Last week saw the initiation of an attempt to break through resistance. We’ve moved close to the 4325 peak of last August, while technicals have not moved into overbought territory on a daily or weekly chart. And this occurred after Price spent a month in what I have considered to be the “extreme” area noted by the orange bands on this chart:
The middle Keltner (55 EMA) in fact is sitting at the resistance point noted in the blue dashed area. This is almost a repeat of the situation of last August, and it took 3 weeks before Price moved back inside the blue dashed lines. Will we repeat?
As I pointed out last week, whether we are in a T or not, we are in a positive period of strength, and not overextended on the weekly or daily charts–a direct quote from last week’s post.
I wrote on elliottwavetrader.net last Thursday: I can’t remember a time when some of my more important charts were so out of line with Price. Yes, Price is everything. But… we are coming up to some profound divergences. In no way should this be interpreted as a reason to go short–you don’t take the skin off a bull or a bear until he is dead, and here we are talking about the living dead. Support needs to begin to break before assuming a change in Price direction. But with volatility low, protection may be advisable.
That situation began to change Friday. Participation, by most measures, increased considerably. You can see that in the RSP ETF, as well as in $RUT. At the beginning of this year, the ratio between RSP and SPY was over 37%, It hit a low this week of 33.3%–which means SPY had increased more than 4% more than the equal weighted index. On Friday, this ratio climbed to 33.6%, or a third of a point. That’s more impressive than it sounds. The following chart represents that move, as well as showing how IWM and SPY reacted this week.
We’ll have to see how that develops. Instead of looking at support breaking, we’re on alert to see if Price breaks through resistance. Furthermore, In a change of trend, good news was taken as good news by the market.
It’s evident to all that this is has been (till now) a rally based on favorites. Most stocks in the SPX haven’t benefited from this recent move, although they now seem to be dragged higher as ETFs such as SPY are forced to buy the basket of stocks, rather than just the winners. This is exemplified by the BPSPX.
Those who review my site regularly know that the above chart is not shown there. I’ve pointed out before that if this is below 50, it is in general negative for stocks. What seems to be developing in the above chart is a narrowing of both strength and weakness, which I believe will result in an inflection point in the future. It will probably occur in mid-August.
The Simple Chart shows neutral Intermediate strength for both Breadth and Volume, although both are rising from beneath the zero line. The definition of this chart is that below the zero line, we may be seeing a change in trend, but it is only confirmed when they rise above the zero line.
I can’t build a T out of this week’s move. There has not been a deep enough low in the Volume Oscillator or McOscillator to create one. But it gives more validity to the T that I have been disregarding–one creating a left side in October, a center point in March, and strength from March through the end of July/beginning of August.
The T noted above is not drawn on my site. Hints as to whether or not I accept this T reluctantly (at last) will be found in the hourly charts. The hourly VO chart shows whether peaks in the Volume Oscillator have positive or negative conclusions. If Price continues higher after a peak, that’s a sign of a positive conclusion. I look at this in conjunction with the hourly Companion Chart:
As we are above the Keltner bands, I’ll be watching to see what occurs when we move back within them. RSI has also peaked above resistance, and needs to reset. We need to see if that Frog jumps to the middle or lower part of its range.
Supporting the above T is the potential for the Advance/Decline Line to have created a T of its own, which would last through the end of this month. It’s not drawn on the following chart. Again, this week will be critical to see it created. The A/D line did move back above the 20 and 50 EMA, however, it did so after the 20 EMA crossed below the 50. This week has the potential to reverse that impediment.
Yes, this report is ambivalent. I apologize for that. The gist is Price is not showing signs of weakness, even though there is (in my mind) no T. There are many periods during which no T exists, and the market continues forward. And that is where we are now.
On rates, I mentioned last week that I entered a position on TLT. I am going to use the low of the last week of May as my stop. Those on elliottwavetrader.net were given the daily resistance at 103.63 a day before we hit it. 101.85 is hourly support, followed by 100.29 as the lower Keltner band level. I’ve been involved in Treasury bill ladders over the last year, but I may be extending that out into Treasury notes (longer maturity) shortly.
It may be a few weeks before I post another update as I’m traveling, but I will try to keep my notes on the charts fresh. Feel free to ask questions asked in the comments section over that period.
T-Theory Thoughts 