SP500 Internals, Dollar & Gold Pre-Week Analysis
After a fierce equities rally on Friday, which I figured would happen, just not that strong; I have to wonder if there is some event or major decision in the works we don't know about?
Friday's rally could be something simpler like window dressing by the funds. This is when the funds buy up all the top performing stocks for month end reporting. They do this so that their investors think they are on the ball and know what they are doing. Window dressing will end Monday and from there we could see some profit taking (selling) start. But for all we know Obama could be extending the tax cuts for everyone or cutting payroll taxes etc…
It would only take one of these events to trigger a sharp up move in the market and that could be what Friday's move was anticipating. That being said volume has remained light and during low volume session the market has a tendency to move higher. Sell offs in the market require strong volume to pull the market down, so until volume picks up there could still be higher prices just around the corner.
Let's take a look at some charts…
SPY – SP500 60 Minute Intraday Chart
Last week we saw the market reverse to the down side with a strong end of say sell off. That set the tone for some follow through selling and for any bounces to be sold into. That being said, the market always has a way of surprising traders and it did just that on Friday gapping above Thursday's reversal high causing shorts to cover and the typical end of week light volume drift to help hold prices up.
NYSE Market Internals – 15 Minute Chart
I like to follow some market internals to help understand if investors are becoming fearful or greedy. It also helps me gauge if the market is over bought or oversold on any given day.
These three charts below show some interesting data.
Top Chart – This indicator shows me if the majority of shares traded are bought or sold. When the red line spikes up and trades above 5 then I know the majority of traders are buying over covering their shorts. I call this panic buying because traders are buying in fear that the market will continue higher and they will miss the train. When everyone is buying you know a pullback is most likely to occur.
Middle Chart – This is the NYSE advance/decline line. When this indicator is below -1500 then the market is over sold and bottom pickers/value buyers will step in and nibble at stocks. But when this indicator is trading over 1500 then you know the market is overbought and there should be some profit taking starting any time soon.
Bottom Chart – This is the put/call ratio and this tells us how many people are buying calls vs put options. When this indicator is below 0.80 level more traders are bullish and buying leverage. My theory is if they are buying leverage for higher prices, then they have already bought all their stocks and now want to add some leverage for more profits. When I see the majority of traders bullish then I an sure to tighten my stops (if long) as top my be forming.
Putting the charts together – When each of these charts are trading in the red zone know I must be cautious for any long positions because the market just may be starting to top. Or a short term correction may occur.
UUP – US Dollar Daily Chart
The US dollar has been under some serious pressure with all the talk about quantitative easing (printing money). Obviously the more the Fed's print the less value the dollar will have. The chart below shows a green gap window which I think once it is filled should put the dollar in a oversold condition for a short term swing trade bounce before heading back down. A bounce in the dollar will put pressure on equities, gold and oil.
GLD – Gold Daily Chart
Gold continues to grind its way up. This move is looking very long in the teeth and pullback will most likely be sharp.
Weekend Trading Conclusion:
In short, equities and gold continue to grind their way higher while the US dollar continues its grind lower. When I say the market is grinding I am implying the market is over extended and a reversal any day should occur.
Financial stocks like Goldman (GS) which typically leads the market has been strongly underperforming over the past week. Insiders were selling GS very strongly which is strange and makes me wonder what's up there? With the financial stocks underperforming it sure looks like a market reversal is just around the corner.
If Friday's rally was simply window dressing by the funds then it should end on Monday and with any luck we will see a sharp reversal to the down side early this week.
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Let the volatility and volume return!