…and the markets go bye bye.

The S&P down 31 points. The Dow down 265. The Nasdaq down 68. Are we surprised? I don’t think so, but let’s look at my previous Chart School newsletters:

The charts above are from my Chart School newsletter “Back to bull, or still a bear?” (For review, go to http://www.themeshreport.com/back-to-the-bull-or-still-a-bear/) We knew that the 50-day SMA had recently crossed below the 200-day on the S&P 500. We also knew that the 50/200 crosses tend to be a reliable sign of trend change, in this case from up to down. Next:

We noticed this pattern forming on the S&P. This wedge tends to be a bearish pattern in a downtrend (For review, go to http://www.themeshreport.com/driving-a-“wedge”-between-bulls-bears/) Although we could have just as easily broke through the topside resistance, the weight of the evidence seemed to hint otherwise. Today seems to have validated that stance. And finally:

There is a correlation between rates on the S&P (For review, go to http://www.themeshreport.com/as-rates-go-update/) As you can see from the 2nd chart above, rates recently broke a key level of support. If rates were going lower, we have every reason to believe the markets would go lower also.

The Tale of the Tape: In previous days & weeks we have seen hints to a potential downside reversal. The 50/200-day SMA crossover told us there was a likely trend change. So, we probably wanted to look at the last 6-week market rally with skepticism. The market was forming a common bearish price pattern in the form of the rising wedge, thus the clock seemed to have been ticking. Finally, rates broke lower last week, which lately means the market will follow. It would appear that all the advance evidence told us that a sell-off might be coming.

Today’s break below the 200-day SMA, and break through the bottom support of the wedge pattern outlined above, tells us to expect lower prices. It would be advised to pull back on long positions and looking to enter short positions moving forward. Market conditions can always change, but until they do, lookout below!

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT

As rates go – update

About a week ago I wrote a Chart School article that highlighted the correlation between interest rates and the stock market, specifically the S&P 500 (see http://www.themeshreport.com/as-rates-go-the-rally-goes/).  For a quick review, please look at the following charts:

The purpose of the above chart was to show the correlation between a drop in 10 Yr. rates and drops in the S&P. More often than not, the 10 Yr. also led the market.

This chart showed important levels in which to watch to gauge the possible future short-term direction of rates, and in turn, the stock market. Specifically, did you notice the support at 2.90?

Well, look at the next chart:

As you can see, the 10 Yr. has broken its key support at 2.90. This would lead me to believe that rates are going lower. Will the market follow? Are investors moving into bonds, thus sending rates and possibly the stock market lower?

The Tale of the Tape: After breaking through its 2.90 support, the 10 Yr. T-Note is pointing towards lower rates. In the past, the 10 Yr. has moved with the S&P 500, and a majority of the time it has been the leader.  So, with rates apparently going lower, the expectation would be for the S&P 500 to move lower as well. Cutting back on long positions might be advised. Rather, short positions should be the higher probability trades.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT

Driving a “wedge” between bulls and bears

While I was analyzing the charts of the S&P 500 and the Dow yesterday, I noticed a common price pattern know as a Wedge. It is simply a technical chart pattern composed of two converging lines connecting a series of peaks and troughs. Wedges can take the form of a rising wedge or a falling wedge.

Falling wedges form during a temporary pause of upward price rallies. Rising wedges will typically occur during a falling price trend and usually hint to a break lower. Even though a falling wedge is seen as bullish and a rising wedge as bearish, technical analysts such as myself look for a ‘breakout’ of this wedge pattern as bullish on a breakout above the upper line or bearish on a breakout below the lower line.

Please look at the chart I have below:

You can see that I have highlighted the rising wedge that seems to be forming on the S&P 500. If you looked at the Dow you would see the same pattern. Since we are currently in an overall down trend, the rising wedge should be looked at as bearish and a breakdown of the rising support is expected. However, this is not a sure thing. The markets could just as easily break higher and resume the short term up trend.

The Tale of the Tape: The markets are forming a common technical pattern know as a rising wedge. This would appear to signal an impending breakdown. However, this pattern should not be acted on without confirmation. The confirmation would be the break of the up trending support. Assuming this happens, entering short positions would be favorable. On the flip side, if you are bullish on the market, one might enter long positions on a pullback to the up trending support or on a break above the up trending resistance.

Waiting for the most opportune times that I have outlined above could provide you with higher probability entry points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT

S&P above 200-day MA: Sure thing?

After last week there has been a lot of talk about the S&P 500 breaking back above its 200-day moving average (MA). On one hand, I’d agree that’s a good thing and could be promising. On the other hand, there seems to be a belief that the market is definitely headed much higher from here on out now that we’re back above the 200-day MA. Is that true though? Is the break back above the 200-day a sure-fire thing?

In one of my more recent newsletters I covered a very common, long-term buy/sell signal in the form of the 50-day MA crossing the 200-day MA. (Feel free to go to http://www.themeshreport.com/back-to-the-bull-or-still-a-bear/ for a review of this topic.) In short, the 50-day MA crossing above the 200-day tends to be a good sign of a trend change from down to up within the market. The opposite would apply when the 50-day crosses below the 200-day MA: a change of trend from up to down. One of the reasons I believe the markets will be heading lower overall is because of the 50-day MA recently crossing below the 200-day MA on the S&P 500.

Well, does this past week’s S&P move back above its 200-day MA change my view? Should it? Take a look at the following chart:


What you are seeing on the chart above is that last time the S&P had its 50-day MA cross below its 200-day MA.  This was back at the end of 2007, and as we all know, that was the start of the bear market.  You will also see that I have highlighted in blue (2) instances where the S&P rose back above its 200-day MA, one of which was after the crossover. So, it does appear that a rise back above the 200-day MA after a 50/200 crossover can happen, yet not change the overall direction of the main trend.

Now, I’m not trying to rain on anyone’s parade. Rather, I just want traders and investors to be cautious and on their A game no matter what. We don’t want to get lazy now that a few talking heads claim that the coast is clear. And hey, who knows, maybe some of those talking heads are right and we are going back up to new highs. Anything can happen, right? As a matter of fact, I recently noticed a subtle glimmer of hope for the overall trend. Please look at the next chart:

The above chart is obviously a current chart of the S&P 500 showing the recent 50/200 crossover that I mentioned earlier. You can also see the S&P’s recent rises above its 200-day MA. If you reviewed my previous newsletter on the 50/200 crossover, you know that sometimes a crossover can just be a fake-out and the 50-day MA can pull back above the 200-day MA, thus putting the up-trend back in force. Well, over the last week the S&P 50-day MA has started to rise back up towards the 200-day MA. Might the 3-month sell-off in the markets just have been a rough correction that is now ending? Stay tuned!

The Tale of the Tape: With the S&P 500 moving back above its 200-day MA, it can be easy to get a little giddy and somewhat complacent. History shows that there can be false alarms with all “signals”. The S&P could very well be heading to higher-highs, but be on guard for whichever way the market may turn.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT

What’s next?

As you may have noticed, the past few days seem to have increased in volatility. With that, a lot of the students that I coach have wondered what the near-term direction of the market is. It seems that we either go up nicely only to have the gains erased, or we go down hard only to fight our way back into the green. So, which is it: up or down? How might one gauge the short-term direction of the market?

As you may have noticed in my other Chart School articles, as often as possible I like to keep things simple.  Below is my very simple, straightforward answer to the above question:

As you can see, I have added the 200-day simple moving average (SMA) to the S&P 500, as well as its current trend line support (blue).  As commonly happens, the S&P is reacting to its 200-day SMA as a resistance area on each rally we’ve had over the last few months. In the meantime, the S&P has created the up-trending support, which we have tested a couple times as of late. At some point one of these levels will have to give.

The Tale of the Tape: The S&P is stuck between its up-trending support and its 200-day SMA, which is currently at 1114. A break of either of these levels should dictate the near term direction of the market. A break above the 200-day SMA would be a great point at which to enter new long positions or add to current ones. On the other hand, if the support we’re to break, short positions might be entered.

Waiting for the most opportune trading times, like I have outlined above, could provide you with the higher probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT