Trend Check with Tushar Chande

It's A Fish Market!

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It's not a bull market.  It's not a bear market.  It's a fish market.  As in a fish flopping around on the dock.  Even as small stocks and technology stocks made new highs, the broad market has moved sideways this year.   A headline overload has made traders jumpy, as trade wars spook markets and earnings guidance dominates short term moves. The rest of the year is unlikely to reduce headline headaches.  So this market may continue to flounder about for a while, which would be consistent with my forecast for 2018.

 

Chart 1: The market has flopped around like a fish out of water this year. (CC0 image courtesy Pexels.com)


 

NYSE Shows The Sideways Move

After sliding past the down-trend line in April and surviving a test of the double bottom, the NYSE composite has moved sideways (Chart 2) even as small stocks (represented by the VTWO ETF gained on their mid- and large-cap cousins represented by VONE ETF in Chart 3).

 

Chart 2: The NYSE composite has moved sideways, consolidating below resistance at 13,000 after surviving a test of the double bottom in April.  The stochRSI is back down in the bearish region over the short-term.

 

Chart 3: Here is the relative performance of Vanguard VTWO ETF (small-cap stocks) versus their larger cousins (VONE ETF). Any relative weakness here will help the large cap indexes.

 

CAT a Victim of Trade Wars

The price action in Caterpillar illustrates the role of trade wars in pushing the market around this year. The big red outside candle printed after the CAT earnings conference call.  The rest of the action mirrors trade-related headlines.  The most recent dive in the Dow shows the close link between trade war headlines and price action.

 

Chart 4: CAT shows the effects of the trade war as well as any stock in the market.  The big red outside candle was as a result of their first quarter earnings conference call.  The recent decline in the Dow was clearly related to weakness in industrial stocks.

 

US 10-year Yields Forming A Head-and-Shoulders Top?

A fear of higher rates had the market in a tizzy this first half.  I had noted earlier when the 10-year yield broke the up-trend line.  The rebound stopped at the extended trend-line as we should expect.  A break below say the 2.75 level would confirm the pattern.  A further broadening of the right shoulder is also possible.  Even though the US Federal Reserve is raising short-term rates, the yield curve is flattening, and a drop below 2.75 would be further proof of that.  Financials have lagged seriously as interest rates have declined, as we can see in the Berkshire Hathaway stock.  It's longer-term moving average will now act as resistance, further impeding a rally by financial stocks in general.

 

Chart 5: A fear of higher rates had preoccupied the market, along with the worry about 3- vs. 4- rate hikes this year.  It appears a head-and-shoulders topping formation is developing in the 10-year yields, which will not be complete till rates fall below 2.75% in a convincing manner.

 

Chart 6: A weekly chart of Berkshire Hathaway shows it has fallen below it's 26-week moving average, which will now act as resistance to a rally, impeding financial stocks in general.

 

Gold Is Gasping Due to a Stronger Dollar

The rising rates finally strengthened the US dollar, which predictably helped small stocks and hurt gold. The chart of the iShares Gold Trust (IAU) certainly looks weak as it approaches some chart support. The lowest panel shows the negative correlation to the UUP (US dollar ETF).

Chart 7: The negative correlation to the dollar (UUP) has gold gasping as it approaches important support on the chart.

 

Market Technicals are Mixed

My trend check carpet of key indexes shows the striking weakness in recent days, which has turned most of the short-term trends into a bearish mode.  The key long-term trend is flat for the Dow and NYSE, consistent with the sideways move shown in Chart 2.  The other indexes are still bullish over the long-term.  The chopping around over the first half of the year has left the indexes mixed on the medium and intermediate term.  A trend analysis of the equal weight Guggenheim sector funds clearly illustrates the very mixed nature of trends in this market.

Chart 8: The trend picture is mixed: bearish in the short-term, mostly bullish in the long-term (except for the Dow and NYSE).  The number of stocks covered by the indexes increases from left to right.  The time frame increases from top to bottom, doubling at each step.  Overall, a very mixed market, like a flopping fish.

 

Chart 9: The multitude of colors shows the very mixed market internals, here illustrated using the equal weight Guggenheim sector funds.  Bullish trends are in green, bearish trends are in red, and neutral trends are in yellow.  Not a single sector is green across all time frames (from 25 to 200 days, doubling at each step).

 

$SPX In Up-sloping Channel

As I have said for some time, the S&P 500 is in an up-sloping channel, and its overhead resistance is clearly defined by the highs in February and March.  Until the $SPX can get above 2800 and hold the level for at least a week or two, I expect the floundering to continue.  This is also consistent with my year-end analysis.  The longish consolidation is testing historical patterns for recovery from corrections.

 

Chart 10: The SPX remains in a up-sloping channel with well-defined resistance starting at 2800.  Until we can break above 2800, expect the floundering to continue.

 

Looking Ahead

Market fear factor ($VIX) has remained well-contained despite the market moving headlines.  A new resistance level has formed at 20 or so.  As long as the $VIX remains in a narrow range and below 20, this market can continue to lurch higher.

 

Chart 11: The $VIX index has remained in a relatively narrow range, hemmed in by newly developing resistance at 20.  The market can continue to lurch higher, if the overall fear factor remains well contained.

 

Tushar Chande
About the author: , PhD, MBA, is the inventor behind an impressive collection of technical indicators, including the Aroon and Stochastic RSI. He has written several books, holds both a PhD in Engineering and an MBA in Finance, and has over two decades of experience trading the financial markets. Follow Tushar in this blog as he highlights his new "Trend Meter" indicator and shares his analysis of current market conditions. Learn More
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