-- Weekly Market Summary --

The Air Smells of Dead Cats Bouncing in a Mushy Swamp

By Joe Duarte on July 27, 2017

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If I was crazy for metaphors, I would say that trading the current stock market is akin to being knee deep in a stinky, boggy swamp riddled with snakes and alligators.

Let’s face it whether you’re bullish or bearish, this market stinks. That’s because even though the charts suggest that lower prices are in the offing, the robots keep buying the dips and the central banks continue to put money to work in order to keep stock prices buoyant. This type of fantasy island trading, where the perpetrators buy every dip and bid prices higher with no regard to what’s happening in the economy or the world, is nearly impossible to trade unless you slap on your own pair of rose colored glasses and drink the poisoned fruit punch. Yeah, we trade the trend. And yeah, we take what they give us. But right now, it’s hard to justify taking any major risks given the very mushy nature of the trading action, regardless of prices.

Perhaps the saddest aspect of the current situation is that the bots and the central banks may yet again be successful in keeping stocks from having a scary ten percent or worse pullback. But, if this was a market based on reality, the bounce we saw over the last couple of days would qualify as a dead cat bounce – a weak and very unconvincing rise in prices which is eventually followed by a move toward significantly lower prices. And if history is any guide, reality will eventually set in.

Market Breadth Tries to Recover

The NYSE Advance Decline line does not want to die; at least not as of the end of trading on August 25. But it’s hard to know which way things are going to break, just yet. For one thing neither the MACD or the ROC have given the all clear, as both momentum indicators are signaling that although a tradable bottom may have been made, NYAD still has some work to do.

Large Caps Are Still Short of Breath

If the S & P 500 (SPX) was a patient who had recently had a heart attack, the treating doctor would not be discharging it from the I.C.U. That’s because the patient – the market - is still having shortness of breath and chest pain with little exertion. The telltale sign of this state of less than optimal health is the fact that the index has not moved above its 20 or 50 day moving average convincingly after the recent drubbing, while trading volume slowed to a crawl as the market tried to bounce at week’s end.

And there are more reasons to stand aside in the short term. For one, buyers are few and hard to find. This is well illustrated by the Accumulation Distribution Line (ADI) and the On Balance Volume (OBV) indicators, which are both in downward trends. This posture of both indicators is a sign that few investors are willing to take a chance on buying into this market and that those that are taking a chance are lukewarm at best. This lack of commitment is confirmed the ROC indicator, which measures momentum, as it has barely come off its recent bottom despite Friday’s attempted bounce.

Tech Stocks Look Queasy

To quote former FBI director, Jim Comey; the Nasdaq 100 index (NDX) has a “queasy” look to it. Not only is the index tracing a lower high and lower high chart pattern; the Bollinger Bands (green lines above and below prices) are also pointing down. These self adjusting channels are excellent at confirming the dominant trend in the market. When you add their current appearance to the negative message of the ROC indicator - little upward momentum, On Balance Volume–more sellers than buyers, and the Accumulation Distribution line (ADI), which is starting to roll over confirming the OBV, it’s difficult to justify buying into the big tech stocks at this moment.

Midcaps Hang On to Up Trend by Fragile Thread

The midcap area of the market was brutalized during the past few weeks, with the S & P Midcap 400 Index (MID) giving back 5% since topping out at the end of July. So, its nearly 0.5 percent jump on Friday was not surprising given its recently oversold levels. Yet, MID is now struggling to stay in a long term up trend as it fights to move back above the 200-day moving average convincingly.

And unless something changes, it looks as if the odds of success are no better than even. Consider the downward slope of the ADI and the OBV indicators on the MID which look worse than those for SPX and NDX. Indeed, the selling does not look to be over in the midcaps by any measure.

Direction of Prices Remains Unclear

I’ll put it this way. This market is all wrong and gives me the willies – did Comey say that too? But I’ve seen some strange things in my time, and these are not normal times, so anything is possible. Therefore, even though it looks and feels as if this market should be crashing, it would not be out of the realm of the current altered reality that we may see a new up leg storm out of the gate on Monday. Nevertheless, my gut and the technical indicators, tell me the bulls are running out of time. So if we’re going to have a meaningful rally, we should know within days. That’s because volume will pick up and buyers will once again show a feeling of urgency as they put their money to work. If this is what happens, the technical indicators which are very flaccid at the moment (ADI, ROC, and OBV) – will point the way higher. But, until I see a real improvement in the market’s measures of momentum and some clear and unequivable buying conviction, I will be waiting and watching.



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