Friday, May 24, 2013

Is the market finally correcting? (Stocks going down -- huh??)

On the heels of Japan's stock market plunge, it appears as if the U.S. market might be hinting at a correction of its own.

Source: Finviz.com

The hourly futures chart above shows the S&P 500 down about 3% from its Wednesday peak. Granted, nothing like the near 8% plunge suffered by the Nikkei, but nonetheless the market is clearly showing near-term signs of what could develop into a corrective phase. As with the Nikkei hourly chart I discussed yesterday, note the S&P's false breakout on Wednesday followed by an abrupt reversal, with the index collapsing about 50 points before attempting to rally overnight. But as often happens, and seen in the Nikkei chart, such a recovery rally following a swift decline is frequently anemic, attaining a lower high before rolling over. Next level of support appears to be the 1615-1620 area, and after that the 1590-1600 range.

To risk sounding like a broken record (oops, CD?), many lingering divergences remain in place, including the relative performance of smaller-caps (IWM) versus larger-caps (SPY).

Source: Stockcharts.com

In the chart above, the upper inset shows the relative return of the IWM vs. SPY (red line), with the S&P 500 depicted in the background (black line). Note the declining orange line pointing out the bearish divergence as the relative performance of IWM vs. SPY has not surpassed its prior high registered in March. This divergence also occurred late last year (shown in chart) and has occurred numerous time over the years, more often than not giving a heads-up before market weakness ensues. Also note for the red relative return line both the RSI and MACD exhibiting bearish divergences of their own, with lower highs put in as the S&P 500 has climbed higher.

And referring back to the Nikkei once again, it would be worthwhile keeping an eye on this index.

Source: Stockcharts.com

As shown in the chart above, for several months now the Nikkei and S&P 500 have been highly correlated, tracking together quite closely. If the Japanese market is beginning to show indications of meaningful weakness, could this be a foreboding sign for the U.S. market?

4 comments:

  1. thanks for the take on the markets. my question is that the size of the divergence, it does look like the size of the move may be 50-100 points on the S&P500.

    Would this invalidate the recent breakout of the 2001 highs?

    ReplyDelete
  2. Everyone is looking for the "correction". It's not likely going to be anything worth waiting for. Furthermore, the US and Japanese markets are intertwined because of global commerce. But, the US market is much more robust for many reasons. I wouldn't hold your breath for any big correction any time soon.

    ReplyDelete
  3. Potential to rise over 50% in the next couple of years. Perfect Post in Stocks Related issues.

    ReplyDelete