Diminishing Effervescence

The cork has popped and after a six month period of unparalleled bullish exuberance we are now on watch for signs of diminishing effervescence. That doesn’t necessary mean buying pressure has depleted completely, but when endeavoring to trade the markets and survive to tell the tale one has to develop a sense of timing as the game of musical chairs always comes to an end at some point.

As of right now I remain on the fence as price yet has to show signs of weakness. Various doors have opened over the past few months and equities have steadily marched in the opposite direction. I can practically see Old Turkey cock his head, lean over, give me a fatherly smile and say, “You know, it’s a bull market!”

Something that caught my eye whilst browsing through my collection of momentum charts was the CPCE  which sliced through an established support line and dropped quite a bit lower while price continued higher. In the past a touch of that support line has been a harbinger of a meaningful correction but at the same time they have been getting smaller and smaller. What’s technically puzzling is that we have barely moved after such a spike lower.

A similar phenomenon can be observed on the NYMO (here smoothed via a 5-day SMA). A pretty solid support line, a touch of which once again has in the past been followed by a correction. However they are getting smaller and smaller every time. Since the NYMO is a breadth indicator (advancing – declining issues) this means that more symbols are participating but at the same time they are dropping less. So we have depleting (shorter term) breadth in the face of shallower/shorter corrections?

Here’s the SPXA200R – as you can see we have over 90% of stocks trading above their 200-day SMA. The signal is tightly embedded and that can go on for quite a while (the same happened on the downside in 2008 but it’s more common to occur during market tops)

The ratio between the 50R and the 200R has us once again near a roll-over point. Will the ‘magic buyers’ once again flood in to pull this one out before a deeper correction can gain momentum? I’ve seen the inverse on the Dollar side as it has been stomped on every single time it has attempted to rise above its 84.5 inflection point.

The weekly stochastic – one of my simplest but most trusted charts. It’s has been denied a breach in April and we are back across the roll-over point. Similar thoughts apply here – another door has opened but given recent market conditions we cannot be sure that the bear will go through it.

Quite a bit more waiting below – please step into my trading lair:

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Cheers,