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Technical Market Indicators
Dow Theory, W.D. Gann, MetaStock, system tester, indicator builder, custom formulas, momentum, overbought, oversold, buy, sell, signals, top, bottom, Bull, Bear, consolidation, sentiment, contrary opinion
January 27, 2020
Stock Market: bullish complacency quickly vanished with fears of the coronavirus.
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"It's still too early to draw conclusions about how severe the virus is...", according to the World Health Organization in Geneva.
Historically, 13 past pandemics produced surprisingly limited global stock price index declines: 7 fell less than 3%, 2 fell between 6% to 8%, and 4 actually rose over the next month. Looking out 3 months, 9 of the 13 instances saw global stock prices higher.
The S&P 500 price index fell 0.90% on Friday after setting another new all-time high of 3337.77 intraday on Wednesday 1/22/2019.
RSI and MACD oscillators plunged steeply to generate short-term sell signals. Extremely strong price momentum can't continue forever, and short-term downside shakeouts are to be expected from time to time.
Economic reports have been better than expected in recent months, surprising the consensus of economists.
Easy monetary policies of the global central banks have been and remain bullish for the financial markets.
Historically, stock market seasonal tendencies have been mixed for the week ahead. Seasonal tendencies easily can be overwhelmed by news headlines as well as price momentum.
The S&P 500 remains systematically bullish for the long term, because price remains above both the rising 50-day and the rising 200-day Simple Moving Averages (SMA), and the 50-day SMA remains above the 200-day SMA. Trend following using moving averages lags at price turning points.
Technically, the S&P 500 index is now less overbought at 3.1% above its 50-day Simple Moving Average (SMA), down from 4.8% a week earlier.
Stock market sentiment moderated substantially in reaction to coronavirus headlines. Until Friday, sentiment had been overly optimistic since last October, rising to levels indicating overbought extreme greed for some indicators. Sentiment is not always useful for precise trade timing, and it was not useful from October to January as bullish price momentum overwhelmed all other considerations.
The Dow Jones Industrial and Transportation Averages remain in strong rising trends, confirming a Dow Theory Primary Bull Market trend. This means that the stock market is in gear to the upside, with its key parts pulling together in the same upward direction.
Long-term U.S. stock sector rotation shows a mix of Defensive and Cyclical sectors, indicating investor uncertainty about long-term economic prospects. The following best-performing sectors are demonstrating the greatest trend strength: Technology, Health Care, Financial, Communication Services, and Industrial. Cyclical sectors such as Technology and Industrial tend to rise and fall in anticipation of the ups and downs of the general business and economic cycle.
The following sectors are relatively weak for the long term: Energy, Real Estate, Consumer Discretionary, Utilities, and Materials. Cyclical sectors such as Consumer Discretionary and Materials tend to rise and fall in anticipation of the ups and downs of the general business and economic cycle.
Foreign (EFA) and Emerging (EEM) stock markets continued to underperform the U.S. indexes last week but still remain systematically bullish, because prices are above rising 50-day and 200-day Simple Moving Averages (SMAs), and the 50-day SMAs are above the 200-day SMAs. Both have underperformed U.S. stock indexes for the past 24 months since 1/26/2018, when global stock markets peaked together. Foreign markets are important because they have led the U.S. stock market at important price turning points in recent years.
The U.S. Dollar ETF (UUP) price rose last week reflecting safe-haven demand in reaction to news of the coronavirus. UUP remains below both its 50-day and 200-day SMAs, however, and these two SMAs appear to be converging toward a downside bearish crossover, which would confirm a downward long-term trend.
Gold (GLD), Gold Miners (GDX), and Silver (SLV) rose moderately reflecting safe-haven demand in reaction to news of the coronavirus. All three remain systematically bullish. Their performance has lagged the strong performance of the common stock indexes for several months, however.
Copper (JJCTF) fell steeply last week, crossing below both its 50-day and 200-day SMAs to turn systematically neutral. The price of Copper is sensitive to prospects for global economic growth, which some investors fear may be dampened by the possible spread of coronavirus.
Oil (USO) fell steeply last week on fears that demand for oil could be dampened by the possible spread of coronavirus. USO remains systematically neutral: it fell below its 200-day SMA last week and remained below its 50- day SMA, while the 50 SMA remained above the 200 SMA. USO traded in a wide trading range between 7.67 and 16.27 since bottoming on 2/11/2016.
U.S. Treasury bond (TLT) and U.S. Treasury note (IEF and SHY) prices rose last week reflecting safe-haven demand. All three are now systematically bullish, although all three remain well below their price highs of more than 4 months ago, on 8/28/2019 for TLT and on 9/3/2019 for IEF. Their medium-term correction/consolidation phase could continue or end depending on the spread of coronavirus. U.S. Treasury bonds and notes are safe havens that some investors switch into when they become fearful.
$VIX Volatility Index jumped up to an average level of 14.56 on Friday 1/24/2020, up from a below-average and overbought 12.10 of 1/17/2020.
The AAII investor sentiment survey reflects investors feelings through Wednesday of last week and does not reflect new coronavirus concerns that emerged on Friday. The survey remained overbought, with 45.60% Bullish, 29.63% Neutral, and 24.77% Bearish. The Bullish plus Neutral percentage of 79.53% on 12/19/2019 indicated one of highest levels of overbought bullish complacency in 13 years.
The Equity Put/Call Ratio rose to an above-average 0.70 on Friday 1/24/2020, up sharply from 0.48 on 1/17/2020, which was a very low level that indicated extremely overbought sentiment. It fell to 0.43 in December, one of the most overbought levels in history. Options speculators typically react to the price action: when stock prices go up they trade more calls, and when stock prices go down they trade more puts. The Art of Contrary Thinking would suggest becoming more bullish as this P/C ratio rises toward extremely high levels and more bearish as it falls to extremely low levels.
The CNN Money Fear & Greed Index plunged to 62 on Friday 1/24/2020, down sharply from 89 on 1/17/2020, which was a very high level that indicated overbought extreme greed. For details, see http://money.cnn.com/data/fear-and-greed/
The full report offers clear and unbiased guidance on the following each week:
Global stock markets
The Defensive stock sectors
The Health Care sector
The Cyclical sectors
The Technology sector
The Financials sector
U.S. bonds and notes
Commodities (Oil, Metals, Agriculture)
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