-- Weekly Market Summary --

Split Decision: Market Makes New Highs as Indicators Say Trouble Lies Ahead

By Joe Duarte for October 9, 2017

I don’t know what to believe anymore as the price charts for the major indexes say we are in the midst of a never ending bull market. Yet, a look at the market’s most accurate indicators over the last twelve months make me wonder if it’s best to head for the exits while the getting is still good.

There are no Bears Left

Before I discuss the current status of the markets via my weekly chart analysis, I want to note the 92 reading on the CNN Greed and Fear Index. This is an extreme greed reading, given the highest possible reading is 100. The index closed the week just shy of its highest reading in the recent past of 94. What this means is that the market is due for a correction as there are almost no doubters left. Another way to phrase this, is that based on this indicator, there is no one left to buy stocks.

Market Breadth Falters

I’ve said this many times – the New York Stock Exchange Advance Decline line (NYAD) has been the most accurate indicator of the market’s direction over the last several years. Its accuracy has been even better since the November 2016 market bottom where overbought readings on the NYAD from the RSI indicator and the ROC indicator marked market pullbacks in March and July 2017.

A detailed examination of the NYAD chart shows that the same pattern that preceded the two prior declines in the NYAD and the overall market is repeating. First, the major indexes made new highs on October sixth without confirmation from the NYAD, which rolled over. More specifically, note the extreme overbought reading of the RSI along with the lack of confirmation of the recent highs in NYAD from the ROC indicator, which has been weakening for the last couple of weeks, forecasting some type of pause.

S & P 500 and NASDAQ 100 Indexes Make New Highs

If you were to look at index prices without analyzing coincident indicators, such as the New York Stock Exchange Advance Decline line, you would say this market is rolling on all cylinders. Yet, as I showed above, momentum in the stock market may be starting to falter. And while it could be early in the game, we may be starting to see a significant technical divergence developing. A divergence occurs when a handful of stocks push the indexes higher while the whole market is actually weakening as is seen when the NYAD is moving lower.

Whether this is what is actually happening currently remains to be seen, given the overall bullish posture of the On Balance Volume (OBV) and Accumulation Distribution (ADI) indicators, on both SPX and NDX, which both made new highs to close last week. These indicators suggest buyers are still coming into the market.

Putting it All Together

The market is in a tight spot as market sentiment is at a dangerous extreme of bullishness while the breadth seems to be faltering even as major indexes make new highs. This scenario suggests we are in the early stages of what may be a significant market reversal, or at least a pause in the current long term bull market.

Perhaps the deciding vote on the situation goes to the overall market’s volume, which as both the NDX and SPX charts show has decreased with every subsequent new high in the indexes. This suggests that although the buyers that are currently engaged are quite convinced that prices will continue to rise, there are fewer and fewer of them that are willing to take a chance.

Of course, this raises the big question: what is everyone else doing? There are two plausible answers to this key question. Some are likely to be standing aside, waiting to see what happens. More importantly, the rest of the players may be hedging their bets through put options or short sales, waiting for the market to fall. Either way, neither group is buying stocks. Therefore at some point, if the number of buyers continues to contract, even a few sellers will start to push prices down. The danger in this scenario is that once a few sellers hit the button, others will follow and the potential for a selling avalanche will increase.

Finally, we are just eleven days away from the anniversary of the crash of 1987. And with a 92 reading on the CNN Greed and Fear Index, it’s a good time to be very careful in this market, unless of course, the robots buy the dip and we are off to the races once again.



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