Morning Notes – Monday October 15, 2018

Directional Bias For The Day:

  • S&P Futures are lower; moving higher since 4:45 AM from a low of 2745.25; almost near Friday’s close
  • Odds are for a sideways to an up day with increased volatility
  • Key economic data due:
    • Core Retail Sales ( -0.1% vs. 0.4% est.) at 8:30 AM
    • Retail Sales (0.1% vs. 0.7% est.) at 8:30 AM
    • Empire State Manufacturing Index (21.1 vs. 20.4 est.) at 8:30 AM
    • Treasury Currency Report anytime today

Markets Around The World

  • Markets in the East closed mostly lower – Mumbai was up
  • European markets are mostly up – France and Switzerland are down
  • Currencies:
    Up Down
    • EUR/USD
    • GBP/USD
    • AUD/USD
    • NZD/USD
    • USD/CAD
    • USD/INR
    • Dollar index
    • USD/JPY
    • USD/CHF
  • Commodities:
    Up Down
    • Crude Oil
    • NatGas
    • Gold
    • Silver
    • Copper
    • Platinum
    • Palladium
    • Sugar
    • Coffee
    • Cotton
    • Cocoa
  • Bonds
    • 10-yrs yield is at 3.163%, up from October 12 close of 3.141%;
    • 30-years is at 3.343%, up from 3.316%
    • 2-years yield is at 2.857%, unchanged
    • The 10-Year-&-2-Year spread is at 0.306, up from 0.288

Key Levels:

  • Critical support levels for S&P 500 are 2745.15, 2732.66 and 2710.51
  • Critical resistance levels for S&P 500 are 2775.77, 2784.11 and 2795.14
  • Key levels for eMini futures: break above 2769.25, the high of 8:00 PM on October 14 and break below 2753.75, the low of 6:30 AM

Pre-Open

  • On Friday, at 4:00 PM, S&P future (December contract) closed at 2768.75 and the index closed at 2767.13 – a spread of about +1.75 points; futures closed at 2768.50 for the day; the fair value is +0.25
  • Pre-NYSE session open, futures price action is to the downside – at 8:15 AM, S&P 500 futures were down -1.50; Dow by -21.00; and NASDAQ by -9.00

Directional Bias Before Open

  • Weekly: Uptrend Under Pressure
  • Daily: Uptrend Under Pressure
  • 120-Min: Down
  • 30-Min: Side
  • 15-Min: Side
  • 6-Min: Side-Up

The trend and patterns on various time frames for S&P 500 are:

Monthly
  • Confirmed Uptrend
  • December 2017 closed higher; index has been higher for the nine straight months; it has only one down month, March 2017, since October 2016
  • Uptrend resumption since Feb 08, 2016 after a pull back of -15.2%
Weekly:
  • The week ending on October 12 was a large red candle, following a bearish engulfing candle, which breached many weeks’ low; the lower shadow was twice the size of upper shadow and two-third the size of the real body
    • Stochastics (9,1, 3) and RSI (14) continue to decline following their bearish divergences
  • Last week’s pivot point=2790.82, R1=2871.14 R2=2975.14; S1=2686.82, S2=2606.50; S1/S2/S3 pivot levels were breached;
  • Third down week in a row; third in last five weeks and fifth in last ten weeks
  • Broke above an ascending triangle but retraced back to its upper limit; 100% extension target is near 3070.00 level
  • Broke above a down sloping flag on April 24 2017;
    • flag-low was 2322.25 during 27-Mar-17 week; shorter flag-pole length is 317.19 and longer flag-pole length is 590.88;
    • 100% extension target of shorter flag-pole near 2639.44 and the 161.8% extension target near 2835.46 are achieved; the 261.8% extension target is near 3013.72
    • 61.8% extension target of longer flag-pole near 2687.41 is achieved; the 100% extension target is near 2913.13
  • Broke above a down-sloping flag on November 14, 2016;
    • the flag low was 2083.79 during 31-Oct-16 week; the shorter flag-pole length is 202.13 and the longer flag-pole length is 383.71;
    • 261.8% extension target of shorter flag-pole near 2612.97 is achieved
    • the 161.8% extension target of longer flag-pole near 2704.63 is achieved; the 261.8% extension target is near 3088.34
  • Last swing low, 2322.25, was the low on March 27, 2017; Last swing high, 2872.87, was during the week of January 22, 2-018; the low since the last swing high is 2532.69 during the week if February 5, 2018
  • At 10-week EMA; above 39-week SMA and above 89-week SMA
  • Uptrend Under Pressure
Daily
  • Small red real body with large lower shadow and small upper shadow – looks like a dragonfly doji – within the real body of previous day or a harami candlestick formation
  • %K crossed above %D from oversold levels at at 0.52, the lowest since February 8
  • Below 20-day EMA, 50-day EMA and 100-day SMA; at/below 200-day SMA
  • Uptrend Under Pressure
2-Hour (e-mini future)
  • Forming a symmetrical triangle at the low end of sharp decline of past few days; a break below its will make it a pennant formation and a break above it will start a bounce
  • RSI-9 continue to rise form a low of 8.07 at 10:00 PM on October 10; bullish divergence at 2:00 PM on October 11
  • Below 20-bar EMA, which is below EMA10 of EMA50
  • Bias: Down
30-Minute (e-mini future)
  • Mostly moving sideways since 6:30 PM on October 11 between 2784.50 and 2732.25
  • RSI-9 mostly between 40 and 65 since 2:30 AM on October 11 with few forays below
  • At/above 50-bar EMA, which is above 20-bar EMA – both almost flat
  • Bias: Side
15-Minute (e-mini future)
  • Bollinger Band (20, 2.0) is mostly moving sideways since 0:15 AM on October 11 with alternatively showing slight up or down biases for few hours
  • The band narrowed from 10:45 PM on Sunday to 4:30 AM; expanding since
  • RSI-9 rising from 31.61 at :45 AM; above 65
  • The Stochastic (9, 1, 3): %K is crossed above %D from below 10 at 4:45 AM; crisscrossing %D above 90 since 5:30 AM
  • Bias: Side

Previous Session

Major U.S. indices closed higher on Friday October 12 in lower volume. the traded volume was lower than that on Thursday but still higher than previous week’s average.

From Briefing.com:

Stocks sold off sharply this week, sending the S&P 500 lower by 4.1%. Fears over potentially weakening economic and earnings growth helped fuel the selling, which left stocks at three-month lows going into the third quarter earnings season. The Dow Jones Industrial Average lost 4.2% this week, and the tech-heavy Nasdaq Composite fell 3.7%.

The International Monetary Fund (IMF) cut its 2018 and 2019 global growth outlook to 3.7% from 3.9% on Tuesday, citing trade uncertainties that include tariffs between the U.S. and China, a pending Brexit deal, and the new trilateral agreement between the U.S., Canada, and Mexico that’s supposed to replace NAFTA.

[…] The yield on the benchmark 10-yr Treasury note, which spiked to a seven-year high last week, hovered between 3.12% and 3.26% before eventually settling Friday at 3.14% — nine basis points below last Friday’s close. Meanwhile, the yield on the more Fed-sensitive 2-yr Treasury note fell four basis points to 2.84%, leaving the 2-10 spread with a five bps point loss for the week.

[…] The CME FedWatch Tool places the chances of a December rate hike at 79.7%; that’s down slightly from 80.0% last Friday.

The S&P 500 got into technical trouble this week, breaching its 50-day moving average on Wednesday and then its 200-day moving average on Thursday. The benchmark index tried to reclaim its 200-day moving average on Friday, but closed right at the key technical mark. The Dow Jones Industrial Average and the Nasdaq Composite breached their 200-day moving averages as well; the Dow eventually reclaimed the key technical level, but the Nasdaq did not.

  • S&P 500 Sectors
Sector Daily Trend Relative Strength (Last Month) Relative Strength (Current)
Consumer Discretionary Down (Break below trading zone – 114.80) XLY SPY
Consumer Staples Side (Break Down Support = 53.49) SPY XLP
Energy Up (From Side) SPY XLE
Materials Side SPY SPY
Industrials Up-Side XLI XLI
Finance Side SPY XLF
Technology Up (Under Pressure) XLK SPY
Utility Up-Side SPY XLU
Heath Care Up (under Pressure) XLV XLV
Real Estate Down SPY SPY
Telecom Side XTL SPY

 

Market Sentiments and Internals Indicate Uncertainty and Time For Caution

Turmoil In the Equity Markets

Fig. 1

The second week of the Q4 of 2018 saw the biggest decline for S&P 500 since the week of March 23, 2018 (see Fig. 1). What is more concerning is that 14-week RSI made a bearish divergence during the week of September 17, when the index made a  new all time high. In the week of January 22, the index made a then all-time high of 2872.87 and RSI was 90.54. In the week of September 17, the index reached 2940.91 but the RSI only reached 68.42. The RIS has not fallen below 50.

For the week, global indices declined sharply with increased volume. The table below shows how the major global indices fared. Asian bourses did pretty badly compared to Europe and North America though Indian Sensex eked out a positive week after making a reversal doji on Thursday. The table does not show Latin American indices, which also did not do well. Brazil, however, was positive for the week though it made a shooting star candlestick pattern.

U.S.A Europe Asia
Dow Jones Industrial Average -4.2%
S&P 500 -4.1%
NASDAQ Composite -3.7%
Russell 2000 -5.2%
Dow Jones Transportation Average -6.4%
NYSE Composite -4.3%
Wilshire 500 Total Market Index -4.2%
Germany -4.9%
U.K. -4.4%
France -4.9%
Spain -3.8%
Italy -5.4%
Switzerland -4.2%
STOXX 6000 -4.6%
Shanghai -7.6%
Hong Kong -2.9%
Tokyo -4.6%
Sydney -4.7%
Mumbai +1.0
Seoul -4.7%
Singapore -4.4%

With global markets in turmoil it is good idea to take a look at the psychological indicators and market internals. For brevity, we will restrict our analysis to U.S. market only.

The detailed analysis is below but what it shows is that the psychological indicators are flashing signs of increased anxiety, which is natural due to the considerable decline seen by the equity indices over a short period. However, the anxiety hasn’t risen to crescendo and the indicators have also not reached levels commensurate with the market reversals.

AAII Investor Sentiment

Fig. 2

The last AAII Investor Survey, on October 4 2018, before the sharp decline on October 10 and 11 showed the investor optimism at its highest level in eight months.

Bullish Sentiment, the expectations that the stock market will rise over the next six-months was at 45.7% from previous week’s reading of 36.2%. This is the highest level since the week of February 12, 2018, when the bullish sentiment was 48.52%. Bearish Sentiment, expectations that stock market will decline over the next six months, was at 25.1%, which was a five-week low. Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, dropped by 3.5% to 29.2%.

To put this in perspective, the historical average for the bullish sentiment is 38.5%, bearish sentiment is 30.5% and neutral sentiment is 29.2%.

On January 4, 2018 the bullish sentiment was 59.75%, which is the highest level seen in the last 5-years. On January 26, 2018, the S&P 500 touched 2872.87, an all time of high at the time. Following the euphoric Bullish Sentiment level, the S&P 500 declined by -11.8% to a low of 2532.69 on February 9, 2018 and then took seven months to regain the January high.

On October 4th, the S&P 500 started a six-day losing streak. On October 10, the most recent AAII Investor Sentiment survey came out with Bullish Sentiment dropping to 30.6%, Bearish Sentiment rising to 35.5% and Neutral Sentiment also rising to 33.9%. The pessimism or the Bearish Sentiment rose to 3-month high and above its historic average for the fourth time in five weeks.

At extreme readings, this gauge works as a contrarian indicator but at other times, it provides signs for future direction of the market. We have found that the current slope of the 4-week simple moving average of the bullish percentage gives a good sign for the slope of the S&P 500 4-weeks later (Fig. 2). Also, the spread between bullish and bearish percentages gives a hint for future direction of the S&P 500. The current trend is moving sideways just above 0, which indicates some level of uncertainty. If it drops below zero then it will increase the chances of current spate of declining days to last longer.

Business and Consumer Sentiment

Fig. 3

The Revised University of Michigan Consumer Sentiment recorded a reading of 100.1 in September 2018. This was the third highest level since 2007. The Conference Board Consumer Confidence Index rose to 138.3, the highest level since 2007. The NFIB Small Business Confidence Sentiment index jumped to 108.8, also highest since 2007.

A composite index of these three sentiment surveys has good correlation with S&P 500 (see Fig. 3). However, this, like all sentiment indicator, is not a leading indicator and does act as a contrarian indicator at extreme levels, which calls for some caution at the current juncture.

The Preliminary UoM Consumer Sentiment dropped to 99.0 in October, it is still above the 12-month moving average of 98.3.

The small decline was due to less favorable assessments by consumers of their personal finances. Unfortunately, the downward revisions in the rate of growth in household incomes were accompanied by upward revisions in the year-ahead expected inflation rate, weakening real income expectations.

Market Volatility

Fig. 4

The market volatility was subdued for most of 2017. The CBOE Market Volatility or $VIX mostly stayed below 12.5 from September 2017 to late January. It flared up in February 2018, when the S&P 500 declined by more than 10%. After reaching 37.32, the highest level since August 2015, in early February, the $VIX gradually declined, though it did not reach the low levels that were prevalent during most of 2017 (see Fig. 3).

Since August, this Fear-Gauge has stabilized between 15 and 12.5 but that stability has come under pressure in October and $VIX is now at the highest level since the June 2018. On October 11, the fear gauge or $VIX rose to 24.98, which is the highest level since February 12, when it was coming down from the high of 50.30 on February 6, which is the 3-year high mark.

The rising $VIX represent higher uncertainty in the market, which in turn results into risk avoidance and lower market index levels. It is at an elevated level but historically, the market turnaround occur at even higher levels, which means that there is good chance the current decline may last a bit longer.

Put-Call Ratio

Fig. 5

The Put-Call Ratio, which compares the total number of puts traded with total number of calls traded on CBOE was 1.050 on October 12.

The 10-day simple moving average is 0.946. Both , the ratio and its 10-day moving average, are rising since late September 2018.

More call options than put option mean that the market is bullish. However, a rising ratio means that the bearish bets are increasing. Usually a reading above 1.15 hints of a near-term reversal in price.

The ratio is still lower than the level that it reached in early July and early April 2018, when it reached 1.180 level. It is reaching the levels reached at the end of February and early March (see Fig. 5). At that time, during the week of February 5, 2018, S&P 500 made the first attempt to reverse the decline after making a low. During the week of April 2, it almost tested those lows and then reversed course and trended higher.

High-Low Ratio

Fig. 6

The IBD proprietary High/Low Ratio was 0.18 on October 12, 2018. It has been declining since mid-September. During a correction or falling market this ratio falls toward zero. A bottom in the market usually occurs when the indicator turns up after falling below 0.5. During the bear markets, when the S&P 500 and NASDAQ Composite are below their 200-day moving averages, the initial trigger level drops to 0.1. We are not technically in bear market but S&P 500 and NASDAQ Composite are below their 200-day moving averages.

The NYSE New High / New Low ratio (see Fig. 6) has been on a downtrend since late August, though it  has not made a higher high since early July. The ratio is at 0.0339 on October 12. In February, it reached a low of 0.028 before reversing and the market also turned around along with it.