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November 18, 2019

Stock Market: negative technical divergences appeared last week.

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The S&P 500 index scored its 6th consecutive weekly gain to a new all-time high. Over the past 20 years, buying the S&P 500 after 6 consecutive weekly gains and holding for one week would have been a losing strategy.

The NYSE Composite Stock Price Index rose last week but remains below its 2018 peak, for a negative divergence compared to the S&P 500 index.

The Cumulative Daily Advance-Decline line for NYSE Common Stocks Only rose last week but failed to make a new high, for another negative divergence.

The Percentage of S&P 500 Stocks Above 50-day and 200-day Simple Moving Averages (SMAs) rose last week but both failed to rise above their September peaks, for another negative divergence.

The number of Net New Highs on the NYSE rose to 228 on Friday, but that was far short of the 400-500 seen at previous S&P 500 new highs over the past 2 years, for another negative divergence.

Stock market sentiment shows a high degree of bullish optimism and is overbought, indicating a significant probability of a price pull-back for the short-term.

The bulls continue to hope that a trade deal between the U.S. and China will improve business confidence and reverse the global decline in economic growth. The terms of any trade deal appear uncertain, however. The two sides have fundamentally conflicting interests.

Despite continuing talk about a trade deal, the China Large-Cap ETF (FXI) has been notably weak over the past 6 trading days, falling below its 50-day SMA and turning systematically bearish for one day on Thursday 11/14/2019. That price weakness did not suggest optimism about a trade deal. FXI price rose slightly above that 50-day SMA on Friday to finish the week systematically neutral.

Historically, a choppy stock market seasonal tendency ends after next Wednesday 11/20/2019 and turns bullish through the end of November. Keep in mind that seasonal tendencies easily can be overwhelmed by news headlines as well as technical factors.

Although overbought for the short-term, the S&P 500 remains systematically bullish for the long term, because price is above both the rising 50-day and the rising 200-day Simple Moving Averages (SMA), and the 50-day SMA is above the 200-day SMA. Keep in mind that trend following using moving averages always lags at price turning points.

Easy monetary policies of the global central banks have been and remain bullish for the financial markets.

Long-term U.S. stock sector rotation now shows more of a mix of Defensive and Cyclical sectors, indicating increasing investor uncertainty about long-term economic prospects. The following best-performing sectors are demonstrating the greatest trend strength: Technology, Utilities, Real Estate, Consumer Staples, and Financial.

The following sectors are relatively weak for the long term: Energy, Health Care, Materials, Industrial, and Consumer Discretionary. With the exception of Health Care, which normally is Defensive, these Cyclical sectors 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 failed to rise to new highs last week. Both turned relatively weak over the past 6 trading days since 11/7/2019, and both have been weaker than U.S. stock indexes since global stock markets peaked together on 1/26/2018. EFA remains systematically bullish (50-day SMA above 200-day SMA), but EEM remains systematically neutral (50-day SMA still below 200-day SMA). Foreign markets are important because they have led the U.S. stock market at important price turning points in recent years. So, recent price weakness could be an early warning.

The U.S. Dollar ETF (UUP) whipsawed back down below its rising 50-day SMA, turning systematically neutral again. UUP remains above its rising 200-day SMA. UUP has been choppy since peaking on 10/1/2019.

Gold (GLD), Gold Miners (GDX), and Silver (SLV) rose slightly last week but remain below their declining 50-day SMAs, so they remain systematically neutral. These ETFs peaked on 9/4/2019, and their medium-term correction/consolidation phase continues.

Copper (JJCTF) price fell last week. It remains systematically neutral for the short term, modestly above its rising 50-day SMA but below its declining 200-day SMA. The price of Copper is sensitive to prospects for global economic growth.

Oil (USO) remains systematically neutral for the short term, above its rising 50-day SMA and above its rising 200-day SMA--but with the 50-day SMA still below the 200-day SMA. USO has been consolidating in a wide trading range since bottoming at 7.67 on 2/11/2016.

U.S. Treasury bonds (TLT) and notes (IEF and SHY) prices recovered moderately last week on relatively low trading volume. They are below declining 50-day SMAs but above rising 200-day SMAs, and so they remain systematically neutral for the medium term. Their correction/consolidation phase has continued after prices peaked from 8/28/2019 to 9/3/2019.

$VIX Volatility Index fell further to a below-average and overbought level 11.92 on Friday. $VIX is at its lowest level since the July stock market top, which was followed by a -6.8% downside price correction.

The AAII investor sentiment survey remains overbought, now with 40.72% Bullish, 34.46% Neutral, and 24.82% Bearish. The Bullish plus Neutral percentage is 75.18%, up from 51.80% on 8/8/2019. Bullish complacency is among the highest levels in 13 years.

The Equity Put/Call Ratio fell to deeper overbought levels, averaging 0.55 last week, down from 0.58 the previous week. 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 jumped to an extremely overbought 91 this month, its highest level in more than 2 years. For details, see http://money.cnn.com/data/fear-and-greed/

Corporate insiders (officers, directors, and major stockholders) have been selling stocks of their own companies at the fastest pace in two decades. This suggests that the 2019 stock market is the most overbought since the dotcom bubble top in year 2000, and that the long bull market in equities is reaching its final stages, according to Smart Insider.

It may be a good time to recall what happened the last 3 times the S&P 500 index rose to a new high.
1. On 9/21/2018, the S&P 500 index made a new intraday high at 2940.91, but 96 days later it had fallen to 2346.58, down 20.21%.
2. On 5/1/2019, the S&P 500 index made a new intraday high at 2954.13, but 33 days later it had fallen to 2728.81, down 7.63%.
3. On 7/26/2019, the S&P 500 index made a new intraday high at 3027.98, but just 10 days later it had fallen to 2822.12, down 6.80%.

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)
Objective Quantitative Rankings for hundreds of Exchange Traded Funds

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Analysis of market forces may offer a sense of probabilities. But the many variables that can impact market prices are notoriously difficult to predict. And, market analysis is something less than an exact science. So, sound trading tactics are always recommended. See my
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Robert W. Colby, CMT,
is a consultant to institutional and private investors and traders, providing regular analytical reports, custom research services, and trading systems tailored to clients' objectives. Clients include the most successful traders and investors in the world. Robert is the author of The Encyclopedia of Technical Market Indicators, Second Edition, McGraw-Hill, 2003, which has become the standard reference for indicator and trading systems design. Previously, at several large Wall Street firms, Robert worked as a proprietary trader, technical analyst, and fundamental analyst. He also was adjunct professor at New York University and New York Institute of Finance, where he developed new courses on technical analysis and market timing.

Robert W. Colby is a Chartered Market Technician (CMT), an accreditation granted to members by the CMT Association (https://cmtassociation.org/) after demonstrating professional competence and ethics over a period of many years. Robert has been a member since 1980, and he strongly supports the CMT Association's high standards. He also supports the The Technical Analysis Educational Foundation (https://www.taeducation.org/about/), which works to have technical analysis included in the curriculum of major business schools. The Market Technicians Association (MTA) is the national organization of investment analysts, stock market analysis professionals, and certified market technicians in the United States.

 
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"PUTTING CANDLES TO THE TEST, How Profitable Are They Really?" by Robert W. Colby, CMT. Published in SFO, STOCKS, FUTURES AND OPTIONS MAGAZINE, Volume 5. No. 8. August 2006, pages 91-94. Please click here to buy this article. (Scroll to bottom of linked page.)
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Active Trader magazine September 2004 interviewed Robert W. Colby. 4 pages. "Robert W. Colby: Technical collector. A discussion with Robert W. Colby about technical trading and his revised Encyclopedia of Technical Market Indicators, Second Edition. By Active Trader Staff."
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MetaStock® PC Software for Technical Analysis
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