Diary of a Financier

SPX update: Bearish setup in need of a savior

In Capital Markets on Wed 14 Aug 2013 at 17:30

The S&P 500 ($SPX) has moved sideways since I started tracking its bearish setup two weeks ago. Naturally, the patterns have morphed since then, but the overarching theme remains: this is a battleground. Mainstream media are starting to question the market’s resilience amid this little bit of stagnation. I’ve offered my intermediate-term outlook, but I wanted to refresh my short term technical appraisal.

I alluded to the latest SPY developments in a series of notes this afternoon (I & II). Having previously raised a red flag for me, SPY’s daily 1x bear divergence has kept lingering, as indicators were unable to reverse out of their downtrend over the last 2 weeks.

The intraday fractals magnify those going concerns. The 30-minute shows a tilted Head & Shoulders island top having fully matured and now resting just above neckline support >$168.5.SPY daily/30min/15min The balance of this week–particularly tomorrow’s trading day–are critical. You can see 2x bull divergence has started bubbling in the 30-minute chart, as echoed by the 15-minute. Now, the pricetrend needs to confirm that signal to avert a breakdown below the H&S neckline into a correction. Were the H&S to have its way, first support lay @ $165.7 (50DMA & fill gap down below island top) or -1.8% from tonight’s close; second support @ $156-7 (200DMA & June’s correction low) or at least -9.3%.

As a check, other broad indices like the Russell 3000 All Market ($IWV) also reflect this disposition. The Dow ($DIA) has actually already slipped below its neckline, but its 30min 2x bull divergence is very strong. Growth ($IWZ) in a 30min bull pennant looks a lot better than Value ($IWW), which is decaying after hitting a double top.

There is no better time than now for that “volume on the sidelines” I keep mentioning to arrive. Again, a lagging MFI manifests the summer’s low volume recovery from May/June’s pullback. That low volume combine with low institutional participation in this rally have a lot of managers underperforming their index, which anxious buying would be enough to trump high–albeit receding–margin credit.

~~~~

We’ve continued to build cash in our portfolio, with liquidations of big positions like $BX and trimming of others like $GES, $SOXX, and $SNE all outweighing additions to $EXPE, $IBKR, and $CLF.

Our allocation is still heavy on risk assets, overweight the 60/40 benchmark with 66/28/6% (stocks/bonds/cash); beta is around 0.91 vs 0.76 benchmark; sigma 1.35 vs 0.83 benchmark.

As is my custom in both a bull market and a bullish outlook, I’m waiting for SPY’s reaction at this neckline before reacting myself. If SPY bounces higher, I expect to deploy that cash on new long positions in Brazil ($EWZ), Gold Miners ($GDX), and Europe ($EZU), as well as additions to $IBKR and indices $IWP and $IDV.

–Romeo

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  1. Update…
    Futures ($ES_F) -10bps overnight after poor $CSCO 2q13 earnings, but selling started at 6:05am est, then accelerated at 7am with poor 2q13 earnings & SSS numbers from $WMT.

    $SPY -1.3% @ 166.5 intraday so far; H&S neckline broken.

  2. Update 2…

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  7. […] 2x bear divergences I’ve continually monitored. The MFI’s breakout, in particular, is a signal I’ve expected and awaited since this summer. In time, MACD should join that brigade, adding […]

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