Thursday, May 08, 2014

stock market upsdate

Here are some charts which illustrate why I think the US stock market is teetering on edge of a bearish precipice but has not yet tumbled over the edge.

You can see that all three of my trend indicators (top three charts) are above their 50 day moving averages (green lines) and well above their 200 day moving averages (red lines). Bot the Dow and the S&P have spent the past 10 weeks in a narrow trading range right beneath their bull market highs so far. So any break down below the lows of this range would be bearish in its own right but doubly bearish because it would also take both averages below their 50 day moving averages. Such a break down would mean that these two averages are headed down to their 200 day moving averages.

However, this break down has not happened yet. Indeed we may well see a brief rally to new bull market highs, perhaps to 1960 in the S&P, followed by a dive down below the lows of the recent trading range. So I don't think it makes sense to be bearish until the lows of this 10 week trading range are decisively broken.

Short term trading sentiment is bearish as you can see from the bottom chart of the equity put-call ratio on the CBOE, This moving average is at the high of its range for the past year and says that short term traders are as bearish as they have been during this time. This is a clue that the downside breakout I worry about is probably not in the cards right now and that the near term  direction of the market will be upward.

The most bearish chart is the chart of the QQQ, home of high tech stocks. This is a classic picture of a market which is about to go substantially lower. You can see the clearly delineated head and shoulders top with a right shoulder rally halting so far just under the 50 day moving average which is itself rolling over.

A downside breakout from this pattern in the QQQ would probably cut the thread which is holding up high cap stocks in the Dow and S&P. If this happens the bull market which began in 2009 may well have breathed its last breath.

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