Extended Stay America

Late last year, the US market bottomed on November 16, 2012. Since then it has been powering higher defying all odds. During this time – 196 calendar days or 134 trading days – the index has not had a significant pullback. Before last week’s decline, it had only three shallow pullbacks averaging -3.43% and lasting for an average of nine calendar days.

Between May 22nd and May 31st, S&P 500 has declined -3.35% in nine days. The current S&P500 rally has stayed within a very well defined upward sloping channel.

SPX-130531-D

Previous pullbacks had taken the price to the lower channel limit. At the moment the price is well above it which means that there is more room for it to drop. The chart shows couple of weak support areas – 1) four day consolidation area in early May with a 1623 support level; 2) The last swing high of 1597 made on April 11th; 3) 38.2% & 50% Fibonacci ratios, from the last swing low, at 1626 and 1609 respectively.

Support levels below these two will most likely instigate breach of the trend line.

Last year, from early June to mid-September, too the index had staged a rally within an upward sloping channel without a 5% pullback. At that time the lower channel line was broken on October 11th, almost a month after the high was made on September 14th. Eventually the index bottomed on November 16th with a -8.9% decline in 63 calendar days.

The current rally may remain intact if the lower channel line is not broken – which means that the decline should not go beyond -5.5% in the next couple of days. If the trend line is broken then next major support level is the swing low of 1536 made on April 18th, which is slightly below the 38.2% Fibonacci ratio of the rally. This is in -10% decline range.

What’s Up With Nikkei? Maybe An ABCD Pattern

Last week started a volatile period for Nikkei 225. As we noted on May 24th, there are two opposing forces acting on the Japanese economy. One is Abenomics and the other is formed by a combination of fundamental reasons, namely –1) Weak closing of S&P 500 following confusing testimony of Chairman Bernanke; 2) Volatility in the JGB market; and 3) Weak Chinese PMI figures raising concerns about Asian growth.

Abenomics wants the Japanese economy to grow, which means Nikkei 225 needs to rise. The fundamental reasons mentioned above are trying to put a damper on Abenomics if not killing it outright, which means downward pressure for Nikkei 225. Along with these opposing fundamental forces acting on Nikkei, the index is also facing few technical forces that we mentioned in our May24th post.

Since then four more days’ of market action has happened and few things are becoming clearer. One is that the technical resistance – the lower bound of the horizontal channel formed in 90’s – is turning out to be a strong one. Nikkei is finding it difficult to break above it at the moment.

Second is that the busted chart patterns are quite powerful. On December 17, 2012, Nikkei 225 broke above the upper line of a descending triangle (see weekly chart below). Descending triangles are bearish in nature with an anticipated downward break. An upward break makes it a busted chart pattern. The resultant move off this pattern was approximately 187% of the height of the pattern.

Nikkei_130524-W

The third is that this time the index is showing more signs of a pullback than previous few attempts – this is turning out to be first significant pullback of the rally that started in early November 2012.

Fourth is the emergence of a bearish ABCD pattern.

Nikkei-130530-W

On May 23rd and May 24th, Nikkei traced the AB leg of the pattern. Then for the next three days it made the BC leg of the pattern. This was only slightly more than the 25% of the down move (AB), which makes it not-a-classic pattern. Today, May 30th, Nikkei has broken below the low of candle that was “C” and also below the low of AB leg. The measured move target – CD = AB – is estimated to take the index to 12550.

In between there are more support levels.

  1. 38.2% and 50% Fibonacci ratios create support levels at 13130 and 12261 respectively
  2. A shallow pullback in mid-April created a support at 13004 – the low of April 16th
  3. April 5th was a gap up day – the support created by the upper and lower limit of the gap are at 12831 and 12634 respectively
  4. A shallow pullback occurred in early April too creating a support at 11805 – the low on April 2nd

There are other support zones below these levels too but they will come in play only if some of the higher support zones are broken.

So the technicals have started to make their move. Now the question is who or what will arrest this downward slide. Will it be more ammunition from the Bank of Japan or Abe government, the enablers of Abenomics? or is it driven by profit-taking and will finish when all short term profit-takers are done? Or is it the beginning of something more ominous? Keep in mind that if the index reaches 12750 – a level within some of the above mentioned support zones – then it will enter bear market territory, which is 20% retracement from the high. A 20% drop does not necessarily mean that the downward move will continue but it does increase that likelihood.

 

NYSE Composite Has Catching Up to Do

US stock market has run through many resistance levels created over the last decade and is at a very high level. Most of the broad market indices are either at all time high or much higher than the pre-financial-crisis level achieved in 2007-2008.

Dow Jones Industrial Averages, S&P 5oo are at all-time highs. So are Dow Transports and Russell 2000. Although, the NASDAQ Composite has not reached the levels seen in 2000, it crossed above high of 2007 in 2012.

Indices-130527

Most of the exchanges are also seeing similar high with an exception of the NYSE stock exchange. The Dow Jones US Total Stock Market Index (DWCF) is at an all-time high with a chart pattern similar to S&P 500.

DWCF-130527-W

However, NYSE Composite Index – index of all stock traded on the NYSE exchange – has reached only the high achieved in May 2008 and is almost 10% below the all-time high of October 2007.

NYA-130527-W

This indicates that the stocks listed on the NASDAQ are rising faster than the stock listed on the NYSE.

Nikkei 225 – Let’s Get Some Perspective

After making a new high since December 2007, Nikkei 225 dropped -1,143 point or -7.3% on Thursday. Friday turned out to be no better with a yo-yo move. Though Nikkei gained +128 points, it was far lower than the 500 point gain that the index had intraday.

In two days, the index dropped -6.4% and saw massive volatility. So what’s up with it? Is it the start of a bad phase? Let’s put everything in perspective.

Firstly, Nikkei has been one of the best performing major stock indexes of 2013. As of today, it has been up +40.6% year-to-date. Since November 2012 – approximately seven months ago – it has been up by +63.7%. During this time it has not had any significant pull back. In mid-January 2013, Nikkei saw a pullback of -4.7% in eight trading days. In late March it saw a pullback of -7.2%, again in eight trading days. In mid-April, a three day pullback brought Nikkei down by only -4.7%. The Thursday’s drop is similar to all significant (or insignificant) pull back since the rally started in early November 2012. The only major difference is that this drop happened in one day whereas earlier pullbacks were spread out over 3-8 trading days.

Now there are various reasons of the so called ‘crash’ – profit taking being one of them. There are many pundits and analysts who are coming out with their own rationales. Some are persuasive and some are not.

Hedge fund manager Kyle Bass blames Macro Tourists for Nikkei’s fall, which Business Insider finds hilarious. One analyst calls it Lehman moment for Japan. This is hard to justify considering what was triggered world-wide after Lehman Brothers’ collapse in 2008.

One reasonable argument is that weakening factory activity in China.

In fact, Thursday’s Nikkei rout was triggered by weak factory activity data in China, Japan’s second-biggest export market, and on concerns sparked by Fed chief Ben Bernanke‘s suggestion that its bond-buying could be tapered this year.

Another reason, though a weak one, is the spiking interest rates fears.

Yields on 10-year Japanese government bonds have risen to 0.88 percent, nearly triple their April 5 low of 0.315 percent, just after the BOJ introduced its latest easing campaign

The increase in yields is still very small and takes it to only slightly above early 2013 levels. However, along with other reasons, increasing yields could spook the market as mentioned by Nomura’s Jens Nordvig, who gives three reasons for the one-day plunge – 1) weak closing of S&P 500 following confusing testimony of Chairman Bernanke; 2) Volatility in the JGB market; and 3) Weak Chinese PMI figures raising concerns about Asian growth.

On the other side is what will happen if the market continues to fall. Morgan Stanley thinks that in that case Prime Minister Abe and BOJ will most likely double down and deploy additional policy tools to support the economy and Abenomics.

But what are the charts saying?

The monthly chart of Nikkei 225 paints a very interesting picture. After making an all-time high in December 89 – January 90, Nikkei retreated sharply. Then from March 1992 to July 2000, it traded within a horizontal channel bounded by a high of 22,000 and a low of 13,000. It briefly moved back in this channel in late 2005 after breaking the down trend line from 1989 high. The financial crisis of 2008 arrested its move towards the upper limit of the channel and Nikkei fell along with all major world indices. See the monthly chart below.
Nikkei_130524-M

It then tested the previous low, breaching it slightly before bottoming in 2009. The sharp rise since November 2012 has brought the index back above the lower limit of the horizontal channel of 90’s. Considering the type of resistance this lower limit creates, it is not surprising that the index is finding it tough to breakout.

Since the 1989 high, the 9-period monthly RSI has not spent much time either in the overbought region or in the oversold region. The first entry in the overbought region was cut short by the dotcom-bubble burst of 2000. The second journey was in August 2005 and lasted for about ten months during which time the index saw a decline of 20% from high-to-low before making a divergence in 2007, when the index made a high but the RSI did not. Presently the RSI is still rising and is not near the highs of 2005 or that of 1989 and 1986.

An analysis of weekly chart provides us with some more explanation. From April 2010 to December 2012, Nikkei traversed a descending triangle pattern. Generally it is a bearish chart pattern with a high likelihood of breaking below the lower bound. However, in late December 2012, Nikkei broke above the upper descending line, making it a busted-descending-triangle.

Since then the index has rocketed higher. In the process it blew past the measured-move target of descending triangle. The height of the triangle is approximately 3,200 points and the break-out point is approximately 10,100. The 1-to-1 moved will make a target of 13,300, which the index crossed in April. The 161.2% move makes the target to be 15,258, which the index crossed last week.

Nikkei_130524-W

Another resistance is created by the 78.6% Fibonacci level of the fall from 2007 to 2009. The third resistance level is created by the high of 16107 made in the early December 2007.

Combining the analysis of monthly and weekly charts, it is natural that the index is facing some serious resistance. Coupled with oher reasons – weakening Chinese numbers, slight uptick in JGB yields, and fears about continuation of QE in the United States – the fact that Nikkei is pulling back is not surprising.

On the other side is the team of BOJ and the Abe Government, which is determined to get Japanese economy out of its prolonged slump. Abenomics has just started to show its result and there is no doubt that Prime Minister Abe and Governor Kuroda of BOJ are going to continue with their policies, which are going to continue propelling the Japanese stock market and weaken its currency.

The net result of these two opposing forces – technical resistance and the support from monetary and fiscal policies – is going to be a turbulent period for Nikkei 225 in the near future.

Dollar Facing Resistance Even With Tailwind

By reaching a low of 78.915 in the last week of January 2013, the Dollar index made a double bottom – it made the first bottom of 78.725 in early September. The index completed the pattern in late February 2013, by breaking above the intermediate high of 81.515 between the two bottoms made in the second week of November. The up-thrust in the current week of 20th May took the index to a high of 84.59. This is equal to the measured target of the DB pattern. It is also slightly higher that the high of 84.245 made in the week of July 23, 2012. See the weekly chart below.

Dollar Index (Weekly) - May 24, 2013

Dollar Index (Weekly) – May 24, 2013

The measured target of 84.115 and the previous high of 84.245 created two resistance points. The third resistance point is at the Fibonacci levels of the index’s fall from the high of 89.100 made in the week of June 7, 2010 to low of 72.860 made in the week of May 2, 2011. The current level is between the 61.8% and 78.6% Fib levels – near 70.7% retracement.

So it is not surprising that the index is stalling at these levels. Presently it is searching for a reason to continue going up and also looking for s good support. There are few previous highs that may act as a support. On its way down from July 2012 high, the index made and small rally high of 83.61 on August 2, 2012. It tested this high on April 4, 2013 before retreating. Presently the index is at this level. This support was also strengthened during the up-and-down moment of the past few days. If the index breaches this support then there are three levels that may act as a short term support – a) 38.2% Fibonacci level of 83.33 and high of 83.32 made on April 24; b) 50% Fibonacci level of 82.98 ad the low of 83.045 made on May 14; c) 61.8% Fibonacci level of 82.60 and the measured move target of 82.50 from the horizontal congestion zone formed in the last week. See the daily chart below.

Dollar Index (Daily) - May 24, 2013

Dollar Index (Daily) – May 24, 2013

All of these support levels will come in play if the index breaks below 83.52, the low made on May 22nd. If the index breaks above May 24th high of 84.02 then it may retest the high of 84.59. A break above that high will take it to the 78.6% Fibonacci level of 85.624 on way to the June 7, 2010 high of 89.10.