I sort of waved flags about this a few posts back. Market looked toppy. Wedging into a pennant, likely to drop but not actually called out as “it’s dead Jim”. Well, what the charts say right now looks like the Fat Lady Singeth.
Here’s the 1 year chart of the DIA Dow Jones Industrial Average:
By now you all ought to be able to read that without me hand-holding.
Here’s my read on it though, for any newcomers.
Starting at the top. The price bars are big. We are past the low volatility topping phase (back at mid to end January). Volatility is minimal at tops, highest at bottoms, and increases when moving from a top to a bottom.
At this point, buying options is very expensive as you are buying a lot of volatility premium. This is when selling options pays better. So instead of buying a put (what is best done at low volatility tops) the better approach is to sell a call (preferably a covered call) against your holdings. You collect more volatility premium and it’s unlikely your stock would be called away.
Notice that the price action has “lower highs and lower lows”. Both top and bottoms are stepping lower.
The SMA (Simple Moving Average) stack is fully inverted. Price on the bottom, longest duration on the top, everybody sorted slowest on top to fastest on the bottom. Prices tend to bounce off the SMA stack to the downside from here on out (until a clear bottom reversal forms). Traders will be shorting when price touches the SMA stack and covering on the big plunges away from the stack.
Now look at volume. It’s a bit odd in that usually volume drops at tops and is max at lows. We see some of that, in that volume was getting weak back in October / November. But then it increased into the peak in January. Come February we get the expected volume peak on price plunge. Not sure how to interpret rising volume into a top. Blow off top? Who knows… But clearly now we’ve got a big volume spike on the drop, and little spikes on other drops. Volume is to the downside. Now this is an ETF, and actual best volume to use is the NYSE numbers, but those are hard to get on BigCharts. So this might be an artifact of who buys the ETF instead of the real stock shares.
MACD is quite clear. Red on top. Below the zero line. “Mouth down” at the end. He’s saying out for now (out since end of Jan start of Feb really).
DMI has red on top too. Early “out” call was the inflection of the black line (ADX ) at the end of January. Now, since early February we’ve had “red on top”. Force of the move is weakening what with ADX at just 25.
Now look at the other lines on the chart. SPY & RUT are about the same place (the two redish lines just under the price line) while gold (bottom line) has some blips up (more fear showing in the market). At the top of the graph, the blue QQQQ line shows even the Nasdaq 100 weak. It had a “higher high”, but same shape. Even tech stocks are losing some magic luster.
Here’s the 1 year chart for the S&P 500:
A bit more ambiguous.
While DMI & MACD tell the same story, and Volume is a bit cleaner (spike at the end on the down dip is nice and clean) it still has some of the volume up into the tops action. A little unusual, so worth watching.
It’s the price bars vs SMA that’s the really ambiguous bit. SMA stack not clearly rolled over. Merged almost to a point. This usually just precedes what I call a “topping weave”. Where the SMA lines weave together for a week or so before clearly separating to the downside (or more rarely, upside). Price action has slightly higher highs end Feb to mid March. (But also like what the chart guys would call a double top sometimes). Lows similarly slightly higher recently. Odd that. Like there’s still some battle ground action and the big plunge in Feb didn’t rattle the Bulls enough.
Looking at qqqq we can see it has even more “slightly higher” tilt to the peaks (common for the techs vs others). While RUT the Russel 2000 has a bit of pennant “wedge” still going on.
Now what worries me about that whole thing is that the Old Money industrials are weakest of the lot. The “hot money” Nasdaq and RUT are showing more strength. That’s still a topping behaviour. Folks still taking risk in the hot groups. So either it’s slow to sink in that it’s time to shift to Risk Off, or the guys in the staid old Industrials are making a mistake and being too cautious.
So this one still is not being as clear a rollover top as prior cases, even as the DIAmonds are starting to sing on stage.
For a good while now, FANG has been popular as a top of the tech heap moving markets selection. There’s a bit of variation in what it stands for F Facebook, A Apple or Amazon, N Netflix, and G Google (now “Alphabet” and such a stupid name change). I’ve even heard one guy put in Nvidia for N. So here’s a chart with Amazon for A, but with Tesla as the main ticker. Both Tesla and Facebook have had face-plants lately, so we’re going to have a “Tesla vs FANG vs QQQQ” chart.
Well the first thing that jumps out at you is just how much of FANG is AN… Amazon and Netflix are doing all the heavy lifting. Google and Facebook are just wandering about the same as QQQQ the whole Nasdaq 100.
Now over at the right edge of the chart (where murky future tries to hide) we’ve got serious downturns for Tesla, Facebook, and Google. Even Netflix and Amazon have had a ‘go flat’ for a month. You can’t hide out there. The market aphorism is that “When the paddy wagon comes it takes the good girls out with the bad”.
PSAR the little red dots, is saying don’t even buy Telsa on a trade right now. Volume is showing lots of exits on drops. MACD and DMI both in “red on top” be out configurations.
IMHO, what this is saying is that first off FANG needs to be extracted. It’s not working as a group any more. Second, Tesla has serious stock action issues. It has gone precisely nowhere for a year and is in a down spike now. Google almost the same and
Face Plant Facebook about the same.
It looks to me like the bloom is off the virtue signalling and reputational rose and folks are starting to look at actual profit potential again. Amazon and Netflix have some. Facebook and Tesla not so much.
This market is being more flighty and hard to call than most. I suspect it’s the cognitive dissonance between The Fed taking the punch bowl away with normalizing interest rates (so stocks ought to fall) along with 24 x 7 “Trump Bashing” trying to create panic and negativity; while at the same time the actual economy is doing well (and is likely to be better in the future).
Essentially the prospects for future profits is good, but the emotional clock is being set closer to worry and panic. We’re looking at earnings ratio compression. PE shrinking despite higher E due to dropping P. (So if a company had a 12:1 PE and earnings doubled, it would become a 12:2 or 6:1 while similarly it could become a 6:1 if earnings held steady and price cut in half. What I think we’re setting up for is a 10% more earnings but a 10% price reduction too…)
That’s a guess. Higher interest rates will mean steeper discount rate used for present value of future earnings (so P paid ought to drop). A growing future E hope can only overcome so much real reduction of net present value.
When I look at those charts, I see a “local top” perhaps setting up for a “secular top”. But not there yet.
Still, the Fat Lady DIA Dow Industrials is on stage and starting to belt out some notes. On the 10 year weekly chart (not in the posting) the MACD and DMI are both saying “Be Out” on that secular trend basis. Price is nearing the bottom of the SMA stack (that is still in normal order, being very slow at that time scale) while volume all of last year is very thin and “toppy”. With the recent down months significantly increasing volume.
So for now, it’s protection strategies and hold cash for “buy the dips” at most. I’m just not seeing the upside at the moment. More like the yawning chasm of a blow-off top. If buying anything, it will be a “value” buy (low PE, high earnings, low debt, etc. etc. That whole Ben Graham thing) with a dividend. Stock picking, not hot ideas like FANG as a group. This is “do your homework and check it twice” territory.
But that’s just my opinion of what I’m doing for me. What’s right for you is something for you to decide. I’m not a money advisor nor a stock broker and I don’t even play one on the internet or on TV. I just like explaining how I use charts and how I read them. For educational or amusement value only.