end of the move; after a few bars of pullback SPX rallied another 500 points or about 50%.

It doesn't seem like we have the economy of the mid 1990s when technology advances were changing so many facets of business, but monthly chart overbought is no guarantee the rally is done. 

If you want to know where I think the market will top, then you'll have to subscribe. 


If you are getting this post by forward or Twitter and want to receive notifications of posts, simply email.

In the last post I pointed out that VIX, while at multi-year lows, could go lower. And that meant stocks could continue higher. As it turned out the VIX low so far was 1/18 but stayed in bullish territory through 1/24 (meaning not significantly up) and stocks maintained the trend; but on Friday when SPX was again making new highs VIX put in a blue reversal bar. It will be interesting to see what happens. 

In the past week even I was not bullish enough. Shorter time-frame charts on the main index (SPX and the futures) reached momentum extremes I have not seen in quite some time. While positive timing certainly played a part, I am also considering the QE fuel from FOMC in the full tank amount of 85 billion a month. 

Granted the Fed is not buying futures, but Treasuries and other mortgage backed securities; yet *someone* is getting $US and it appears they are buying stocks. 

Check the SPX weekly chart below which marks the various FOMC actions since 2008. 

QE1 was first announced in late November 2008, and then more than doubled (up to 1.25 trillion in MBS) in March 2009; these purchases ran through March 2010.* This coincided with a huge rally in S&P that made what is likely a generational low in March 2009 and rallied with an important top soon after in April 2010. After a run of 83% from the low, there was a pullback of 17%.

QE2 was telegraphed by Ben in August 2010 and then officially announced in November; these ran through June 2011. If you include the "Jackson Hole" speech in August, this coincided with a 31% rally that topped in May 2011. A 19-21% drop followed (depending on which low to count, August or October).

In September 2011 the FOMC began Operation Twist. This is not true easing since it was a balance sheet neutral program, but another extraordinary action designed to keep long term rates low. As it happened stocks made a major low in early October 2011 and have been in an uptrend since then, currently up nearly 40% from October 2011. Operation Twist was expanded in June of 2012 (again near a low).

The FOMC has learned the lesson to keep the money flowing. QE3 was telegraphed in the summer of 2012 and officially announced in September. This turned out to be a sell the news event, but since doubling QE in December the market has been quite strong. Unlike QE1 and QE2 there is no set amount or end date to the program; but instead tied to a lower unemployment rate. I have drawn the green line to the end of 2013. Although there are occasional rumblings of ending it sooner Ben has made it clear that he expects the programs to remain in place for quite some time. I have been calling it "QE infinity times two." 

Keep in mind all the easing and twisting this is on top of very low interest rates that have been in place throughout, with the FOMC target of federal funds rate between 0 and .25%. 

Regardless of whether you think these moves are cause or coincidence, the fact is the market is in a strong uptrend. With the exception of April 2012, the weekly chart has pushed to overbought levels before a larger drop. Weekly RSI is currently 65; getting up there, but room to go higher.

If the market was able to rally half in percentage terms of its QE2 rally of 31%, so let's say 15%, this would give a target of 1545 if projected from the November low. If it can rally 20%, then we see above 1600.

Ben was appointed on February 1, 2006. The crash occurred on his watch. I think returning the market to its 2007 high is a point of pride for him. He will chair the FOMC until the end of January 2014. At 1400, even 1300, the market is not at crisis levels. While Ben has said that all this easing and twisting is designed to lower unemployment, I think he really wants to leave with the market completely recovered from 2008.

* For a detailed FOMC timeline see this. 

First a quick review. The last two posts pointed to the importance of the 3.0 area on the 30 year bond. From the 1/13 post: "If the yield stays up this means bonds are going down; if bonds are going down, stocks really should continue to rally." The lows on 1/15-16 were 2.994 and 2.992 respectively, and the yield quickly rallied back above 3.0 on both days. And indeed, stocks have continued higher. 

Over the weekend the CNBC.com USA headlines read: "Dow, S&P Close at 5-Year Highs; Vix plunges near 12."

This post is about VIX; I have seen several posts in various online places about "low VIX." While I could do an entire post on what VIX is and isn't, think better to get straight to the point here. Is VIX too low? If you think yes, then the market is probably about to fall. If VIX can go lower, stocks have room to run. 

It is true that VIX is at multi-year lows; the last time VIX was in the 12s was June 2007. Does this mean we are 4 months from a multi-year top?

Take a look at the VIX monthly chart below. I have purposefully stretched this out to show the bull markets in both the 1990s and 2000s. Both times VIX made it to its lower monthly Bollinger band, and in both bull markets VIX dropped below 10. Currently the monthly Bollinger band is 6.8; while that does seem lower than we are immediately likely to see, on this view VIX has much further to drop. 

I'm also watching the monthly RSI as previous lows were near 39-40. 42 is getting close, but can go lower.

Below that is the weekly VIX chart. Weekly VIX has not seen its lower Bollinger band since late 2010. While VIX did make important lows in 2011 and 2012 that were above the band, it did tag the band several times in 2009 and 2010. All the SPX charts look very bullish here, so I see no reason why VIX cannot tag its lower Bollinger band. This value is currently 11.44 and falling. 

RSI on the weekly VIX chart is currently 41 which is on the low side, but in 2012 and several times in the past made it below 40. 

Now onto the daily chart. While it just broke through the lows in 2012, again we see VIX is far away from its Bollinger band. RSI at 35 is low but has gone lower at several points in the rally from 2009. While something could happen to make the lower Bollinger band turn up, right now the downtrend in VIX has room to fall further. This means stocks can continue up.

In the last post, I said that 3.0 yield on the 30 year Treasury was an easy guide to whether the stock market rally will continue. This remains my perspective. The larger theme for the 2013 so far is bonds vs stocks; if money comes out of bonds, which are still not so far from multi-decade highs, then it has to go somewhere. With metals sagging the obvious place is equities. 

Remember, yields move inverse to the price of bonds so yield up means the price of bonds (or bond ETFs like TLT) is going down. Generally the yield chart of the 30 year bond is moving along with SPX - note 9/14H, 11/6 key lower high, 11/16L, 12/18H, 12/28-31L shown on TYX and SPX daily charts below. 

However, we are starting to see some warning for stocks since SPX made a new high on 1/11, but TYX high remains 1/4. That said, as long as TYX stays generally above 3.0 (reasoning explained in the prior post) then stocks should continue higher.

This week we have even more reasons to watch this level. The rising daily 20MA (orange line) ended Friday at 2.991 and will be a bit higher as Monday opens. The Fibonacci 38.2% level anchored to two lows back on 12/5 is 3.01, and from the 11/16 low (not shown) is still 2.99.  

At the risk of repeating myself: if the yield stays up this means bonds are going down; if bonds are going down, stocks really should continue to rally.

The interesting question here is the long term trend of yields and the bond market. As you can see on the TYX monthly chart below, TYX is bumping up against a sharply falling monthly 20MA. If this wins as resistance, then this means the price of bonds is moving back up and the stock rally probably fades. But if TYX clears its 20MA then there is potentially quite a lot of room above. 

In the last post, I said to watch 61.8% resistance on SPX at 1424. On Monday 12/3 the market opened higher right on the level and sold off. The high of 1423.73 was the top for the week.

This week I'd like to look at the monthly and weekly charts of TLT, a commonly traded ETF for bonds. As you can see in chart #1 below, the monthly 20MA (orange line) chart has a very strong slope. RSI on the monthly chart has reached full overbought territory twice from 2008 and nearly again with two RSI readings at 67. 

In comparison, the monthly SPX chart (not shown) reached an RSI high of 66 in April 2011; since then monthly RSIs have been lower. Even though stocks have had a larger percentage increase from their March 2009 lows, bonds have been overall the much stronger market, especially from 2008. 

But look at the weekly 20MA on chart #2 below; it is starting to turn down. This alone doesn't guarantee a downtrend; the weekly 20MA turned lower at the end of 2010 and again for a brief period in early 2012. Yet if bonds drop, stocks will probably rally. 

Currently both TLT weekly chart and SPX weekly chart (#3 below) are just above their 20MAs, both above their 50MAs yet both below 61.8% resistance. This condition will not last. If TLT drops further SPX will probably rally above 1424. If TLT turns back up then SPX will drop from its resistance level back towards its 50MA (purple line). 

I consider the definitive measure of a long term trend to be the 50MA and it slope. Again, both TLT and SPX are above their weekly 50MAs; both have a rising slope though currently stocks are stronger than bonds in this regard. Both have recently broken their 50MAs and have come back. While markets may turn out range bound as we approach the holidays, I don't think this condition will last that much longer. 

In weeks ahead, either SPX  will be clearly rejected from 1424 or chance 1435-43 resistance as TLT rallies back up towards 126.80 and then its upper weekly Bollinger band; or SPX pushes higher as TLT moves down to its 50MA or lower. 

The last blog post from 11/17 said that both stocks and bonds were at key 61.8% levels. These were SPX 1346 and TLT 126.80 respectively. As you can see in the weekly charts of SPX and TLT (#1 and #2 below), both markets have turned from these levels. 

I said that all the smart $ would be watching these levels, and indeed as stocks showed signs of strength above 1346 even more buyers came in to the market. At the same time, bonds did not go higher though the drop has been mild. 

Now both indexes are near their weekly 20MAs (orange lines). These are now the levels to watch. Currently SPX is just slightly above its 20MA, and TLT is still above its 20MA as well. If the SPX 20MA turns into support, then the TLT 20MA will probably break. But if the SPX 20MA turns into resistance as stocks drop back down, the TLT 20MA will remain as support and bonds will rally.

In addition, we can also watch the 61%s on the other side. 61.8% resistance on SPX is 1424, and 61.8% support for TLT is 121.54. These are shown on charts #3 and #4 below. Currently SPX is much closer to its 61.8% resistance because it has bounced more in the last two weeks than bonds have dropped.

So one of these markets is a bit off. Either stocks have gotten a bit ahead of themselves and due for a drop back down as bonds remain firm; or the stock rally is correct and bonds should break. It would be rare for stocks to continue to rally and bonds stay up, although this can happen occasionally since bonds via TLT is the stronger market on the on the monthly chart. However, with the EU currently in a period of calm, the more likely move is stocks up and bonds down OR stocks pull back and bonds rally. 

It has been a few weeks since my last post. As of the 10/26 post here, I said the levels to watch were the SPX support zone 1395-1404 and the NDX daily 200MA. At the time wasn't sure if next move was bounce for break. Here's how it turned out.

NDX led the market down and broke its 200MA on 10/31 (see chart #1 below). There was a battle around this area as bulls tried to come back the very next day. The following red bar again closed just below the level but not enough to be definitive. However, 2 small blue bars set up the convincing break on 11/7. 

SPX was able to hold the support zone and lifted into 11/2 price high and 11/6 close high. But a small blue bar on the weekly chart (see 10/28 bar on chart #2 below) above support set up the break. A small blue bar above support is not bullish; see my post here about this idea. 

SPX has already broken its weekly 50MA (purple line), although the slope is still rising and bulls may try to recover this level. For now 61.8% of the move from the June low to September high at 1346 is acting as support. This is a very key level. 

TLT (bond ETF) is at similar 61.8% resistance of its move from July highs to September low at 126.80. (See weekly TLT chart #3 below.)

What would you rather own? A market that has broken its 50MA support and now at 61.8% support; or a market lifting from 50MA support and heading into 61.8% resistance? 

All the smart $ will be eyeing these levels. A short term bounce for SPX is probably due, but if it does not get far then the market will be at risk for another move down. Similarly, if TLT clears 126.80 on daily/weekly close, then it has a good chance of going for its weekly Bollinger band which is currently about 131.00. But if stocks can put in a better rally from this level it may look good as an intermediate term low; and if TLT drops hard from resistance it could define the July high as 'it.'

Bottom line: both stocks per S&P and bonds per TLT are at key support and resistance respectively. Usually there will be some reaction; it is the extend of the lift in stocks (drop in bonds) that matters for the next larger move. 

If S&P stays below the weekly 20MA (orange line) currently 1409, then larger move is down; any lower than that would be even more bearish. Similarly, if TLT holds its weekly 20MA as support then it will probably make a move towards highs. 

Reminder: for all my price notes, it is the close that matters on whatever time-frame is appropriate. 

In the last post, I pointed to two levels to watch. On SPX it was a weekly support zone from 1395-1404. The session low of the week was 1403, right on the weekly 20MA. The futures market went lower Thursday and early Friday to a low that corresponds to above 1399 SPX. So right in the support zone. 

But is it a hold or pause in downtrend? In other words, bounce or break? I'm not sure. Check the first chart below. A larger red bar above a support line does not guarantee a bounce as the next move. If Monday opens below 1403 that would look quite bearish.

NDX was able to hold its daily 200MA (see chart #2 below) on close basis on Friday, but pros know the market was much lower after hours on Thursday! NQ futures were as low as 2604 after poor earnings from Amazon and Apple; futures are about 6 points below cash so that corresponds to the daily 61.8% Fib exactly at NDX 2610.

In addition, a smaller blue bar above support is not necessarily bullish. This is because a small blue bar means a weak bounce. To my eyes, a small red bar above support might have looked better for the bulls, because that would show down pressure abating. 

We'll have to see where things open on Monday. I have no problem with this approach. Sometimes I have a very good sense of where the market is going via time or price or both. That move has happened, and there will be another one soon. In between I'll be watching to see what develops.

After another failure near highs last week, market has dropped hard for 2 of the last 3 trading days. These are the levels to watch.

SPX daily chart has broken support, so let's turn to the weekly chart (#1 below) for context. The blue lines represent the prior price and close highs from late March and April 2012. The prior close high is marking the low so far.

Just below that is the 20MA (orange line), currently 1403. Just below that is the first real Fibonacci level at 38.2% or 1395. I think a move to this support zone 1395-1404 is likely. As usual, how the market responds to support is important.

Biases aside, the weekly chart doesn't look horrible here - 20MA and 50MA are rising with a nice slope, and RSI near overbought has worked off with a relatively minor move compared to the June rally. That said, why should a shallow 38% pullback hold with all these companies missing on earnings and revenue and NDX leading down? Still, 1395-1404 usually is good for some bounce.

NDX has been the weakest index of the 6 I track. It is already near its daily 200MA (thick black line on chart #2 below). Keep in mind that NDX was the only one of 6 to hold its 200MA in June, and I think this helped the summer rally. If the NDX 200MA breaks, it would be the first time below since end of 2011. This would be an important shift for the larger market.