Top, Topping, Correction or What?

So after a year or so of “nothing really to say” with markets just doing the usual “wobble up” the Financial News was all yackity yack about this being the Horrible Month Of August when markets take a dive and how after so long going up and with Volatility at 1/2 historic lows it just MUST be at a minimum a 10% “correction” and possibly even a “Secular Top” (meaning a minor crash coming like we get about once a decade and last had about 8 years ago).

So FINALLY there’s something to talk about in Stock Trading Land. Maybe.

So lets do “the usual” and look at a couple of charts. I know, it’s been a while since I said “looks like a time to buy”, so some will have forgotten how to read the little darlings. I’ve described it 100 times in prior charts postings, so I could just say “Go Fish!” there, but I won’t. Just to keep it interesting, though, I’m adding a couple of new indicators.

I’m limiting this “look” to just a couple of tickers. Those with major market ties, not those with specific industry things driving them. SPY – the S&P 500 index fund. RUT – the Russel Small Stocks fund. GLD a gold proxy fund. TLT – long term bonds. FXE – Euro and FXY Japanese Yen. Basically looking at the broad market, the weaker small stocks that have a harder time in bad markets, then places money runs for safety when leaving the USA.

First off, we establish our Grand Context. A reminder of what the last decade has been. Also, these are BIG charts, so you can click on the image to embiggen them. I make them using:
http://bigcharts.marketwatch.com

SPY RUT GLD TLT 10 year weekly chart with Vol+ MACD and DMI

SPY RUT GLD TLT 10 year weekly chart with Vol+ MACD and DMI

Gold has risen some in the last 1.5 years, but after falling for 4. So maybe some money running to gold, but that looks to have started back during the US Presidential election when it looked like Hillary was going to win, then had a minor collapse when Trump won. Not seeing a lot of panic into gold on the long time scale.

Bonds were the next strongest below gold for about 5 years at the start of the chart, but pretty much topped and were a SPY match after that. Lately they have underperformed stocks, basically flat lined, despite The Fed giving token interest rate rises to an irrelevant amount above zero… Not seeing a big run to “safety” in bonds, especially for near nothing returns. We do know that The Fed has tried to talk up interest rates and tried nudging them, but we also know they haven’t done much really. So it is a minor worry point to watch, but not driving much yet.

Small stocks move farther faster than large stocks, both directions. RUT is above the SPY for the start of this chart, and is still above it at the end. During the “corrections” it tends to drop to match SPY. (Note to self: At correction bottoms you get more “juice” out of RUT bouncing back…) So on THIS TIME SCALE, things look like not rolled over yet.

On the SMA Simple Moving Average stack, we have shortest duration over longest and stock price riding on top. That’s they usual rising pattern. No crossover of the SMA stack to inverted order. Look at the first 1.5 years for an example of a rollover at a bottom or look back 2 years for an example of a flattish ‘inversion’ in a strong correction. We’re not seeing anything like that.

Now, The Big Worry. Look at that Volume+ indicator. Up days are black, down red. Volume is just slowly drying up an dying. The market is a volume seeking machine. Commissions are paid on VOLUME not DIRECTION. There’s a lot of brokerage houses not getting the volume they want. IF folks are not willing to buy, it IS possible to stampede them with a good enough scare. So watch out for Scare Stories. (That’s a general rule, BTW, I think Politicians have also learned the art of using Scare Stories to Stampede The Voters… “There’s always a story. -E.M.Smith”) So we need to look more closely at volume, and it’s mate, volatility.

MACD is above zero and in a flat sideways weave. On this time scale, it is saying “steady up”. Which it can do for long periods of time, just before it turns down… so not a worry, but not a great confidence either.

DMI is still “blue on top” so “be in”, BUT, it has crossed the ADX Black line and is falling. That says “Getting weaker” and time to start looking at exits. Once it crosses RED, it’s time to be out. Look at the middle of 2015 for an example where a correction had MACD go below zero and DMI red over blue. Calling an exit well before the worst of it. That’s what we’re looking for, going forward, as our worry trigger.

10 Year Summary: Volume (and not on the chart, volatility) are strong worries. Seasonal Pattern is a worry too. Trader sentiment is looking for volume in a correction. Yet we are NOT there yet. Is it time to step aside? Probably for part of a position. Time to short? Not just yet, you short at failed advances back to the top, we’ve not even had the first turn down yet. MACD & DMI & SMA Stack are all still saying it’s a continued up run SO FAR.

Then we pull our time scope in tighter for a 1 year view, with emphasis on SPY and looking strongly at volume and volatility. Moving away from long duration investing and toward trading, from context to action now.

1 year SPY GLD RUT Volatility focused 20 Aug 20 1 7

1 year SPY GLD RUT Volatility focused 20 Aug 20 1 7

RUT has been basically flat for 9 months with only a bump and dump at the end. Not making money there unless you are trading faster. That drop at the end is a real worry. It is much easier to short thin small stocks than big ones, and it looks like RUT is weakening. It has crossed under the S&P 500, indicating market weakness.

SPY has dropped below the SMA stack, but only just barely, then made a hard stop. It isn’t a crash. So maybe a correction in the offering. BUT the SMA Stack is still in normal order. You don’t have a correction underway until that inverts and price returns to it from below, bounces off, and drops more. So IF this is a correction, it is only just barely started and price will do another rise before a failure to advance and a fall. (Almost all the time…) If it is a correction, it is still very early in the game and very much not confirmed. Speculative start at most.

Embiggen the chart and look closely at the “candlestick” daily price range ticks. They ave very short, sometimes just a + at tops, they become big long bars in crashes and bottoms. We have a LOT of short bars, then a big one in the drop. That’s topping behaviour. So “possible top forming”, but not formed yet. Rather like last March, so far.

Looking at GLD, it has had 3 tops all stopping at the same place, all a couple of month apart (maybe swing trade that months cycle?). It is NOT showing an big run up underway. No “panic in the streets”.

Volume had gotten extremely low at the start of the month. We’ve had a couple of spike days on drops. Just like about last May. But now we’ve got 3 big down spikes and the black up spikes are wimpy. Volume is saying “volume is to the downside” so expect traders to push that way to get more commissions. (Until a Whale Investor like Chase or Buffet comes in to buy on the cheap and they are forced to abandon the shorts).

I have 2 Volatility indicators up. Start with the bottom one, Slow Volatility. See that ‘dip’ at the start of August? That’s about 1/2 the historic low point. That is Way Worrisome. Low Volume on Low Volatility is a Very Bad Thing and happens at major market tops. That’s what we’ve got. Given all the other indicators, I’d speculate we are at the start of a correction in the making, but it isn’t here yet. There’s usually at least one “false start” as shorts measure buying strength. IF this is a false start, prices will rise back to the SMA stack, but we will have a “failure to advance” with “lower highs” and very weak up volume. That’s the last call before the big shorts come in hard. (First they have to do “distribution” and quietly sell off any long holdings they have, so we’re watching for ‘distribution’ – those very flat + shape price bars with low volatility and quiet volume)

Now look at Volatility Fast. A small spike up at the end, right now, but not big by historical standards. Not saying much yet, but it is saying the preceeding few weeks of dead flat are over. Of note, maybe a minor worry, but mostly a ‘start watching’ flag.

Then looking at “where the money goes”, does it show money running for the borders?

SPY vs TLT FXE FXY with Money Flow MACD DMI 20 August 2017

SPY vs TLT FXE FXY with Money Flow MACD DMI 20 August 2017

During last month, the Euro got stronger, but during the recent drop, it was flat. More likely politically driven and the usual summer rush to buy € for vacations than any market money. The Yen has stayed basically flat for 6 months and bonds for 3. Not seeing a “flight to safety”.

Note that the Money Flow indicator is NOT actual measured money flow. It is a computed indicator that TRIES to guess money flow based on volume and up vs down days. That said, it shows a long steady rise, and the start of a rollover at the end. Yet it had that shape several times before this year and then continued. MF isn’t my favorite indicator, but I put it here just for variety and interest. It COULD be saying “down soon”… but needs more duration of the turn. It tends to lag and confirm rather than lead and predict.

Most worrisome are the next two indicators.

MACD is “mouth down” with red on top and crossing the zero line. The trading “trade out” crossover to red on top was about 2 weeks ago. Had I been more focused on trading than playing with computers, I’d have traded out then (but was not heavily in risk anyway). MACD is saying “Get out if you are in, stay out if you are out”. The buy back in comes at the next crossover to blue on top.

DMI is similarly “red on top” but with the black ADX at below 15 with ‘weak conviction’. It is saying “Pffet, yeah, be out, whatever, it’s beach time, order a beer, or just order the beer”. So ambiguous. It’s a down out recently market, but in a ‘going nowhere’ context.

In Conclusion

My conclusions in all this are simple:

It is NOT a confirmed market top, not even a confirmed correction. So far, the indicators only show a few weak days in a long term bull market, but one that is getting old. There isn’t any “catalyst” in the news to drive a collapse anyway. Now if N. Korea rally nuked somebody, that would be a catalyst… but as of now it’s all weak tea news.

It is most likely the typical ‘minor trade down’ trader driven correction and a chance for some faster term trading.

There IS risk, mostly from the low participation. Volume and volatility in the basement. The context is right for a downturn, with The Fed threatening tighter money; BUT double nothing is still nothing and adding 1/4 point to that is still nearly nothing… My GUESS is we’ve got another year before The Fed, interest rates, and such start to bite.

We’ve got clear weakness of RUT vs SPY, so I’d be rotating out of smaller and less robust stocks, into things with greater stability and resistance to shorts.

So, it’s time to adopt more regular “watchful waiting” to see if this bull run is stopping now, or going for another year+ before it takes a dump.

Not time to run for the border yet, but time to make the coffee, load up, saddle up, and start scanning the hilltops…

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics - Trading - and Money, Stock Charts and tagged , , , , . Bookmark the permalink.

4 Responses to Top, Topping, Correction or What?

  1. mddwave says:

    Thanks for update.

    One negative is upcoming federal debt limit on 30 September 2017. I don’t anticipate house, senate, president to come an agreement.

  2. E.M.Smith says:

    I think they will. “Government Shutdown” has become a race loser icon, so nobody wants it hung on their neck.

  3. p.g.sharrow says:

    Extending the debt limit seems to be a done thing. No one wants to crash the system. BUT!
    Something Major is being brewed to follow it’s heels.
    The “Mark of the Beast” is in commerce, financial. A change in how the world conducts it’s financial affairs. A strait jacket on who and how they conduct international commerce…pg

  4. E.M.Smith says:

    @P.G.:

    There’s a war on between the 3rd Way Globalists and Trump / Libertarian Capitalists.

    It isn’t clear who’s going to lead in the race by next year…

    THE biggest problem, IMHO, is just how much empty debt exists in the world. There is just no way in hell it can ever be paid. It isn’t a question of will it be paid or repudiated. The only question is how the repudiation will be done. The Cyprus / Greece way? Inflation? Import a new culture and new population to tax enough to pay the old culture and old population (until the new ones vote to stop paying…)? Flat out financial collapse?

    Simply put: The only folks with enough money and assets to pay the debt are the ones to whom the debt is owed…

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