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The Market Dive Begins

03/01/13 by  
Filed under Bourbon & Bayonets

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We’ll start with the big news first.

For those who didn’t notice, the Dow Jones Industrial Average yesterday bested its previous bull market high, rising to end the day at 14,075, just 89 points (about a half a percent) lower than it’s previous all-time high set back in October of 2007.

And that raises the question – are we now going to see fireworks and hear hosannas as the Dow moves into record territory?

And the answer is – it doesn’t matter.

 

bb02281311

 

Well, o.k., it matters, but insofar as it’s an inevitability, it makes little sense to quibble about whether it will be next week or next month.  The bull is moving, and a new high is around the corner.


A more important question is whether the market has temporarily topped here and is headed lower – and, of course, just how far lower the bottom lies.

Take us through it, Matt.

You got it.

Let’s start by looking at a chart of the broad market.

Here’s the S&P 500 since New Year’s.

 

bb02281322

 

The S&P 500 had a steady rise from New Year’s until the second week of February.  At that time, the market began to stall, flattening and tightening its range.  Intraday moves for those five trading sessions were compressed (red oval at top), while volatility (see chart below) fell to 52 week lows.

That period, we have labelled the ‘calm’.

What immediately followed, we’ve termed the ‘storm’ (in black).  Daily trade ranges for that latter period were significantly wider, and volatility, as seen on the chart below, began popping like ligaments in a jiu-jitsu death match.

 

bb02281333

 

This pattern of ‘quiet’ topping action followed by high amplitude turbulence is very often the mark of a turn in trend.  It may signal a short term retracement, or it may be intermediate – everything depends on how long the storm persists and how much volume gets churned.  The longer the volatility and the greater the share turnover, of course, the deeper we should expect the downturn to be.

As of now, the duration of the pattern points to a brief spill.

Leaders are Struggling

We note, too, that the financials, which have been among the most consistent, outperforming sub-groups in the market for well over a year, are now starting to show signs of weariness.

Take a look at the Select Sector SPDR Financial ETF (NYSE:XLF) for the last four months – from the move off its November bottom.

 

bb02281344

 

The stock’s sluggishness can be seen in the RSI and MACD indicators, which have traced lower even as the stock has risen (in blue, at bottom).  That divergence will eventually be resolved either via a sudden drop in XLF, or a slow, persistent sideways move that flatlines both these indicators before price once again advances.

More recently, we’ve seen two bearish engulfing patterns (in black box, at top).  On both February 20th and 23rd, price action engulfed the prior days’ trade activity entirely, with the latter doing so egregiously.

A bearish engulfing pattern paints a very unhealthy picture of a stock’s immediate future.  Two in one week should convince even the meanest sceptics of a coming down-move.  And the fact that the latter pattern was also a perfect marubozu should have short term market timers out or short without further adieu.

As to how far the financials could ultimately drop, we point to the two gaps that require filling on the chart, one at $16.30, the next at $15.25.  Those markers constitute declines of 8% and 14% respectively.

Hey! That hurts!

bb02281355

It’s not our intention to scare you – just to remind you that the market looks like it’s ready to cramp up.

 

You mean a face-cramp?

We’re on record as saying that this is the Facebook Market – that the web’s biggest time-waster owns this market in the same way that Lehman Bros. is forever associated with the 2008 crash.  As Facebook goes, so, too, will this final breakneck equity rocket to Mars go, and that means we should pay close attention to the stock.

And she ain’t looking so pretty.

 

bb02281366

 

Facebook’s RSI and MACD indicators (in black) are now both below their waterlines for over a week – that’s full-on bearish.

A head and shoulders top (in red) is nearing completion that could send the stock into the low 20’s.  It’s too early for a formal count on the decline, since the pattern is not complete.  But we feel it’s safe to assume that, at the very least, the gap at $24.50 (in blue) will be filled, necessitating a 10% drop from current levels.

To sum it up, buy volatility, sell the indexes, mind those joints(!) and get ready to dive back in sooner than you think.

With kind regards,

Matt McAbby, Senior Analyst, Oakshire Financial

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Comments

17 Comments on "The Market Dive Begins"

  1. Jim Ray on Sat, 2nd Mar 2013 2:31 PM 

    Fine contemporary article that gets the important news across in style. Will heed the warning on Facebook, and appreciate the comment that it’s the currrent greatest time waster on the web.

  2. Frank on Sat, 2nd Mar 2013 2:33 PM 

    What says the Dow, NASDAQ an Transportation Indexs?

  3. Ed Frye on Sat, 2nd Mar 2013 2:39 PM 

    very nice job of TA. bulls keep buying pull-backs. first time they don’t, the bear is on.

  4. Bob on Sat, 2nd Mar 2013 4:31 PM 

    What? How about putting this into English for those who are not cartoon literate.

  5. Jon Granger on Sat, 2nd Mar 2013 7:16 PM 

    Good analysis. But with facebook, the technicals can easily be trumped by news. Now on Friday, Facebook had news come out inviting people to review a new and improved news feed feature, with an event planned shortly, which will attract more mobile interest and may jack the stock a little. Hence a stronger bullish finish on friday. Now lets make no mistake that FB is a momentum stock like NFLX and responds to hype and speculative excitement. So be prepared for a few days of bullish action in the coming days before the possible sell on news event comes along and then you may get another down leg. Am I right, who knows, but watch and learn from the coming days of price action leading up to this event. One could be a little more precise on price action if one factors in the story especially with the hyped up momentum stocks. Keep up the good work… JON

  6. tom on Sun, 3rd Mar 2013 12:10 AM 

    uncle matty,

    uh oh, we finally agree. lol. thank you for this analysis.

    i also agree FB is a scam, but why do you correlate its chart fate with that of this market, which btw is also a scam? a real thought provoking postulate. i used to think GS and XLP were the bell weather, now USO and UUP.

    btw,

  7. Matthew on Sun, 3rd Mar 2013 12:31 AM 

    What bothers me is that it is TOO OBVIOUS so may be range bound for a week or two and THEN collapse

  8. Joel on Sun, 3rd Mar 2013 4:15 AM 

    Love the advice. Didn’t go DIA last week. Oops… Long UVXY for a little while. Which MA do you see the SPY settling on?

  9. Jimmy H Joyner on Sun, 3rd Mar 2013 11:03 AM 

    Matty,

    I believe you are right on all accounts. The Fed controls the markets and investment institutions are now the secondary players. I thought Friday’s buying volume based on the price range was very high with the DJIA being at this high level, so a small pullback may just take place. Like you, I have no idea how much the market will pull back but rest assured the Fed will control it-they will throw what ever dollars are needed to control it.

    Have no fear many new market highs will develop until the end of 2014-will see S&P at 1700. This is a 5 year bull market and there will be a few corrections along the way.

    Now that the Fed has gotten everyone fully invested based on your charts, a sudden little drop will be healthy.

    It appears the EWavers and the Fed are in sink and Caldaro(the elliott wave lives on) has been very accurate in his forecast for the markets.

    One last point, all one needs to do is keep an eye on the S&P 50 DMA and until that averaage drops below the former low, no big problem for the market. If you don’t believe me make a chart of S&P and its 50 DMA and you will see the beautiful rising curve.

    FB could develop a H&S pattern and make a correction and at some point be a great buy!

    Have a good week!

  10. Jimmy H Joyner on Sun, 3rd Mar 2013 4:17 PM 

    Matty,

    A little diversion:
    IBM has made a lower high and a lower low on its 50 DMA since 3/2009.

    What does that mean? You be the judge!

    Jim

  11. Rex on Mon, 4th Mar 2013 4:50 AM 

    Great presentation – New highs here we come!!

  12. Rodd Mann on Mon, 4th Mar 2013 2:10 PM 

    Your articles run the gamut, from prescient, thoughtful, insightful, analytical, contrarian and focued — to arcane, folksy, irrelevant, trivial and superstitious.

    The market is in a short-term funk for the usual headline reasons: Y2K, Mayan Calendar, Greece, Fiscal Cliff, now it is Sequester. The March earnings season will shake all of that off. Stay focused on earnings. PE’s are historically close to their run-rate but cash per share is at an all time high across the world’s company balance sheets. The real question is will firms be able to find good investment opportunities for all this cash down the road?

    And the long-term bond collapse is coming as well. The double-whammy of halting the $85 billion/month in Fed purchases, along with unwinding the accumulated investments on the Fed balance sheet, will send interest rates up. And with 10-year T-Bonds yielding 1.8%, a small increase to say 3.6%, doubling the underlying rate (not even close to historical average either by the way), will send investors and sovereigns around the world into a financial tailspin.

  13. Dave on Mon, 4th Mar 2013 4:37 PM 

    Mc “Great One”,

    Three letters: MBI You’re a stinkin genius! Sell or fasten myself to the rollercoaster?

    Dave

  14. Jimmy H Joyner on Mon, 4th Mar 2013 6:46 PM 

    Matty,

    After viewing the markets today, I noticed that SentimentTrader’s sentiment is 5, dead neutral.

    We continue to have a creeping market so don’t see signs of a dive as you spoke of lately.

    Also P/C ratios are too high for a dive in the market.

    It would take an “external” event to create a dive in the market.

    The buying volume on major indices has been over 95% the last 2 days-in other words, no selling vol.

    Things can change in 2-3 weeks, though.

    The indexes put in a bottom on 2/25/2013; therefore, the market should move up for a period of time-not dive as you you indicated, just yet. When it does it will be a small correction-<6.5%. Then off to the races.

    Also Caldaro(the elliott wave lives on) commentary should be viewed daily-it is a free website.

  15. Mike2 on Mon, 4th Mar 2013 10:31 PM 

    Why not sell puts on the VIX, as if its going to drop below 8 ever in my life.

  16. Jimmy H Joyner on Wed, 6th Mar 2013 3:02 PM 

    Matty,
    It would be helpful if you would give an update you “dive” prediction now that the S&P has reached new highs.

    If you are wrong about this prediction, tell you subscribers your current thoughts!

    Jim

  17. piper marie on Thu, 7th Mar 2013 2:18 PM 

    This column is nothing but the musings of an idiot.


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