Gone fishing

Taking a break, will return next Monday. Have a wonderful July 4th!

I love this chart

Below is a daily chart of the Guggenheim Solar ETF (TAN):

Source: Stockcharts.com

The chart encapsulates a long, steady decline that actually dates back to early 2011. The 50-day MA (blue line) more or less served as resistance during this protracted downtrend. Price bottomed last November at around $12 and has since more than doubled before the recent pullback.

So many bullish things in the chart, I don't know where to start:

• The inverse head-and-shoulders (green circles). The green line at $20 represents the neckline, which was successfully breached this past February only to revert and sell-off. However, last month the neckline was broken through again, this time more meaningfully with high volume and a gap up (second time is often the charm). 
• Note the huge reversal day this past April, abruptly halting the downtrend near the 50-day MA with a huge spike-up in volume, clearly signaling a change in sentiment. 
• The Golden Cross in early February, with the 50-day MA rising up through the 200-day MA.
• The 200-day MA (red line) had been heading south since 2011, but flattened out earlier this year and now is ascending.
• Volume spikes this year have occurred for rising price periods, with volume drying up and declining when price has either retreated or consolidated sideways (see orange lines) -- bullish action that suggests ongoing accumulation. In contrast, note the orange box for early last year showing elevated volume as price steadily eroded, suggesting distribution.
• After the fast and furious run-up from $16 to $26 in April-May, price has since undergone a healthy pullback, holding at the 50-day MA area of $22. More recently price has responded nicely, lifting off and approaching $24, further confirming the 50-day MA as solid support. 
• Assuming this recent pullback holds, it's bullish to see the RSI remain at around 50 during this price retreat, indicating impressive momentum and confirming a change in trend from bearish to bullish.

I'll leave it at that, you get the point. A very nice chart.

Market Update: Rally off lows but resistance nearby

The market (S&P 500) has rallied off its June 24th lows, rising from 1555 to pushing over near-term resistance of 1600 in overnight futures:

Source: Finviz.com

Note in the hourly chart what looks to be an inverse head-and-shoulders pattern, a bullish sign, but again it's within a very compressed time frame.

Referring to the daily chart, overhead resistance is more apparent:

Source: Stockcharts.com

The S&P 500 Index has staged a reflex-rally from the abrupt declines suffered over the last few days -- a common price reaction. The 50-day moving average has served as support during the YTD market advance and with the June 19th sell-off, the rising trend (as represented by the 50-day MA) was broken. This recent rally has put the S&P 500 within about five points of the 50-day MA of 1620; all eyes will be watching to see if the Index can meaningfully get through this level. Also note the recent rally has served to fall just short of "closing the gap" as the June 19th decline exhibits a gap at around 1625, another level of resistance.

Bottom line: in the short-term, it's not surprising to see this market rally off oversold levels, a fairly typical TA occurrence. However, as discussed, the 1620-1625 range poses as significant resistance and it will be interesting to see if the Index can successfully break through this price area (and mind you, not just poke through, but get well beyond 1625). If not and the Index rolls over, next stop could be 1550. Stay tuned.

Defensive sectors shining of late

Since the market selloff on June 19th, defensive sectors have been doing their thing, hanging in there quite well on a relative basis.

Source: Stockcharts.com

The S&P 500 is off about 5% from its peak last month with the bulk of the loss coming in just the last few days (since June 19). I've been on the sidelines for several weeks now, expecting a correction, and the pullback has been a healthy one until more recently. For me to get more constructive on the market, one thing I want to see is the more cyclical, risk-on sectors begin to outperform. As always, I will be keeping a close eye on relative sector returns.

I will say that with this decline, I continue to not (yet) see signs of cataclysmic danger. Yes, I am and have been concerned, letting prudence dictate my actions. However, I wouldn't describe my tone or bias as five-alarm bearish. The indicators and charts I track simply haven't conveyed anything warranting such a dire posture. Not yet anyway.

As an example, the chart below shows high-yield "junk" bonds vs. the TLT, with the S&P 500 Index in the upper inset:

 Source: Stockcharts.com

The relative performance of high-yield bonds vs. TLT is another risk-on/risk-off surrogate, with a rising relative line inferring risk-on or heightened investor appetite for risk (bullish for stock market). Note that in the past the relative performance of junk bonds vs. TLT has tended to put in a top before that of the S&P 500 Index, creating a negative divergence. However, currently we're seeing quite the opposite as the Index peaked in May and has been in decline, whereas the HYG:TLT relative line recently hit a higher high, exhibiting no signs of a bearish divergence.

The weight of the evidence could change quickly in this environment, understood. But as of today, this market pullback has been overdue and remains just concerning, not (yet) hair-raising.

Not surprisingly, the Loonie remains weak

As with most investment vehicles, the Canadian dollar (CAD) -- otherwise known as the Loonie -- has declined precipitously since June 19th, continuing a trend that has been in place for many months.

The CAD hourly chart shows the breakdown from support on June 19th followed by the near-uninterrupted descent:

 Source: Finviz.com

The daily chart illustrates the downtrend in place since last September and the recent break in support at 0.96:

Source: Finviz.com

The weekly chart displays the long, gradual rise and roll over of the CAD, starting back in 2009:

 Source: Finviz.com

Note the downtrend actually spans beyond 2012 back to 2011, and also note the recent breach of the longer-term rising trend line.

The CAD's continued weakness is not surprising since all you need to do is refer to the price action of gold and commodities in general. The chart below plots the CAD (red line), gold (green line) and the Reuters-CRB Index (blue line).

Source: Stockcharts.com

Clearly there exists a very positive relationship between the three, one that goes back several years. The rolling 50-week correlation between the CAD and commodities index (CCI) has remained above zero for almost all time periods, and most often well above zero. This strong positive correlation makes sense since the bulk of Canadian equities are natural resource or commodity-related.

I've been bullish on the US dollar (USD) for some time as it has remained in a nice, fairly well-defined uptrend since late 2011:

As long as the USD remains strong, it will continue to reflect a bearish environment for the CAD and commodities. I've shown in the past the long-term chart of the USD versus commodities, clearly a negative relationship, and not surprisingly the same holds true for the CAD vs. USD:

 Source: Stockcharts.com

Market Update: Correction no longer a healthy one

Within a matter of just two days, the S&P 500 has gone from approaching 1650 as it pushed the upper limits of its short-term trading range of 1600-1640, to abruptly plunging by about 70 points, breaking down through the 1600 support level and bottoming near 1580.

Source: Finviz

The hourly futures chart above shows during overnight hours the Index has undergone a reflex-rally back to prior support at 1600, a very common price reaction after a breakdown. Typically such a bounce-back rally fails at the prior support area -- which is now resistance -- and rolls over. 

Where is the next level of support?

Source: Stockcharts.com

 

Based on the daily chart above, support for the Index now resides in the 1550-1570 range. Also, note the breakdown in the ascending trend line.

I also wanted to point out some similarities between the weekly gold chart discussed here yesterday and the S&P 500's daily chart below.

 

There is the bullish breakout at the start of this year, the rally into April which then kicked into another gear with a somewhat parabolic rise beyond 1650, followed by a reversal and correction, and more recently a failed run at prior highs (see red circle, a common post-parabolic occurrence) and finally yesterday's breakdown. Much like the weekly gold chart, all pretty classic technical analysis price behavior, as if lifted from the pages of a TA textbook.

The bottom line: the market is now in bearish mode.

Gold is broken, again

On April 17th, I posted a blog entry entitled, "Gold is broken." Well, based on the overnight gold futures, gold is broken, again.

I wrote last Friday that gold was approaching a key inflection point, as it was forming a triangle and its apex was near complete. Although it appeared as if there was slight positive divergences occurring in the RSI and MACD, I concluded by writing, "As is always the case, price will ultimately shape my opinion." And as you can see with the hourly futures chart below, price has spoken and it's quite bearish.
 

Source: Finviz.com

The daily chart gives a better perspective:

Source: Finviz.com

Clearly we're seeing gold break down -- again. Yesterday Bernanke hinted at easing up on easing (QE) and it spooked markets, gold in particular. Yes, more of the fear-inducing "tapering off" verbiage.

The weekly chart of gold is something to see as it has played out in near-classic technical analysis fashion:

Source: Finviz.com

There's the bullish breakout of an ascending triangle in the 2H of 2009, followed by a rally into the 2H of 2011, cresting with a parabolic rise to just shy of 1900, then an abrupt reversal followed by a bearish break through the rising trend line in early 2012, then another run at the prior high in 2H of 2012 only to fail near 1800 (classic post-parabolic action), then the break down earlier this year -- and now another break down. Wow, textbook stuff.

On April 23rd, I posted an entry entitled, "Is Gold Following Expected Inflation," and showed gold's relationship to expected inflation as represented by the 5yr5yr forward breakeven rate. There appeared to be a high correlation between the two and I wrote then, "Judging from history, as long as this 5yr5yr inflation trend remains down or declining, it's not good for gold."
 
As you can see in the chart below, and undoubtedly much to Bernanke's dismay, the trend for expected inflation has remained down.

 Source: Bloomberg

What I continue to find interesting is what I further wrote on April 23rd:

I have to think Bernanke is keeping a close eye on this 5yr5yr inflation chart, definitely preferring that expected inflation reverts back to the 3% level -- which would be bullish for gold. But -- and it's a big "but" -- expected inflation had been declining since late January in conjunction with Fed balance sheet expansion going through the roof. Question: can the Fed do enough to get expected inflation back to the 3% level, or is it pushing on a string?

Here's the current chart for the Fed's balance sheet:

Source: Bloomberg

The growth in the Fed's balance sheet has continued unabated, and yet expected inflation continues to decline. I ask again, is "Helicopter Ben" out of bullets, i.e. pushing on the proverbial string?